KONA - Kona Grill

[peridotcapital]

Does Diningstocks.com have a viewpoint on Ruby Tuesday's?

Thanks.

 

The research service covers >40 public restaurant stocks, RT included.

 

Is a subscription worth it? Can you look at historical reports?

 

 

I think it's worth it if you are interested in the sector. You can't view historical reports, but they send out research notes pretty frequently (about 50 emails in Q1 2017) so it does not take long to figure out if you value the insights. In addition, at the beginning of every month they revisit their ratings and make changes.

 

With investing I can tend to justify the expense for moderately priced research like this, because all its takes is one good trade a year to more than cover the monthly cost.

[peridotcapital]

On another note - anyone here have a view on RT?

 

I own the bonds for clients, but no equity. The real estate gives you a margin of safety but who knows what kind of long-term cash flows the units can generate in this environment.

[BeerBBQ]

On another note - anyone here have a view on RT?

 

I own the bonds for clients, but no equity. The real estate gives you a margin of safety but who knows what kind of long-term cash flows the units can generate in this environment.

 

Thanks for your comments re: DS.com

 

I saw that RT announced a strategic review recently, Leon Capital Partners filed a 13D w/ 9.5% ownership (I don't know anything about them, looks real estate oriented?), & engaged capital bought some in past couple quarters.  Any thoughts on what the real estate could be worth?

 

P.S. not trying to hijack KONA thread so if you want to respond in a new thread re: RT, please do.

 

 

[peridotcapital]

On another note - anyone here have a view on RT?

 

I own the bonds for clients, but no equity. The real estate gives you a margin of safety but who knows what kind of long-term cash flows the units can generate in this environment.

 

Thanks for your comments re: DS.com

 

I saw that RT announced a strategic review recently, Leon Capital Partners filed a 13D w/ 9.5% ownership (I don't know anything about them, looks real estate oriented?), & engaged capital bought some in past couple quarters.  Any thoughts on what the real estate could be worth?

 

P.S. not trying to hijack KONA thread so if you want to respond in a new thread re: RT, please do.

 

They are selling properties for over $1M each, so it's highly likely the real estate value more than covers the debt. The big question is whether the operating business is worth much or not.

[ebdem]

No more leases for a while! I already assumed they would not sign a third for 2017 (though it's possible they did before this amendment was finalized). So good chance only 2 openings this year and another 2 next, but that's it. It's nice that the lenders wanted this outcome too. Alright, management team... go out and execute!

 

That is quite good for the case. If the aging growth of the operation margin still works we will see debt repayments and maybe also a good numbers soon.

[atbed]

21M just doesn't seem to be the right go-forward cash flow expectations. Has anyone looked into how aggressive they are with rents on new stores? Deferred rent and other long-term liabilities are producing a lot of cash (+10.4M) for them. Are they negotiating low rents now and trading that for much higher rents in the future? Furthermore, fixed cost inflation, variable cost inflation, and negative SSS will have a negative impact on cash flows in 2017. 14x EBITDA does not seem cheap

[ebdem]

Cashflow and my estimates are mapped out in post 46. Maybe I made to bullish estimates.

 

Attached is the part on rents in the 10k. I can't see a pattern of trade off of the future for now. Do you?

 

I also attached a chart on the historical costs in % of revenue (read 2012/13 with no growth as reference point, check out post 26 for growth). Labor costs are structurally growing, but should also revert to the mean, cause growth effects are pushing the labour costs higher. I think we will see 34% revenue for this cost. Occupancy and restaurant operation expenses should also shrink. SG&A is negativly correlated with size and positivly correlated with growth - so it should shrink. Preopening expenses wil decline.

 

Even if SSS are flat or shrinking a bit, revenue has to grow (if the agening-growth effect of stores still work - described in post 23), cause a lot oft stores were opened in late 2016 and had mostly negative effect on 2016.

 

On SSS: Revenue by restaurant in 2016 is at 3,178,000 $ (2009 it was 3,168,000 $!). If all other 48 restaurants just reach the level of 2012, which is 4,138,000 $, we will have 200 Mio $ of revenue.

SSS year on year growth from 2012 was: 1,40%, 3,80%, 2,00% and 0,5%. If I add this SSS growth to the numbers of 2012, I end up with a revenue by restaurant of 4,513,000 Mio $.

