KONA Kona Grill, Inc

Sector financial performance:

This company, who owns and operates 45 upscale casual restaurants, has been grouped into American menu- fine dining restaurants sector in foodservice industry.

Data indicates the average increase in comparable sales all across this sector went down from around 1.7% of 2015 to around 0% of 2017 and then went up to 1.2% in 2018.  Correspondingly, traffic all across the sector decreased 0.5%, 0.5%, 1%, and 1.5% in 2015, 2016, 2017 and 2018 respectively. It seems that slowing down traffic contributes the downturn in comparable sales of fine dining restaurants between 2015 and 2016. However, the accelerating decline in traffic since then has been completely offset by more spending per customer.

Generally, impacts of unfavourable climate of restaurants industry to traffic since 2015 seem to be less significant to this sector than to casual restaurants as indicated by their numbers of decrease in traffic. For some companies, reduced menu prices help slow pace of decrease in traffic while caused decrease in sale simultaneously.

Unlike in QSR where companies use franchise as buffer, companies’ margins in this sector declined as traffic and thus sales slowing down. However, to retain traffic and as well because of small space to allow price to go up, few companies in this sector improve their margin and sales by significantly raising menu price. In fact, since 2017, it seems companies started more aggressively promote menu to offset the decline in traffic. Most of companies experienced shrinking gross margins (12%) and operating margins (4%) in 2018.

According to our analysis, the current companies’ enterprise price/EBI ratios (or /sales) is average 24 with an interest/EBI ratio of 14%.

The average cash flow/share of companies in this sector presents decrease of 10% and 4% for 2017 and 2018.

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Company performance:

It seems that the demand for service/products of this company has been decreasing in the past three years as indicated by continuingly decreasing traffic.

The first six months of fiscal 2018 compared with the same period of 2017(20180630)

Comparable sales decreased by about 10% due to decrease in traffic.

The fiscal 2017 compared with 2016

Comparable sales decreased by 5.9% due to decrease in traffic.

 The first nine months of fiscal 2017 compared with the same period of 2016

Comparable sales decreased by 5.6% due to decrease in traffic.

Fiscal 2016 compared with 2015

Comparable sales increased by 0.5%.

Fiscal 2015 compared with 2014

Comparable sales increased by 2% due to increase of 2.6% in check (1.5% increase in price) offset by decrease of 0.6% in traffic.

Its gross margin (primarily including company-operated expenses) went down significantly from 12% of 2014 to about 2% of 2018 primarily due to increased labor and occupancy costs and deleveraging of expenses as a result of increasing opening new restaurants. Its SG&A as percentage of sales has been down to around 8% in 2018 and its operating margin thus decreased to about -5% in 2018 from 3% of 2014.

Stock price

This stock currently has an enterprise price/sales ratio of 0.37. We think that its stock is being relatively overvalued with its peers.

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