Business and Accountancy
Kona Grill Analysis
Sponsoring Faculty Member: Professor Cindi Bearden
Caelin Campbell
Kona Grill is an upscale restaurant that operates 30 stores in over 19
states nationwide (Kona Grill [KG], 2015). The company will be compared to
The Cheesecake Factory, which is also an upscale restaurant that operates 189
restaurants domestically (The Cheesecake Factory [CF], 2015) Kona Grill is also
compared to an industry average, which is categorized as 7 Full-Service Restaurants which averaged $77 million in Sales between fiscal years 2010 and
2013 (BizMiner, 2015). Kona Grill was founded in 1998 and went public in 2005
(KG, 2015). The Cheesecake Factory started in 1972 and went public 20 years
later in 1992 (CF, 2015). Both companies are listed on the Nasdaq Global Stock
Exchange.
In the analysis, the primary source used was SEC filings regarding
Kona Grill and The Cheesecake Factory. This was used as a primary source for
the numbers and I created the ratios used in the analysis.
The analysis is structured into six categories: profitability, investor,
liquidity, activity, leverage, and cash flow analysis. Some important considerations for this report are that Kona Grill does not pay cash dividends, so ratios
associated with dividends will be excluded from this analysis (KG, 2015). Inventory was placed in Other Current Assets and the Other Current Assets was an
estimated 3% of total assets for the last five fiscal years. This is not material and
will not be discussed in this analysis (KG, 2015).
The fiscal year end for Kona Grill is December 31 and The Cheesecake
Factory has a fiscal year end the Tuesday closest to December 31 (CF and KG,
2015). The current market cap for Kona Grill is $292.2 million and $2.4 billion
for The Cheesecake Factory (NASDAQ, 2015). As mentioned earlier, The Cheesecake Factory operates 159 more stores than Kona Grill at the end of fiscal year
2014, which is why The Cheesecake Factory earned $1.9 billion in sales for fiscal
year 2014 compared to Kona Grill who earned $119 million for fiscal year 2014
(KG and CF, 2015). Throughout this report Kona Grill will be represented in red
and The Cheesecake Factory will be represented in blue.
The Kona Grill Annual Report for investors showed the percentage of revenue
across different times of the day, which is in Figure 1. In Figure 1, based on fiscal 2014 revenue, lunch is specified as 11 a.m. to 3 p.m., happy hour was 3 p.m.
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to 5 p.m., dinner was from 5 p.m. to 9 p.m., and reverse happy hour was from
9 p.m. to close which ranged from 11 and 12 p.m. As expected dinner was the
largest portion of revenue at 52%, but the important piece to take away is that
by earning sales at various parts during the day shows that the company is fully
utilizing the rent space.
Percentage of Revenue Across Time of Day
Figure 1
Restaurant Industry Outlook
The restaurant industry is being driven by an improving economy.
One important measure of the improving economy is how much disposable
income the United States consumers have. A measure of the economy is personal disposable income, which increased from $11,000 billion in 2010 to over
$13,000 billion in 2014 (The University of Michigan, 2015). Restaurant sales are
largely tied to the Consumer’s Disposable Income level. One of the benefits the
restaurant industry is expected to provide is creating 1.7 million jobs by 2025
(National Restaurant Association [NRA], 2015).
The restaurant industry is experiencing rising food costs, which affects
the profitability of a company by rising costs of goods sold (Savilonis, 2014).
As of February of 2014, a pound of ground beef cost $3.55, which is a record
high even after accounting for inflation (CNN, 2014). Ground beef increased by
56% since 2010. Ground beef is not the only thing rising in demand, but round
steak is too, which is selling $5.28, which the government states is the highest
price seen in the last 20 years (CNN, 2014). Ricky Volpe, economist with the U.S
Department of Agriculture, explains that droughts in California and growing
demand for beef in Asia has increased demand for beef (CNN, 2014). This resulted in beef posting the largest month to month increase in February in more
than a decade (CNN, 2014).
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Sales
Sales have increased for five consecutive years between fiscal years
2010 and 2014. See Figure 2. Restaurant sales are dependent upon consumer
disposable income, which is largely tied to the economy.
