Will Kona Grill Be the Fastest Growing Restaurant Chain of 2014?

Source: Kona Grill

For 2013, sales growth of 2.3% at Kona Grill (NASDAQ: KONA  ) was a yawner when compared to other growth chains such as Yard House of Darden Restaurants (NYSE: DRI  ) . According to a report by Nation's Restaurant News, Yard House was the second-fastest growing national restaurant chain last year percentage wise, with systemwide sales growth of 20.1%, second only to Jersey Mike's at 21.2%. Kona Grill was nowhere in the running, but so far it looks like it may hit the top spot for this year.

How can that be?
Kona Grill has mostly kept its head down the last few years while perfecting its concept. The company describes itself as a polished casual restaurant. It has an upscale cocktail bar, a sushi bar, and entrees that are a mixture of American and international food all under one roof. With 24 successful restaurants across diverse markets all around the U.S., the company is now ready for more rapid expansion.

Darden Restaurants claimed the No. 2 spot with Yard House this year, mostly from unit expansion. Its average sales per unit rose 2.6%, which helped a little; but what mostly did the trick were the eight new openings that increased the number of locations by 18.1%. Kona Grill plans to add five new locations this year, or 20.8% more.

According to an SEC filing submitted on May 16, this "would make Kona Grill one of the fastest growing national restaurant concepts in the country." On top of the unit growth, Kona Grill has successfully grown same-store sales in 14 out of the last 15 quarters including an excellent 6.2% jump in the first quarter of this year. Not a bad start to 2014.

Source: Darden Restaurants

Beating Yard House by more than a Yard
Darden Restaurants reported that for its quarter ended on May 25, Yard House only saw an 0.8% gain, and for the quarter before that, it was a decline of 0.1%; both sets of results were way behind Kona Grill. The wild card here for Darden Restaurants is the number of new Yard Houses will it open for the rest of the year. The company hasn't given any guidance for the rest of the year as far as I can tell, but if it does open new units at the same pace as Kona Grill, it looks so far like Kona will win on individual unit sales growth.

Back on February's conference call, Berke Bakay, CEO of Kona Grill, stated, "Excitement around our brand is intensifying as we accelerate new unit growth." He noted that new restaurants were so far seeing on average $100,000 in sales per week compared to an average of $80,000 per week for existing restaurants. That 25% increase could very well put Kona Grill over the top for this year if that trend continues.

Source: Kona Grill

Foolish takeaway
If Kona Grill takes the top spot, it could put it on the national scene and bring it attention in the form of more customers and better financing terms for expansion. In short, its growth could feed on itself. Fools should take a closer look at Kona Grill based on the long-term fundamental picture of getting into an exciting, growing restaurant chain with a bright future. Also keep an eye on Yard House from Darden Restaurants. It doesn't get a lot of publicity from the company itself, but it could end up turning into a significant contributor to Darden's overall business.

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  • Report this Comment On July 28, 2014, at 1:43 PM, Taz wrote:

    I was invited to a dinner by a friend but found nothing worth going back a second time. Service was average and food was average as well. The only thing rating highly were the prices. I won't be back.

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