Kona Grill Inc. (KONA) recently shut down one of its underperforming restaurants in Sugar Land, Texas. Since the recent past, the company has embarked upon a strategy to padlock its unprofitable locations. Earlier, in July, the company shut down another underperforming location in West Palm Beach, Florida.
Following the closure of Sugar Land, management further revised its sales guidance for the third quarter to $23.6–$23.7 million from $24.1–$24.2 million as the unit will henceforth be reported as discontinued operations. The expected range for GAAP net income has also been lowered to the range of $0.3–$0.4 million or 3–4 cents per share to reflect lease termination and other related exit costs. The previous expectation was $0.5–$0.6 million or 5–6 cents per share. However, the company's projected income from continuing operations remains unchanged.
The latest closure was decided upon after the sudden end to negotiations with the leaseholder. In fact, the location has been reeling under pressure. To make it potentially profitable, management was trying to reduce its overhead. On the other hand, West Palm Beach unit has been suffering from volume and seasonality since its opening in 2008.
These closures will ultimately improve the company’s future profitability as it will deploy its resources to improve results of the strong performing locations. Additionally, this trimming will prepare the company for two additional openings in 2012.
We also remain impressed with the company’s continuous market share gain in a highly competitive bar and grill segment. The American grill and sushi bar company has been reporting strong same-store sales in recent times.
In recent past, sell-offs, closure of underperforming units and shift toward a franchise-based model gained momentum as these are long-term strategies to strengthen financial flexibility. In August, another company, Frisch's Restaurants Inc. (FRS) closed six of its 35 Golden Corral restaurants. Yet another company DineEquity Inc. (DIN) offloaded its company-owned Applebee's restaurants in a phased manner.
Kona Grill currently retains a Zacks #1 Rank, which translates into a short-term Strong-Buy rating. We are also maintaining our long-term Outperform recommendation on the stock.
DINEEQUITY INC (DIN): Free Stock Analysis Report
KONA GRILL INC (KONA): Free Stock Analysis Report
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment