Never bite off more than you can chew.
It's a good lesson for diners digging into hefty portions at Kona Grill (NASDAQ:KONA). It's also something for Kona Grill itself to remember. The casual dining chain lowered its top-line guidance for 2007, realizing that it won't open on time all four of the eateries scheduled to debut later this year.
It shouldn't come as a surprise, even if the company didn't see it coming. During last month's conference call, the company was even pressed by analysts as to the ambitious scheduling of four openings during the final months of the year.
Kona Grill didn't back off from its projections at the time. It was comfortable with the timetable, though it cautioned that there are always things out of its control. Well, it turns out that permitting and construction delays in Florida and Arizona will push two of the four units into opening during the first and second quarters of 2008.
With just 16 existing locations, hiccups can be seismic. That isn't the case here, though. Kona is revising its revenue guidance down to $72 million to $73.5 million for 2007, off last month's forecast of $73 million to $75 million. The delays won't affect its bottom-line projections, where the fast-growing chain still expects to post a small loss for the year. New units take some time to get up to speed, so potential delays wouldn't have really hurt the profit outlook much.
The delays illustrate the risks of buying into young eatery chains. However, growth investors can often deal with the thorns in the pursuit of getting in early on the bloom. How rich would you have been if you had hopped onto chains like Chipotle (NYSE:CMG) and Panera (NASDAQ:PNRA) when just a handful of locations were open? The question is moot. The companies went public only after they had hundreds of successful units in operation.
However, casual dining chains like Cheesecake Factory (NASDAQ:CAKE) and P.F. Chang's (NASDAQ:PFCB) did go public with only about a dozen units. Despite recent snags at both companies, early investors have been rewarded for picking the right chains early.
This doesn't vindicate ownership of Kona at this point. Cheesecake Factory and P.F. Chang's were consistently profitable early in their growth cycles. Just don't hold a few opening delays against Kona. If anything, this will create an ideal buying opportunity if the near-sighted market ignorantly trashes the shares in the coming days.
For more on the restaurant scene, check out:
Chipotle is both a Rule Breakers and a Hidden Gems recommendation -- A-shares for Rule Breakers and B-shares for Hidden Gems. Both newsletters are available for a free 30-day trial.
Longtime Fool contributor Rick Munarriz has been to Kona a few times, but never to a Kona Grill (which you won't find in Kona, by the way). He does not own shares in any of the companies in this story, save for Cheesecake Factory. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.
