Earnings Call Transcript - STKS Q2 2023

Operator, Operator

Greetings and welcome to the ONE Group Second Quarter 2023 Earnings Conference Call. As a reminder, this conference is being recorded. At this time, I would like to turn the conference over to Tyler Loy. Please begin, sir.

Tyler Loy, CEO

Thank you, operator, and hello, everyone. Before we begin our formal remarks, let me remind you that part of our discussion today will include forward-looking statements. These forward-looking statements are not guarantees of future performance, and you should not place undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Please also note that these forward-looking statements reflect our opinion only as of the date of this call. We undertake no obligation to revise or publicly release any revisions of these forward-looking statements in light of new information or future events. We refer you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial conditions. During today's call, we will discuss certain non-GAAP financial measures, which we believe can be useful in evaluating our performance. However, the presentation of these measures or other information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. For reconciliations of these measures, such as adjusted EBITDA, adjusted net income, restaurant operating profit, comparable sales and total food and beverage sales at owned and managed and licensed units to GAAP measures along with a discussion of why we consider these measures useful, please see our earnings release issued today. With that, I'd like to turn the call over to Manny Hilario.

Emanuel Hilario, CEO

Thank you, Tyler, and hello, everyone. We sincerely appreciate you joining us today and for your interest in the ONE Group. First off, let me begin by thanking all of our team members for their hard work, providing world-class operations as we build a strong portfolio of restaurants with industry-leading returns. We recently opened a new Kona Grill in Riverton, Utah, and the restaurant is off to a strong start. This marks our second Kona Grill opening this year and the seventh venue opening in the last 12 months, and we will only be accelerating the pace. We've been diligently preparing and building our construction pipeline and it's finally primed, and we anticipate a new venue opening every four to six weeks for the foreseeable future. In addition to the strong start at our Riverton location, our other new store openings continue to perform above our investment model. Kona Grill Columbus averaged approximately $100,000 per week and our STKs averaged approximately $250,000 per week during the quarter. For the STKs, this is significantly above our new store sales target of $154,000 per STK. Turning now to the second quarter. Comparable sales faced tough post Omnicom comparisons from last year, especially at STK. As you may recall, our STK same-store sales volumes as compared to the pre-pandemic baseline were positive 82% during the second quarter of 2022 and significantly above industry averages for this benchmark. To put this in perspective, the Fine Dining segment has increased 20% to 30% versus 2019 and the STK is up 70% versus the pre-pandemic baseline. While we believe we could hurdle this incredibly robust performance, our comparable sales faced greater macro pressure than anticipated. That said, we are maintaining our share gains from the last few years and our STK average unit volumes continue to be over $16 million. Importantly, we did see accelerating comparable sales throughout the quarter and Kona Grill sales in particular are gathering momentum going into the back half of the year. Moving on to restaurant operating profit. We continue to show best-in-class performance relative to cost of goods sold as we posted our third consecutive quarter of 24% cost of goods. While we continue to see more moderate year-over-year inflation, much of the basket seems to be flat compared to where we've been over the last 12 months. As discussed earlier, because of the macro pressure on sales, we invested greater in digital marketing, where we