Kona Grill
(amounts in millions)
2010
2011
2012
2013
2014
$82.7
$93.7
$96.0
$98.3
$119
Figure 2
A measure of the economy is Personal Disposable Income, which increased from $11 billion in 2010 to over $13 billion in 2014 see Figure 3. Another indicator of the economy is consumer confidence, which had a lower
rating of 60 in 2011 and had a higher rating of 100 in 2014 (The University of
Michigan, 2015).
Figure 3
Sales are heavily influenced by foot traffic levels. Between fiscal years
2010 and 2011, the foot traffic increased by 3%, which was the highest over
the five fiscal years. On average over the last five fiscal years, the foot traffic
increased by roughly 1.8% (KG, 2015). The increase in foot traffic levels led to
an increase in comparable store sales for the last five fiscal years. Between fiscal
years 2010 and 2014, the same-store sales growth was 8.8%, 2.7%, 1.4%, and
3.8% (KG, 2015).
Profitability Ratios
The biggest impact on sales between fiscal years 2012 and 2013 and
fiscal years 2013 and 2014 was the increase in restaurant locations (KG, 2015).
See Figure 4. At the end of fiscal year 2012, Kona Grill had twenty-three restaurants, which quickly turned into twenty-five by the end of fiscal year 2013. Sales
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increased by $1.2 million between fiscal years 2012 and 2013 as a result of the
two store openings (KG, 2015). The company added five more restaurants in
2014 to have a total of thirty by the end of fiscal year 2014 (KG, 2015). The company expanded the amount of retail restaurants by 20%. Sales increased by
$16.3 million between the fiscal years 2013 and 2014 because of the five new
restaurants and the two restaurants that opened in 2013 in the fourth quarter
that reached a full year of sales (KG, 2015).
The company has seven more restaurants scheduled to be added in
2015 including one in Puerto Rico, which opened successfully in quarter one of
fiscal 2015 (KG, 2015). At the end of fiscal 2015 the company will have a total of
thirty-seven restaurants.
2012
23
Number of Restaurant Locations
2013
2014
25
30
2015
37
Figure 4
Gross Profit
The Gross Profit Margin is one indicator of a company’s profitability.
See figure 5. Kona Grill’s Gross Profit Margin was 15% in fiscal 2010 and 18% in
fiscal 2014. Kona Grill had an average Gross Profit Margin over the last five fiscal
years of 17.6%, which is 1% lower than The Cheesecake Factory’s Gross Profit
Margin average of 18.6%. The industry average had a Gross Profit Margin of
roughly 55% in 2013, which was 37% higher than Kona Grill’s Gross Profit Margin in 2013. This was a result of the industry average only including cost of sales
into the Cost of Goods Sold calculation (BizMiner, 2015). Kona Grill and The
Cheesecake Factory included Sales, Labor, Operating Expense, and Occupancy
(rent) into Cost of Goods Sold (KG, 2015).
Figure 5
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Operating Profit
Operating Profit Margin is one of the most important indicators of a
company’s profitability. See Figure 6. Kona Grill’s Operating Profit Margin went
from (1.3) % in 2010 to 0.8% in 2014. This was a result of sales growth from fiscal
years 2009 to 2010 of 8.8% and sales growth from fiscal years 2013 to 2014 of
21%. Total Costs and Expenses in fiscal year 2010 as a percentage of sales were
101.3% and in fiscal year 2014 Total Costs and Expenses as a percentage of sales
were 99.2%.
Figure 6
In 2012, Kona Grill’s Operating Profit Margin was roughly 6% and by
2014 it was down to less than 1%. This was a result of Labor, Cost of Sales, and
General and Administrative expenses growing at a faster rate than Sales. See
Figure 7. Cost of Sales increased as a result of unit expansion and the increase in
beef and dairy prices (KG, 2015). General and Administrative expense increased
from additional employee costs, start-up costs associated with the international franchising strategy, and higher audit fees to ensure compliance with SOX
404 (KG, 2015). SOX 404 is part of the Sarbanes Oxley Act to protect investors
from accounting fraud (KG, 2015).