If you are bearish on SSS, you can count with the numbers of 2012 and estimate that SSS of mature restaurants is going down 7% from today (to compare: 2008 it was -7,2% and 2009 it was -9,3%). Even in this scenario revenue by restaurant and total revenue is going up.

If I price in the crisis SSS scenario of -7,2% and -9,3% on the mature restaurant revenue of 4,513,000 $, the revenue of mature restaurants will be 3,789,000 $ - which is higher as todays revenue of new and mature restaurants.

 

By the way: Main driver of this case is the restaurant operation margin. If they can bring it back to 18% even with a revenue of 160 mio $, there is in my eyes no downside.

[peridotcapital]

21M just doesn't seem to be the right go-forward cash flow expectations. Has anyone looked into how aggressive they are with rents on new stores? Deferred rent and other long-term liabilities are producing a lot of cash (+10.4M) for them. Are they negotiating low rents now and trading that for much higher rents in the future? Furthermore, fixed cost inflation, variable cost inflation, and negative SSS will have a negative impact on cash flows in 2017. 14x EBITDA does not seem cheap

 

Agreed that the $21M is elevated due to unit growth. My assumption would be that as the new units ramp and margins come up, it will mostly offset the lack of one-time cash flow from tenant allowances etc. So maybe it comes down to 15M and then ramps back up toward 20M when all the units are mature.

 

Based on their 2017 guidance, it trades at 7x EBITDA, not 14x. Will be interesting to see if Q1 results show that guidance to be conservative or aggressive.

[atbed]

Still getting up to speed on this name. I appreciate the help

 

To be honest, 21M in operating cash flow vs call it 6M in EBITDA has me concerned. I haven't fully modeled out 2017, so I won't comment on future opcf or EBITDA. But the delta in F16 is very concerning.

 

Ebdem and peridot, going back to your discussion on capex. Based on my understanding, restaurants pay for all capex and then get reimbursed by the landlord. If that is the case with KONA, they put up the 2.6 (net) and the full 0.7-1.2M but will get reimbursed later. So capex per unit should be $3.3-3.8M total. In 2018, I think they spend somewhere in the neighborhood of 10.6M in capex for the three units. But they will get the 0.7-1.2M per unit back in operating cash flow. I believe that is how it usually works.

 

If that was the only issue, I would agree with you Peridot. 15M looks appropriate. But 15M in operating cash flow is still significantly greater than 6M!

 

Low initial rent agreements are not unheard of in retail leases. They are negotiable. Landlords have probably been willing to grant them given the retail environment we have been in. Anyway, I started modeling this out and got a 13% increase in total restaurant operating weeks (2,339 vs 2,072) in 2017. But the chart of future minimum lease payments shows a 32% increase, no?

 

I think normalized 2016M operating cash flow is closer to 10M. There was also an unknown amount of initial franchise fees from 12 units that haven't opened yet. Not sure if this is recurring. If we assume 3-4M in maintenance capex, then this trades at around a 10% FCF yield where it could possibly bottom. But other names like NDLS for example, bottomed at a higher yield IMO.

 

This is becoming an interesting name. I am still wrapping my head around the maturing store hypothesis.

[peridotcapital]

Still getting up to speed on this name. I appreciate the help

 

To be honest, 21M in operating cash flow vs call it 6M in EBITDA has me concerned. I haven't fully modeled out 2017, so I won't comment on future opcf or EBITDA. But the delta in F16 is very concerning.

 

Ebdem and peridot, going back to your discussion on capex. Based on my understanding, restaurants pay for all capex and then get reimbursed by the landlord. If that is the case with KONA, they put up the 2.6 (net) and the full 0.7-1.2M but will get reimbursed later. So capex per unit should be $3.3-3.8M total. In 2018, I think they spend somewhere in the neighborhood of 10.6M in capex for the three units. But they will get the 0.7-1.2M per unit back in operating cash flow. I believe that is how it usually works.

 

If that was the only issue, I would agree with you Peridot. 15M looks appropriate. But 15M in operating cash flow is still significantly greater than 6M!

 

Low initial rent agreements are not unheard of in retail leases. They are negotiable. Landlords have probably been willing to grant them given the retail environment we have been in. Anyway, I started modeling this out and got a 13% increase in total restaurant operating weeks (2,339 vs 2,072) in 2017. But the chart of future minimum lease payments shows a 32% increase, no?