drove more than 10% increase versus the first quarter in social media impressions. In addition, we invested in restaurant staffing to ensure strong guest loyalty for the long term and to replace the high-quality talent that we moved into our opening teams. We are happy with our current guest loyalty metrics, and we believe they bode well for future performance. Lastly, we carried some additional management headcounts in order to support our growth initiatives, and they are being deployed to our new store openings for the balance of the year. Macro pressures on sales, coupled with our strategic investments in brand awareness, guest experience and staffing ahead of our robust development pipeline impacted our adjusted EBITDA year-over-year. Based on these factors, we have adjusted our guidance but believe we have actions in place that will deliver positive comparable sales and increased margin versus the prior year for the back half of 2023. Looking ahead, we are committed to robust growth and margin expansion. Our strategic focus is as follows: one, driving the in-restaurant experience at both brands by making sure that we are delivering exceptional and unforgettable experiences to every guest every time. This is fundamental to our operating model, and that's what sets us apart from our peers. We have an amazing talented group of restaurant teams and we'll leverage them to upsell our premium menu items and high-margin add-ons. Two, continued investment in digital marketing, especially focused on our value offerings. It's imperative that we keep the brands accessible to our entry-level price points. Our branch and three, six, nine five-hour offerings are especially relevant in the current economic environment and some of the best values in the industry. In addition to our value layers, our takeout and delivery business continues to grow in dollars and percentage of total revenue, and that's another area where we will continue to invest. Three, taking targeted price increases as we have lagged our peer group and the industry in the amount of pricing we have taken during this highly inflationary period. Based on our peer comparisons and our guest satisfaction levels, we believe we have additional pricing opportunities that we plan to take. Four, committed to opening a new restaurant every four to six weeks for the foreseeable future; and five, rightsizing labor and other operating costs for post-initial investment in growth. We've talked about the increased managers that we've carried in order to support our growth initiatives, but we have additional opportunities to scale our scheduling in order to drive sales and increase labor efficiency. In addition, we have launched several initiatives to reduce costs that do not impact sales, such as system-wide optimization of our paper supplies, credit card processing fees and various outside services. Year-to-date, our store level margin is 15.7%, we anticipate finishing the year in the 17% range. We believe these strategic initiatives are paramount as we look to drive positive comparable sales and margin improvement during the back half of the year. Moving on to our development pipeline. We expect to open eight to 12 new venues in 2023, and we plan to open a new venue every four to six weeks for the foreseeable future. Already this year, we opened Kona Grill in Columbus, Ohio, two Reef Kitchen licensed locations and a Kona Grill in Riverton, Utah. In addition, we added a rooftop at the STK in Scottsdale, Arizona. By the end of the year, we are on track to open one to two additional corners in the following cities, Phoenix, Arizona and Tigard, Oregon and three to four new company-owned STKs in the following cities, Charlotte, North Carolina, Washington, D.C., South Lake City, Utah and Boston, Massachusetts. And finally, we plan to add managed or licensed STK. Over the long term, we view our addressable market as 200 STK restaurants globally and 200 Kona Grills domestically with best-in-class ROIs of between 40% and 50%. There is clearly a runway of opportunity ahead of us that we are just beginning to actualize.