Sales, Labor, & Cost of Sales Growth
Sales
Growth from
2012 to 2013
2%
Growth from
2013 to 2014
21%
Labor
4%
22%
Cost of Sales
2%
23%
General & Administrative Expense
12%
36%
Figure 7
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Net profit
The Net Profit Margin for is an important ratio for investors. Kona Grill’s Net
Profit Margin was (1.9) % in fiscal year 2010 and 0.6% in fiscal year 2014. See
Figure 8. The 2010 discontinued operations was a result of closing the Naples,
Florida restaurant in 2008 (KG, 2012). Kona Grill recognized expenses from discontinued operations as a result of closing the restaurants in Sugar Land, Texas
and West Palm, Florida on the Income Statement under Discontinued Operations Loss in 2011 (KG, 2012). There was a disagreement between the landlord
in Texas and Kona Grill over lease termination costs, which led to a lawsuit.
Kona Grill and the landlord reached a settlement of $950,000 in September of
2012 (KG, 2015). The litigation costs and incremental lease termination costs
were included in Discontinued Operation Loss in 2012 (KG, 2015).
Investor Ratios
One of the most important evaluations for an investor is Earnings Per
Share. Kona Grill’s Earning Per Share went from $(.12) in fiscal year 2010 to $0.7
in fiscal year 2014. See Figure 8. Earnings Per Share fluctuated because Net Income was $4.8 million in 2012 and $700,000 in 2014. Net Income decreased
from fiscal year 2012 to 2014 as a result of added expenses for new restaurants.
The company opened seven restaurants in the last three fiscal years, but five of
the seven restaurants have not been open for a full year of sales. The company
also has leases to open seven more restaurants in 2015. The annual report gave
an estimate of the cost to open a Kona Grill, $3.2 million to $3.7 million and
$425,000 in cash for preopening expenses (KG, 2015). A conservative estimate
of $3.2 million per restaurant multiplied by seven new restaurants equals $22.4
million in costs (KG, 2015). Kona Grill will double that cost when it includes
2015.
Earnings Per Share
2010
2011
2012
2013
2014
Kona Grill
$(.12)
$.25
$.60
$.32
$.07
Cheesecake Factory
$1.39
$1.70
$1.85
$2.19
$2.04
Figure 8
This was a result of Kona Grill’s Net Income, which was $(1.6) million in fiscal
year 2010 and $0.7 million in 2014. See Figure 9. This was also a result of outstanding shares increasing for Kona Grill by 700 million shares from fiscal years
2010 and 2014. Kona Grill sold shares to acquire cash for new unit expansion,
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Caelin Campbell
capital expenditures, and general corporate purposes (KG, 2015).
(amounts in millions)
Earnings Per Share
2010
2011
2012
2013
2014
Net Income
$(1.6)
$2.0
$4.8
$2.7
$0.7
Outstanding Shares
9,167
9,242
8,726
8,573
9,870
Figure 9
Stock Price
The Stock Price is another indicator that investors use to make decisions. See
Figure 21 page 20. Kona Grill had a selling price of $2.91 in 2010 and the selling price increased to $23.09 at the end of fiscal year 2014 (KG, 2015). This is a
result of analyst’s belief in long term profitability based on historical success
(NASDAQ, 2015). Kona Grill’s Sales increased for the last five fiscal years. The
company has expanded the amount of restaurants by 20% from 2013 to 2014
(25 to 30 restaurants). As well, Kona Grill has signed seven more restaurant
leases in 2015 to have a total of thirty-seven restaurants. Many analysts have
stated that there is long-term profitability in Kona Grill (NASDAQ, 2015). The
Cheesecake Factory went from selling at $21.04 in 2010 to $50.14 per share in
2014. This was a result of consistent Net Income growth for the last five fiscal
years (NASDAQ, 2015). The graph in Figure 10 shows the return of $100 from
Kona Grill versus the peer industry, which includes The Cheesecake Factory, BJ’s
Restaurants, Bravo Rio Group, and Granite City Food and Brewery versus the
NASDAQ (KG, 2015).
