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Strategies & Market Trends : Value Investing

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To: James Clarke who wrote (29255)	12/14/2007 8:20:09 AM
From: Mark Marcellus	Read Replies (1) of 78832

KONA looks very much like PF Changs when it had 20 restaurants. There was a five year huge growth curve after that where early investors made a lot of money. Thats why you don't want to wait until the concept is proven. I think that Peter Lynch's advice about not investing in the "next" anything applies here. I don't doubt that their concept is good, if it wasn't they probably wouldn't have made it this far. However, every region has "concepts" that work (Long Islanders can point to Green Cactus Grill or Ayhan's Shish-kebab but there are literally hundreds if not thousands of examples). The question if you're going to invest in them as a growth story is how well they can manage expansion. With Kona there are a lot of question marks, and the fact that the founder/creator is in charge of operations may be more of a hindrance than a help. The person who created the concept is usually not the right one to move it to the next level. That's been true from McDonald's on. Just out of curiosity I went back and took a look at the 1998 10-k for PF Chang's (at which point they had 23 restaurants). First of all, take a look at the difference in the 10-k. It is well written, well prepared, and clearly explains their concept and strategy. The best way to describe Kona's 10-k is "sloppy". Also note that PF Chang's already had in place a well thought out expansion plan with a formalized management structure that created a bunch of employee "partners" from the regional down to the restaurant level. I don't see that at Kona. Kona may very well prove to be a winner, and I'm certainly going to keep an eye on it. I also agree that the economics look good for a restaurant concept at this stage of development. However, when I invest in growth I'm investing in management more than anything else. Right now I don't have confidence that Kona's management is ready for the big leagues.

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