 

I think normalized 2016M operating cash flow is closer to 10M. There was also an unknown amount of initial franchise fees from 12 units that haven't opened yet. Not sure if this is recurring. If we assume 3-4M in maintenance capex, then this trades at around a 10% FCF yield where it could possibly bottom. But other names like NDLS for example, bottomed at a higher yield IMO.

 

This is becoming an interesting name. I am still wrapping my head around the maturing store hypothesis.

 

Totally see where you are coming from. EBITDA is low due to so many brand new units and high pre-opening costs and OCF is high due to tenant reimbursements. Lower unit growth should help these numbers converge, but we'll have to see at what level.

 

The lease payments issue is less clear to me. If they are really getting better early rates, then a bunch of new units should result in a near-term benefit to occupancy expense, but it has been going in the opposite direction (6.8% of sales in 2014, 7.4% in 2015, and 8.1% in 2016).

[ebdem]

I see EBITDA and OCF converging, too. Maybe the attached chart helps a bit to give a direction. What also might be helpful is to look at the numbers of 2011 and 2012. There we had around 7,5 Mio $ of OCF and 1,7 Mio $ of Capex. We had 25/23 restaurants then. Today we have 45/48. So just double the numbers and you have a first estimate for the state today, if the restaurants on the historical pattern. A bit simple, but it points in the direction of the named 15 Mio $ (without the SSS increases).

 

On EBITDA: they estimate it to be 11,5 mio for 2017 (see here: https://seekingalpha.com/article/4050259-kona-grills-kona-ceo-berke-bakay-q4-2016-results-earnings-call-transcript?part=single).

 

Anyway, I started modeling this out and got a 13% increase in total restaurant operating weeks (2,339 vs 2,072) in 2017. But the chart of future minimum lease payments shows a 32% increase, no?

I don't get your point here. Can you please give a bit more detail? Thanks!

 

I think normalized 2016M operating cash flow is closer to 10M. There was also an unknown amount of initial franchise fees from 12 units that haven't opened yet. Not sure if this is recurring. If we assume 3-4M in maintenance capex, then this trades at around a 10% FCF yield where it could possibly bottom.

 

On the franchise fees: Do you really see them? Just quoting F14: "We  are  currently  performing  an  assessment  of  the  revised  standard  and  impacts  on  the  Company’s  consolidated  financial statements and disclosures. To date, we have reviewed a sample of contracts that are representative of the current types of revenue generating streams. We are still in the process of completing our assessment of the impacts, including the potential impacts on variable consideration on royalty income received from franchise sales; however, based on the initial assessment we do not expect it to have a material impact on the consolidated financial statements, and

based on preliminary findings, we do not expect these areas to have an impact on revenue recognition. We expect to have an update to the impacts of the

standard in the second quarter of 2017."

 

On the lease payments: I think they are sometimes connected to the success of restaurants, but they all in all seem to be stable - which is also reflected in the numbers peridot quoted (6.8% of sales in 2014, 7.4% in 2015, and 8.1% in 2016). The disclosed future lease payments indicate that, too. But I am not totally sure.

 

On the maturing thesis: I just made a list with the restaurants and their age and added a conservative assumption on the typical operation margins by age, that were guided in the earning calls. I didn't weight it on size or seats, as numbers for 2016 (and 2017) are missing. I just came out with conservative 13,7% for 2016, which is close to the disclosed 14%. I truly have to wait for the numbers of 2017 and 2018, but this indicates that we are on the right track - if you like to have my excel, just send a PM.

 

By the way: the sentiment for the stock is quite bad. They made the agreement with the banks, which is in my eyes a good result, and it was also knowable, that there has something to come, but the stock is dropping to a new low...

[atbed]

I see EBITDA and OCF converging, too. Maybe the attached chart helps a bit to give a direction. What also might be helpful is to look at the numbers of 2011 and 2012. There we had around 7,5 Mio $ of OCF and 1,7 Mio $ of Capex. We had 25/23 restaurants then. Today we have 45/48. So just double the numbers and you have a first estimate for the state today, if the restaurants on the historical pattern. A bit simple, but it points in the direction of the named 15 Mio $ (without the SSS increases).

