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Kona Grill’s quick fall from grace

Overly aggressive unit growth proved to be the company's undoing, says RB's The Bottom Line.
Photograph: Shutterstock

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Marcus Jundt is getting a second chance to fix Kona Grill.

Jundt was surprisingly named co-CEO in November. We say surprisingly because he’d been the CEO before—having resigned in 2009 under pressure from an investor following the chain’s weak sales performance.

We also say surprisingly because Kona Grill just named a CEO three months earlier in Jim Kuhn.

And then this week, Jundt had the “co” removed from his title when his chief executive partner, Steve Schussler, resigned from the company and his position as a Kona director.

For those keeping track at home: That’s three CEO changes in six months. Even in a restaurant business known for its frequent management changes, that’s an awful lot.

Yet it’s also a sign of the chain’s striking decline over the past two years. Kona Grill lost all of its momentum in 2017. 2018 would prove to be a disaster.

To understand where the company is, we have to go back a decade—when Jundt was last CEO.

Marcus Jundt is one of Kona Grill’s founders. He was on the board from 2000 to 2009 and served as its CEO from 2006 through 2009, when he was also the company’s chairman.

But Jundt also ran into pressure during the recession, when Kona’s same-store sales fell, losses widened, and the company’s stock price fell into the low single digits. He faced tension with an investor, Mill Road Capital, which made an effort to provide the company with capital.

Mill Road then tried to buy the chain outright in 2009 after Jundt’s departure, offering $28 million for the company, or $4.60 per share at the time.

That was double Kona’s stock price at the time, but the company said no.

For a while that would prove to be a good idea. The company’s performance steadied over time, and it started generating profits from 2011 through 2014. In 2012 the company named Berke Bakay, an activist investor who had been a company director since 2009, to be its CEO.

Under Bakay, Kona Grill began to discover unit growth—which had largely stalled coming out of the recession. The chain’s same-store sales improved, and its stock price skyrocketed.

Between 2012 and 2015, the company’s stock price more than quadrupled.

But just as soon as Kona’s stock price rose, it came falling back down even harder. Kona Grill is trading below $1.30 a share and faces delisting from the Nasdaq stock exchange, which would be disastrous.

Kona seems to have grown too aggressively. When Marcus Jundt left the company in 2009, Kona Grill operated 22 locations. By the third quarter of last year that was up to 46, though the chain has since closed at least two locations.  

All but one of those additional units were opened between 2013 and 2017.

To be sure, Kona is not the only restaurant chain to have doubled unit count over a five-year period. But Kona is not your typical restaurant chain. It operates upscale casual locations that average 7,200 square feet. It also leases its locations.

Perhaps not surprisingly, the company’s restaurants began having problems. It had to take impairment charges on weak units beginning in 2016 and has since been looking at closing underperforming locations.

As many of these underperforming locations began to enter the “comp base,” or the base of locations used to determine same-store sales, those sales began falling. Same-store sales were up 2% in 2015 and 0.5% in 2016.

They fell 5.9% for the full year of 2017 and 11.6% for the first nine months of 2018. That includes a 14.1% decline in the third quarter.

Meanwhile, the company has lost more money.

It began losing money again in 2015. By 2017 the company posted a $23.4 million loss. It lost $8.6 million through the first nine months of 2018, somewhat narrower than the same period a year earlier.

Kona worked out a deal with a Chinese investor in May, when the company’s stock hit a 52-week high of $3 per share. But weak performance and what many see as a diluted stock base has taken its toll ever since.

Today, having lost 96% of its value since that $28 peak, Kona has market cap of less than $17 million and has more than $30 million in debt.

Maybe it should have taken that Mill Road deal, after all.

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