Figure 10
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Return on Assets and Return on Equity Ratios
Another two ratios investors use to evaluate a company is the Return
on Assets and the Return on Equity. The Return on Assets for Kona Grill went
from above 12% in fiscal year 2012 to below 1% return in fiscal year 2014. See
Figure 11. The company’s Return on Assets decreased because Net Income decreased and assets increased for the last 3 fiscal years. Kona Grill’s Net Income
went from $5.2 million in 2012 to $0.7 in 2014. See Figure 12. Assets in fiscal
2012 went from $39.3 million in 2012 to $94.8 million in fiscal year 2014. Assets increased in 2014 as a result of selling 2.3 million shares of stock, which
raised $40.9 million (KG, 2015). The Cheesecake Factory went from 9% Return
on Assets in 2012 to a 9% Return on Assets in 2014. The Cheesecake Factory is a
much larger company, so its losses do not affect the company as much as Kona
Grill is affected.
Figure 11
Net Income decreased from 2012 to 2013 as a result of Labor and Selling and Administrative expenses growing at a faster rate compared to Sales.
Kona Grill had a sales increase of 2% from 2012 to 2013 and a Labor growth
from 2012 to 2013 of 4%. General and Administrative expense grew by 12%
from fiscal year 2012 to 2013. From 2013 to 2014, Sales grew by 21% and General and Administrative expense grew by 36% from 2013 to 2014. As well, Labor
grew by 24% from 2013 to 2014. Assets increased from 2012 to 2013 because
Property and Equipment increased by 39% or $11.4 million. In 2013 to 2014,
Cash increased as a result of selling stock for $40.9 million.
Percentage Growth from Year to Year
Figure 12
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2012 to 2013
2013 to 2014
Net Income
(43)%
(74)%
Assets
27%
89%
Caelin Campbell
Kona Grill’s Return on Equity followed the same pattern as the Return
on Assets. In 2012 the Return on Equity was 25% and in 2014 it was less than
1%. See Figure 13. This was also a result from Kona Grill’s Net Income went from
$5.2 million in 2012 to $0.7 in 2014. See Figure 12. Kona Grill’s equity increased
from 2012 at $18.8 million to $65.4 million in 2014. See Figure 14. This was also
a result from Kona Grill selling 2.3 million shares, which totaled $40.9 million
net proceeds.
Figure 13
Kona Grill’s equity increased from 2012 at $18.8 million to $65.4 million in 2014 see Figure 14. This was also a result of Additional Paid in Capital increasing from Kona Grill selling 2.3 million shares of stock, which totaled $40.9
million net proceeds (KG, 2015).
Kona Grill Net Income & Equity Growth Year to Year
Net Income
Stockholder’s Equity
2012 to 2013
(43)%
2013 to 2014
(74)%
18%
193%
Figure 14
Liquidity
The Current Ratio is important to evaluate if the company has
enough cash to cover its short-term needs. The Kona Grill’s current ratio was 1.1
in 2012 and was 3.2 in 2014, which was 2 higher than the Cheesecake Factory
in 2014. See Figure 15. Kona Grill’s most material account as a percentage of assets is Cash and Cash Equivalents, which increased by $28.7 million from 2012
to 2014. This increase was a result of the $40.9 million cash received from selling shares (KG, 2015). Another important ratio is the Quick Ratio, which was not
59
used in the analysis because inventory was not material. The only difference
between Current Ratio and Quick Ratio is that the company subtracts inventory from the numerator. Kona Grill included inventory in other current assets,
which was 3% average as a percentage of total assets over the last five fiscal
years (KG, 2015).
Figure 15
Activity
Kona Grill’s most material Asset account is Property and Equipment.
In 2013, it accounts for 81% of total assets. The other account that has a material effect on the assets is Cash and Cash Equivalents, which increased in 2014
because of the stock sale mentioned earlier. For those reasons Fixed Asset
Turnover is an important ratio because fixed assets are the largest account as
a percentage of total assets. In 2012, Kona Grill’s Fixed Asset Turnover was 3.3
and in 2014 it was 2.2. See Figure 16. This was a result of Fixed Assets growing
at a faster rate as compared to Sales. See Figure 17. Kona Grill is investing in
more Fixed Assets because it is expanding the number of retail restaurants (KG,
2015). Kona Grill had 23 restaurants in 2012. It will have 37 by the end of fiscal
year 2015. See Figure 4 (KG, 2015). The Cheesecake Factory stayed the same at
2.4 for the last three fiscal years. Fixed Assets grew at a similar rate as compared
to Sales for The Cheesecake Factory. From 2013 to 2014, The Cheesecake Factory Sales grew by 5% and Fixed Assets grew by 4%.