 

On EBITDA: they estimate it to be 11,5 mio for 2017 (see here: https://seekingalpha.com/article/4050259-kona-grills-kona-ceo-berke-bakay-q4-2016-results-earnings-call-transcript?part=single).

 

Anyway, I started modeling this out and got a 13% increase in total restaurant operating weeks (2,339 vs 2,072) in 2017. But the chart of future minimum lease payments shows a 32% increase, no?

I don't get your point here. Can you please give a bit more detail? Thanks!

 

I think normalized 2016M operating cash flow is closer to 10M. There was also an unknown amount of initial franchise fees from 12 units that haven't opened yet. Not sure if this is recurring. If we assume 3-4M in maintenance capex, then this trades at around a 10% FCF yield where it could possibly bottom.

 

On the franchise fees: Do you really see them? Just quoting F14: "We  are  currently  performing  an  assessment  of  the  revised  standard  and  impacts  on  the  Company’s  consolidated  financial statements and disclosures. To date, we have reviewed a sample of contracts that are representative of the current types of revenue generating streams. We are still in the process of completing our assessment of the impacts, including the potential impacts on variable consideration on royalty income received from franchise sales; however, based on the initial assessment we do not expect it to have a material impact on the consolidated financial statements, and

based on preliminary findings, we do not expect these areas to have an impact on revenue recognition. We expect to have an update to the impacts of the

standard in the second quarter of 2017."

 

On the lease payments: I think they are sometimes connected to the success of restaurants, but they all in all seem to be stable - which is also reflected in the numbers peridot quoted (6.8% of sales in 2014, 7.4% in 2015, and 8.1% in 2016). The disclosed future lease payments indicate that, too. But I am not totally sure.

 

On the maturing thesis: I just made a list with the restaurants and their age and added a conservative assumption on the typical operation margins by age, that were guided in the earning calls. I didn't weight it on size or seats, as numbers for 2016 (and 2017) are missing. I just came out with conservative 13,7% for 2016, which is close to the disclosed 14%. I truly have to wait for the numbers of 2017 and 2018, but this indicates that we are on the right track - if you like to have my excel, just send a PM.

 

Regarding the 32%, I was pointing to the ~16M in minimum lease payments for 2017 vs. the ~12M in 2016.

 

Also on the franchise fees: "In February and April 2016, we entered into franchise agreements for the development of six Kona Grill restaurants in Mexico and six restaurants in the United Arab Emirates. Territory and franchise fees received in conjunction with these agreements are recorded as deferred revenue and included in “Deferred rent and other long term liabilities” in our consolidated balance sheets. Territory fees are recognized as income on a pro-rata basis at the same time the individual franchise fees for each location are considered earned, typically when the individual franchise unit is opened. We have not recognized any franchise related income for the year ended December 31, 2016."

 

I think this added a few hundred thousand or so in cash.

 

Also, gift cards added about 2M in cash

 

Looking into 2017, I agree with you guys. The upside really depends on a recovery in margins as you guys point out. Slowing down unit growth and focusing on turning around operations in these stores is the right move to make that happen. But I worry about the current new store cohort. Why did new store performance deteriorate from 100%+ to 90% and now 80%?

 

2013: New store AWS = 101.6 compared to Comp store AWS = 81.7

2014: New store AWS = 85.7 compared to Comp store AWS = 85.0

2015: New store AWS = 83.5 compared to compare store AWS = 86.2

 

1Q15: New Store AWS = 80.4 compared to comp store AWS = 86.6

1Q16: New store AWS = 70.5 compared to Comp store AWS = 88.5

 

2Q15: New Store AWS = 89.2 compared to comp store AWS = 91.0

2Q16: New Store AWS = 75.6 compared to comp store AWS = 92.5

 

[atbed]

Still getting up to speed on this name. I appreciate the help

 

To be honest, 21M in operating cash flow vs call it 6M in EBITDA has me concerned. I haven't fully modeled out 2017, so I won't comment on future opcf or EBITDA. But the delta in F16 is very concerning.

 

Ebdem and peridot, going back to your discussion on capex. Based on my understanding, restaurants pay for all capex and then get reimbursed by the landlord. If that is the case with KONA, they put up the 2.6 (net) and the full 0.7-1.2M but will get reimbursed later. So capex per unit should be $3.3-3.8M total. In 2018, I think they spend somewhere in the neighborhood of 10.6M in capex for the three units. But they will get the 0.7-1.2M per unit back in operating cash flow. I believe that is how it usually works.

