It didn't take long for Kona Grill (NASDAQ:KONA) to turn freshly minted shares into stale leftovers. Just four months after going public, the casual-dining chain offering American cuisine with an island kick is lowering its outlook for 2006.
The company expects to lose between $0.44 and $0.53 a share next year on $49 million to $51 million in revenue. No, investors weren't looking for the upstart eatery to turn a profit in 2006, but the company had originally projected to lose between $0.26 to $0.35 on the year with at least $53 million in meals rung up.
Investors who bought in during the August IPO at $11 a pop can't be too happy to see the stock marinating in the single digits. Then again, they're probably not as steamed as those who bought in when the shares opened at $13 on its first day of trading.
Restaurant stocks tend to be hit-or-miss situations for early investors. Texas Roadhouse (NASDAQ:TXRH) went public 14 months ago and is doing so well that it recently split its shares 2-for-1. A company like Smith & Wollensky (NASDAQ:SWRG) has gone the other way. It seems that for every P.F. Chang's (NASDAQ:PFCB) or Outback Steakhouse (NYSE:OSI) that rewards its shareholders richly over the first few years, there's an operator like Cosi (NASDAQ:COSI) that just crumbles like a stale cookie once it hits the open market. Then again, diners are fickle, and some chains -- like Cosi, given its recent improvements -- do live to bounce back another day.
Where will Kona wind up? It's hard to say. The company clearly went public way too early in its tenure. The company had just seven locations open when it went public over the summer, with plans to double in size by the end of 2006. The company expects to turn a profit in 2007, but we'll just have to wait and see about that. I'd trust a company that just hosed down its 2006 targets about as far as I could throw one of its Macadamia Nut Chicken entrees.
Then again, this is a high-volume concept. The first four Kona Grill locations were averaging $5.5 million in annual revenue. Few chains can match that kind of production at the individual unit level, and those that have lapped it -- like Cheesecake Factory (NASDAQ:CAKE) and P.F. Chang's -- have gone on to become solid long-term investments. However, both of the concepts were profitable early in their tenure. Kona has to prove that much before its shares get back up and above its IPO price. Yes, that's right. Kona is going to have to actually earn its way out of the single digits.
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Longtime Fool contributor Rick Munarriz has been to Kona, Hawaii, but never to a Kona Grill location. He does own shares in Cheesecake Factory. The Fool has an ironclad disclosure policy. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