Figure 16
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Caelin Campbell
Fixed assets increased between fiscal years 2012 and 2014 as a result
of putting equipment in the seven new stores. Kona Grill also spent $21.4 million in Property and Equipment in anticipation of opening seven more stores
in 2015 (KG, 2015).
Fixed Asset and Sales Growth Year to Year
2012 to
2013 to
2013
2014
Sales
2%
21%
(Kona Grill)
Fixed Assets
39%
34%
(Kona Grill)
Figure 17
Leverage Ratios
Kona Grill did not have any long-term debt, so the Debt to Equity Ratio
is excluded from this analysis. Deferred Rent is the only liability that is material
on the Balance Sheet. Kona Grill’s Deferred Rent is money Kona Grill owes the
landlord and will be paid later. It is the difference between the monthly rent
payment and the monthly rent expense associated with an operating lease
that will be paid in the future (Simple Studies, 2015). An average of Deferred
Rent for the last five fiscal years was $14 million (KG, 2015). Deferred rent has
increased from $12 million in fiscal year 2012 to $17 million as a result of recording tenant improvement allowances for new restaurants (KG, 2015).
Cash Flow Analysis
The three sections of the Cash Flow Statement are represented in Figure 18. Cash from the Operating Section for Kona Grill increased by an
estimated $3 million from fiscal year 2010 to 2011 as a result of higher net income and an increase in accrued expenses. Kona Grill’s Net Income went from
$(1.6) million in 2010 to $2 million in 2011. Accrued expenses went from $292
thousand in fiscal year 2010 to $2 million in 2011. Kona Grill increased cash
from the Operating Section by an estimated $7 million as result of an increase
in deferred rent, depreciation, and the timing of payments for accrued expenses (KG, 2015). Deferred rent increased from $1.9 million in 2012 to $4.6 million
in 2014. Depreciation was $5.7 million in 2012 and increased to $7.2 million
in 2014 as a result of seven restaurant openings (KG, 2015). Accrued expenses
also increased from $(1.6) million in 2012 to $1.5 million in 2014 (KG, 2015).
Kona Grill’s investing section was influenced by the purchases of property and equipment. Cash from the Investing Section went from $1.8 million in
fiscal year 2010 to $(21.8) million in 2014 as a result of purchasing $21.8 million
in property and equipment as a result of opening five new restaurants in 2014.
In 2013, Kona Grill purchased $14.4 million in property and equipment, con61
sisting of architecture and design fees, general contractor costs, and furniture
and equipment costs (KG, 2015). The Financing Section increased from $(6.4)
million in 2010 to $37.8 million in 2014. This was a result of a public offering of
2.3 million shares, which generated $40.9 million (KG, 2015).
Cash Flow Analysis
Operating Section
2010
4,718
2011
7,676
2012
7,352
2013
9,460
2014
14,744
Investing Section
1,808
(1,538)
(1,776)
(14,536)
(21,858)
Financing Section
(6,375)
(2,366)
(3,914)
2,968
37,811
Figure 18
Kona Grill’s Cash Inflows are represented in Figure 19. Operating Activities were the highest material average as a percentage of total inflows over the
last five fiscal years. In 2010 the most material inflow as a percentage of total
inflows was Sale of investments. This was a result of selling $5.8 million in auction rate securities and $0.3 million in other investments. (KG, 2015). In 2014,
Kona Grill sold 2.3 million shares for $40.9 million (KG, 2015). In 2013, Kona Grill
borrowed $3.5 million from the Key Bank Credit Facility (KG, 2015).