 

If that was the only issue, I would agree with you Peridot. 15M looks appropriate. But 15M in operating cash flow is still significantly greater than 6M!

 

Low initial rent agreements are not unheard of in retail leases. They are negotiable. Landlords have probably been willing to grant them given the retail environment we have been in. Anyway, I started modeling this out and got a 13% increase in total restaurant operating weeks (2,339 vs 2,072) in 2017. But the chart of future minimum lease payments shows a 32% increase, no?

 

I think normalized 2016M operating cash flow is closer to 10M. There was also an unknown amount of initial franchise fees from 12 units that haven't opened yet. Not sure if this is recurring. If we assume 3-4M in maintenance capex, then this trades at around a 10% FCF yield where it could possibly bottom. But other names like NDLS for example, bottomed at a higher yield IMO.

 

This is becoming an interesting name. I am still wrapping my head around the maturing store hypothesis.

 

Totally see where you are coming from. EBITDA is low due to so many brand new units and high pre-opening costs and OCF is high due to tenant reimbursements. Lower unit growth should help these numbers converge, but we'll have to see at what level.

 

The lease payments issue is less clear to me. If they are really getting better early rates, then a bunch of new units should result in a near-term benefit to occupancy expense, but it has been going in the opposite direction (6.8% of sales in 2014, 7.4% in 2015, and 8.1% in 2016).

 

Agree, lowering unit growth is the right move and should help things turn around.

 

I think they get a benefit in cash flows but not in the income statement. I believe rent expense booked in the income statement is the average for the lease term, so it is higher than cash rent in the first half but revert above in the second half.

 

[ebdem]

Regarding the 32%, I was pointing to the ~16M in minimum lease payments for 2017 vs. the ~12M in 2016.

 

Maybe I miss sth here, but they had 37 stores in 2016 and 45 in 2017. 12/37 is 0,32 and 16/45 is 0,35. I don't have the size and the local rent map/price levels of the new stores, but maybe this is the reason why they are more expensive.

 

Also on the franchise fees: "In February and April 2016, we entered into franchise agreements for the development of six Kona Grill restaurants in Mexico and six restaurants in the United Arab Emirates. Territory and franchise fees received in conjunction with these agreements are recorded as deferred revenue and included in “Deferred rent and other long term liabilities” in our consolidated balance sheets. Territory fees are recognized as income on a pro-rata basis at the same time the individual franchise fees for each location are considered earned, typically when the individual franchise unit is opened. We have not recognized any franchise related income for the year ended December 31, 2016."

This was the quote I was looking for. Thanks!  :D

 

Looking into 2017, I agree with you guys. The upside really depends on a recovery in margins as you guys point out. Slowing down unit growth and focusing on turning around operations in these stores is the right move to make that happen. But I worry about the current new store cohort. Why did new store performance deteriorate from 100%+ to 90% and now 80%?

 

2013: New store AWS = 101.6 compared to Comp store AWS = 81.7

2014: New store AWS = 85.7 compared to Comp store AWS = 85.0

2015: New store AWS = 83.5 compared to compare store AWS = 86.2

 

1Q15: New Store AWS = 80.4 compared to comp store AWS = 86.6

1Q16: New store AWS = 70.5 compared to Comp store AWS = 88.5

 

2Q15: New Store AWS = 89.2 compared to comp store AWS = 91.0

2Q16: New Store AWS = 75.6 compared to comp store AWS = 92.5

 

I think New Store AWS is just negativly correlated with growth. They grew restaurants strongly and doubled the amount (see attachments). This growth did happen monthly and margins of new stores behave like this:

 

After 6 months Break-Even

After 12 months 7-10% Marge

After 18 Months 13-16% Marge

24 till 48 months 17-18% Marge

 

So I think this is just reflected in AWS.

 

In my eyes, it is simple. Half of the company is just under or still in water. We got to wait till they move out and get dry.

[atbed]

Regarding the 32%, I was pointing to the ~16M in minimum lease payments for 2017 vs. the ~12M in 2016.

 

Maybe I miss sth here, but they had 37 stores in 2016 and 45 in 2017. 12/37 is 0,32 and 16/45 is 0,35. I don't have the size and the local rent map/price levels of the new stores, but maybe this is the reason why they are more expensive.

