SCOTTSDALE – Kona Grill (NASDAQ: KONA) hopes to follow in the footsteps of other successful high‑volume eateries such as P.F. Chang’s and The Cheesecake Factory by serving up tasty returns to investors. But for now the Scottsdale‑based company is on a growth binge aimed at establishing the restaurant as a national upscale casual brand. With the focus on expansion, investors are prepared to

digest another year of losses before the company crosses into the black in 2007.

Since going public last summer, Kona has traded between $7.25 and $13.89, closing recently at $12.34. In the first quarter of 2006, the company reported a more than 27 percent increase in revenue to $10.2 million, with a same‑store sales increase of 6.2 percent. It suffered a net loss of  $300,000.

One hiccup in the company’s plans has been caused by problems at its location in Sugarland, Tex., in the greater Houston area, according to Chief Financial Officer Mark Robinow.

“We built the restaurant there as part of an addition to an existing mall, and the landlord ran into some permitting issues so we wound up in a construction zone,” he explained. “It’s taken away parking, visibility and hurt our marketing, so we’ve been operating at a reduced sales level.” The situation should be resolved by October, Robinow added.

In addition to Sugarland, Kona owns and operates two Valley restaurants–one in Scottsdale, the other in Chandler–and  others in Denver; Kansas City; Omaha, Las Vegas, Dallas, San Antonio and Carmel, Ind. Plans call for the company to open five new locations this year–two in Illinois, one in Naples, Fla., and additional sites in Dallas and Houston. Each restaurant is designed to accommodate approximately 275 guests.

Long term, Robinow believes Kona could have nearly 100 restaurants nationwide. With so many good opportunities in the U.S., he said the company has no international plans.

According to Robinow, the gross costs of opening a new Kona Grill are $3 million to 3.5 million, adding that each new restaurant is expected to turn a profit after 90 days. Asked why the restaurant industry in general has such a high mortality rate, Robinow pointed to poor location and an inability to control costs. He said Kona carefully selects its sites, shooting to open restaurants near high activity areas such as thriving businesses, retail centers, shopping malls, lifestyle centers, and entertainment centers. Additional focus is placed on areas that have above‑average income populations, and are convenient for and appealing to business and leisure travelers

“In addition, we place a lot of emphasis on control and then train, train and retrain our people,” explained Robinow. Kona employees’ compensation is also at the upper end of the industry and the company seeks to create a work environment that encourages feedback and respects employee contributions, he added. With relatively low employee turnover, the company’s formula is obviously working.

Kona offers diners freshly prepared food, personalized service, and a warm contemporary ambiance that creates an exceptional, yet affordable, dining experience.

Investors appear to have suffered a spot of indigestion when Kona backed off from its original guidance last year that called for it to lose only between $0.26 and $0.35 per share in 2006 on sales of at least $53 million. The company is now anticipating revenues of $49 million to $51 million and a net loss per share of $0.47 to $0.56.

In February the investment firm Oppenheimer & Co., Inc. downgraded the company’s stock to “neutral” from “buy” after president and chief executive officer, Donald Dempsey, retired. Oppenheimer securities analyst Mike Smith said this is something he does with every company he covers after a senior management change. Robinow emphasized that Dempsey’s retirement doesn’t represent a flaw in the company, pointing out that its two most recent earnings statements have been at or above expectations. He said a new president and CEO should be in place by the end of the year.

In an online article published in May, the personal investment advisor group Motley Fool said one reason Kona is an interesting concept is because less than half its sales come from conventional food.

“That’s because 20 percent of the typical location’s sales comes from sushi and another 33 percent comes from the lively bar tabs,” the article explained. “That kind of revenue mix can play out well with health margins, once the company grows its base of units and keeps its corporate overhead in check.”

Smith, too, sees a bright future for Kona. “They have a ‘box’ that works, and it’s been proven in other geographic markets” he explained. “All they have to do is to continue to open restaurants and you’ll have another P.F. Chang’s on your hands.”

Kona’s diverse menu includes a wide variety of mainstream American dishes, as well as a variety of entrees and appetizers with an international influence. The restaurant has gained a reputation for its 40 signature sauces and dressings, and also features an award‑winning sushi menu containing all of the traditional favorites plus several unique dishes created by its sushi chefs.

Reach the reporter at barrythedesertadvocate.com.