Cash Inflows
(amounts in thousands)
Operating Activities
Proceeds from Issuance of Common
Stock
Net Sales of Investments
Sale of Common
Stock under employee purchase
Net Borrowings on
short-term borrowings
Other
Figure 19
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2010
2011
2012
2013
2014
$4,718
$7,676
$7,352
$9,460
$14,744
-
-
-
-
$40,879
$6,108
-
-
-
-
$109
$561
$1,536
$310
$1,466
-
-
$500
$3,500
-
-
-
-
$87
-
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Cash Outflows was primarily affected by the purchase of property
and equipment. See Figure 20. The purchase of property and equipment went
from $4.3 million in 2010 to $14.4 million in 2013 and $21.8 million in 2014 as
a result of costs associated with opening seven new restaurants (KG, 2015). In
2010, Kona Grill repaid $5.8 million under a line of credit with UBS (KG, 2012).
As well, $0.7 million principle payments on equipment loans were made (KG,
2012). Kona Grill also repaid $3.8 million in 2014 to the KeyBank credit facility,
included $0.2 million in fees for upsizing to $35 million for the credit facility to
fund the increase in the number of stores (KG, 2015)
(amounts in
thousands)
Purchase of Property & Equipment
Purchase of
Retirement of
Common Stock
Repayments
borrowings of Line of
Credit
Other
2010
Cash Outflows
2011
2012
2013
2014
$4,318
$1,492
$1,794
$14,445
$21,855
-
$2,423
$5,536
$203
-
$5,800
-
$262
$370
$3,500
$684
$504
$152
$447
$1,037
Figure 20
Recent Quarter Results
The recent quarter results will be released one day before the analysis
has to be completed. Quarter 1 of fiscal 2015, will be released May 5 at 5 p.m.
Conclusion
This conclusion will be presented in a SWOT structure. Kona Grill has
many strengths including increasing Sales for the last five fiscal years. Since
2010, Sales increased by 44% to $119 million. Sales increased as a result of
the improving economy. A measure of the economy is Personal Disposable
Income, which increased from $11 billion in 2010 to over $13 billion in 2014
(The University of Michigan, 2015). The stock price went from selling at $3 per
share in 2010 to $21 per share in 2014. The investors see long-term growth in
Kona Grill, which has opened seven restaurants in the last two fiscal years and
plans to open seven more in 2015 (KG, 2015). The investors also like Kona Grill
because it does not have any long-term debt. The only debt associated with
Kona Grill is Deferred Rent (KG, 2015).
Kona Grill had a decrease in Return on Equity and a Return on Assets, which is
the company’s biggest weaknesses. Kona Grill had a Return on Equity of 25%
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in 2012 and in fiscal year 2014 it was less than 2%, as a result of decreasing
Net Income. In 2014, Kona Grill had a stock offering that had net proceeds of
$40.9 million, which affected Return on Assets and Return on Equity (KG, 2015).
It affected Return on Assets by increasing Assets by 89% between fiscal year
2013 and 2014 and affected Return on Equity by increasing Additional-Paid-inCapital on the equity side. (KG, 2015). Return on Assets decreased as a result of
Net Income decreasing and cash collected from the stock offering (KG, 2015).
Kona Grill has an opportunity to expand the number of restaurant locations and to enter into international territories. Kona Grill went from twentythree stores in 2012 to thirty stores at the end fiscal year 2014. The company
has also signed leases for seven more restaurants in 2015. Kona Grill has had
talks about opening locations in the Middle East and Latin America (Doerfler,
2015). Kona Grill recently created a new position, vice president of international development (Doerfler, 2015). The company hired Carlos Leon, who has over
20 years of experience in international restaurant franchise expansion (Doerfler, 2015).
Restaurants are largely tied to the economy, which is a threat to Kona
Grill. The economy was in a recession in 2009 and as a result Kona Grill’s Net
Income was $(21.6) million (KG, 2012). If the economy goes into another recession, then the average Personal Disposable Income in the United States will decrease resulting in less Sales for Kona Grill. Another threat to Kona Grill is rising
food costs, which decreases restaurant profitability by raising Cost of Goods
Sold. As of February of 2014, a pound of ground beef cost $3.55, which is a
record high even after accounting for inflation (CNN, 2014). Rising food costs is
something Kona Grill has little control over, but it might be in a better position
than other restaurants because the company has a diverse menu.
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Caelin Campbell
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