 

 

The average number of units in 2016 is about 41. In 2017, it should be around 46. That's a 12% increase in the average number of stores, but minimum base rents are going up 30%+. Larger stores or better markets could be the reason, but if that is the case the underperformance of the current new-store cohort looks worse.

 

In the past, new stores generated similar sales (AWS) as comp stores and even did better in some cases. But that's not the case for the current cohort, which is generating about 80% of the sales volume of more mature stores.

 

[ebdem]

Thanks for your reply! I am not sure to which part of my post you are refering to. Can you maybe shorten the quote? (thanks for doing it! :))

 

With "the underperformance (80% of comp base vs 90-100% of comp base) looks worse" you mean old and new stores, or?

I just took a look at the chart in their 2016 Q2 news release. The numbers are not really comparable, cause the number of restaurants on both labels changed. 4 restaurants with higher margins moved to the comps (from 23 to 27) and the mix of non-comps got younger and there filled with restaurants with weaker operating profits.

 

Just found this interesting quote in the earnings call: "The focus for 2017 is to build sales and improve the operating margins of our 12 non-comparable base restaurants. As Christi mentioned, these restaurants had an average age of seven months as of yearend."

[mattone]

re: newer stores not performing up to par, some of that is obviously going on since they took a write-off for 5 restaurants in Q4.

Some of my fears are:

- More short-term in nature: spoke to some industry contacts and it seems some people are jumping ship and internal environment is a little chaotic (going from a high grower to not, is a cause).  There is some anecdotal evidence on glassdoor and couldn't find anything on LinkedIn (ex-employees, etc.) but that could be a while as ppl don't necessarily update their profile realtime.

-  I have noticed you can buy Kona gift cards for 40-55% off (higher than most other peers).  Not sure what this figure was historically but sounds steep.  Are they desperate to drive traffic?

- increased competitive environment (mgmt talks about this in Q4 call) - given the higher debt load (even higher post Q4, from 10K add another ~$8mm to debt), could this become a concern down the road?  I was glad to see banks re-negotiated debt (with stricter covenants), market doesnt seem too happy with it.  re: general restaurant environment, listen to Ignite's ICR conference, some good comments.

- I don't live near a Kona but have a mailed a few (cheap) gift cards to contacts that are, will report if anything interesting comes up.

- Anybody been to one recently?

 

 

[ebdem]

Happy to hear your/your friends observation from the restaurants!

 

On debt and this downside - from the earnings call in Q4: "We had $26.8 million in debt outstanding at December 31, 2016. As mentioned on our last call, during October, we entered into a five-year amended credit agreement with KeyBank National Association and Zions First National Bank providing for revolving and term credit facilities totaling $60 million. Their managed facilities allow for available borrowings of $60 million compared to $35 million under the old facility and continues an accordion feature that include increased availability by an additional $25 million for total availability of $85 million. The amendment provides little flexibility to allocate capital for future growth, share repurchases and other corporate initiatives."

There is space to borrow money - and in my eyes they are able to pay the 1,5 mio of current interest and there is space to pay higher interest fees. If restaurant operation margin, which is on depressed levels now (I mapped that out in post 56 - also with reference to the crisis of 2008/09), does not go back to 16% or better 18% paying back debt will be a real challenge. But if you assume operation margins staying flat, you should definatly not invest here.

[mattone]

Debt is ~$35mm, from 10K:

"Subsequent to Decmeber 31, 2016, we borrowed an additional $8 million on the Credit Facility to fund working capital and the share repurchase program."

 

 

[oldcookie]

as the CEO owns 12% of the shares

 

Just started reading up on this stock, saw this statement in the first post which doesn't seem to be correct.  Kona has about 10m share outstanding, but the CEO has 92k shares plus 50k of options.  Did I miss something?

 

[NBL0303]

as the CEO owns 12% of the shares

 

Just started reading up on this stock, saw this statement in the first post which doesn't seem to be correct.  Kona has about 10m share outstanding, but the CEO has 92k shares plus 50k of options.  Did I miss something?

 

1. Name and Address of Reporting Person *

Bakay Berke 2. Issuer Name and Ticker or Trading Symbol

KONA GRILL INC [ KONA ] 5. Relationship of Reporting Person(s) to Issuer (Check all applicable)

__ X __ Director                      __ X __ 10% Owner

__ X __ Officer (give title below)      _____ Other (specify below)

President and CEO

(Last)          (First)          (Middle)

7150 E CAMELBACK ROAD, SUITE 333 3. Date of Earliest Transaction (MM/DD/YYYY)

9/9/2016

 

 

Common Stock    1230000  I  By BBS Capital Fund, LP

[gfp]

Yep, that CEO has 13.9% on the last proxy

Berke Bakay (3)

1,413,580 13.9 %

[oldcookie]

Thanks guys!

[atbed]

re: newer stores not performing up to par, some of that is obviously going on since they took a write-off for 5 restaurants in Q4.

Some of my fears are:

- More short-term in nature: spoke to some industry contacts and it seems some people are jumping ship and internal environment is a little chaotic (going from a high grower to not, is a cause).  There is some anecdotal evidence on glassdoor and couldn't find anything on LinkedIn (ex-employees, etc.) but that could be a while as ppl don't necessarily update their profile realtime.

-  I have noticed you can buy Kona gift cards for 40-55% off (higher than most other peers).  Not sure what this figure was historically but sounds steep.  Are they desperate to drive traffic?

- increased competitive environment (mgmt talks about this in Q4 call) - given the higher debt load (even higher post Q4, from 10K add another ~$8mm to debt), could this become a concern down the road?  I was glad to see banks re-negotiated debt (with stricter covenants), market doesnt seem too happy with it.  re: general restaurant environment, listen to Ignite's ICR conference, some good comments.

- I don't live near a Kona but have a mailed a few (cheap) gift cards to contacts that are, will report if anything interesting comes up.

- Anybody been to one recently?

 

Jeez, Ignite... that's some fall from grace. Restaurants can be a tough biz...

 

That's some helpful scuttlebutt. I'm not surprised things are a bit chaotic. Poor performance definitely diminishes career prospects. I'm a bit wary of chains who sell discounted gift cards at Costco. JMBA did it a few years ago. Look at how SSS has trended...down down down. Good thing they ended it.

 

These new stores are dogs. Definitely something wrong. They must have gotten sloppy as growth ramped up and made a mistake. It's a shame, since new stores in '14 and '15 seemed to do so well right out of the gate (strong AWS and strong margins). Now they don't even disclose. I believe they mentioned tourist locations as an issue since they don't get repeat customers. I had a face palm moment hearing about these openings, given how they highlight their loyalty program. I'm a bit concerned about the new Miami location, which is the only one of the 3 new ones that seem to be in a touristy location (h/t ebdem).

 

3 stores opened in 1Q14 and 1 opened in 2Q14. These 4 reported margins of 13.1% in 2Q14 and 16.8% in 3Q14.

 

Wish they weren't so levered

[ebdem]

These new stores are dogs. Definitely something wrong. They must have gotten sloppy as growth ramped up and made a mistake. It's a shame, since new stores in '14 and '15 seemed to do so well right out of the gate (strong AWS and strong margins). Now they don't even disclose. I believe they mentioned tourist locations as an issue since they don't get repeat customers. I had a face palm moment hearing about these openings, given how they highlight their loyalty program. I'm a bit concerned about the new Miami location, which is the only one of the 3 new ones that seem to be in a touristy location (h/t ebdem).

 

3 stores opened in 1Q14 and 1 opened in 2Q14. These 4 reported margins of 13.1% in 2Q14 and 16.8% in 3Q14.

 

Come one... calling the new stores dogs is really painting a real picture - that is one reason why we are here. As I am invested here I don't want to fall into confirmation bias, but I don't think they are dogs. You have to weight the climate in which opening happend. In 2013 and 2014 SSS were a wave that pushed them. They had tailwinds - as the graphic shows. So numbers looked good.

 

Now it changed a bit. They have headwinds. And maybe also a perfect storm. But let's wait and see what we can see, if the weather stabilizes. I don't think it are dogs. I think it are restaurants that are making money.

 

Also got to ask what you pay for it. They have replacement costs of 3 mio for each of the 45 restaurants = 135 mio $. Market Cap is about 60 mio $. EV is around 95 $. The have a historical cash on cash return of 27% for the 135 mio. So you might get a 38% cash on cash return rate on current levels.