Tyler Loy, CEO

Thank you, Manny. Let me start by discussing our second quarter financials in greater detail. Total GAAP revenues were $83.4 million, increasing 2.8% from $81.1 million for the same quarter last year. Included in our total revenue is our owned restaurant net revenues of $79.9 million, which increased 3.9% from $76.9 million for the same quarter of last year. The increase in revenue is primarily attributable to the opening of STK San Francisco in August of 2022, the opening of STK Dallas in November of 2022, and the opening of Conagra Columbus in January of 2023. This was partially offset by a 4.7% decrease in comparable sales. Consolidated comparable sales were 46.5% compared to 2019, our pre-pandemic base year. Management license and incentive fee revenues were $3.5 million during the quarter and $4.2 million in the second quarter of 2022. This decrease was primarily attributable to lower profitability on our managed STK restaurants in North America and decreased revenue at a managed property in London, England. Owned restaurant cost of sales as a percentage of owned restaurant net revenue was better by 180 basis points to 24% in the second quarter of 2023 compared to 25.8% in the prior year, primarily due to menu mix management, pricing and operational cost reduction initiatives. Owned restaurant operating expenses as a percentage of owned restaurant net revenue increased 340 basis points to 61% in the second quarter of 2023 from 57.6% in the second quarter of 2022, primarily due to staffing ahead of growth, increased marketing expenses and general operating expense inflation. This was partially offset by single-digit pricing taken in the back half of last year. In August, we will be taking an approximate 4% price increase at Kona Grill, reflecting our current confidence in the performance of the brand. Restaurant operating profit was 14.9% for the second quarter of 2023 compared to 16.6% in the second quarter of 2022. Restaurant operating profit at STK was 18.9% and Kona Grill operating profit was 9.9% for the quarter. We anticipate restaurant operating profit to increase year-over-year as a percentage of revenue during the back half of the year. On a total reported basis, general and administrative expenses were $8 million compared to $7.3 million in the prior year. The increase was attributable to increased stock-based compensation expense and additional investments required ahead of new restaurant openings. When adjusting for stock-based compensation, adjusted general and administrative expenses were $6.8 million in the second quarter of 2023 and $6.4 million in the same quarter last year. Preopening expenses were $1.6 million compared to $0.8 million in the prior year. This increase was primarily related to Kona Grill, Riverton, which opened in July 2023 and STK and Kona Grill restaurants currently under development. Both years include non-cash preopening rent required for U.S. GAAP. Interest expense was $1.6 million in the second quarter of 2023 compared to $0.4 million in the second quarter 2022. The increase was driven by increases in our outstanding balance and benchmark rates year-over-year. Income tax expense was nominally beneficial in the second quarter of 2023 and $0.9 million in the second quarter of 2022. Net income attributable to the ONE Group Hospitality, Inc. was $0.6 million or $0.02 net income per share compared to a net income of $4.3 million in the second quarter of 2022 or $0.13 net income per share. Adjusted net income was $1.8 million or $0.06 adjusted net income per share compared to an adjusted net income of $4.9 million in the second quarter of 2022 or $0.15 net income per share. Adjusted EBITDA for the second quarter attributable to the ONE Group Hospitality, Inc. was $8.5 million compared to $10.4 million in the second quarter of 2022. We have included a reconciliation of adjusted EBITDA and adjusted net income in the tables in our second quarter 2023 earnings release. During the second quarter, we repurchased approximately 0.5 million shares of our common stock. In total, we have purchased 1.7 million shares or approximately 5% of our outstanding shares under our buyback program. We have approximately $3.7 million in share repurchases that remain available under our $15 million share repurchase program. We will continue to use discretion in determining the conditions under which shares may be purchased from time to time, if at all. Now I'd like to provide some forward-looking commentary regarding our business. This commentary is subject to risks and uncertainties associated with forward-looking statements as discussed in our SEC filings. We have always reminded our investors that actual numbers and timing of new restaurant openings for any given period is subject to a number of factors outside the company's control, including weather conditions and factors under the control of landlords, contractors, licensees and regulatory and licensing authorities. Based on the information available now and the expectations as of today, we are updating the following financial targets for 2023. Beginning with revenues, we project our total GAAP revenues of between $350 million and $365 million. Embedded in this top line range is our expectation of flat consolidated comparable sales for the third quarter versus 2022 and positive 4% to 8% in the fourth quarter when compared to 2022. Managed license and incentive fee revenues are now expected to be between $15 million and $15.5 million due to lower revenues at our properties. Total owned operating expenses as a percentage of owned restaurant net revenue are expected to be 83% to 82%. Total G&A, excluding stock-based compensation, is projected to be approximately $27 million to $29 million. We now expect adjusted EBITDA of $45 million to $50 million, which represents an approximate 10% to 20% increase compared to 2022. Restaurant preopening expenses are expected to be between $5.5 million and $6.5 million, with an effective income tax rate of between 5% and 10%. Total capital expenditures, net of allowances received from landlords, are expected to be approximately 2.5% of company-owned revenue and approximately $3 million to $3.5 million for company-owned venues. And finally, we plan to open eight to 12 new venues in 2022, including adding one managed or licensed STK.

Emanuel Hilario, CEO

Thank you, Tyler, and thank you all for your time today. Let me conclude by saying that we are in the early stages of our long-term growth strategy as we continue to build a portfolio of high-volume brands with compelling returns for our shareholders. Thank you all for your interest in the ONE Group. As I always say, none of this would be possible without the fantastic support of our teammates who bring our mission of great execution to life every day. We have some exciting times ahead, and we'll be opening a lot of restaurants in the near future, and I look forward to seeing you all out there. We appreciate everyone joining us on the call today. Tyler and I are happy to answer any questions that you may have.

Operator, Operator

Today's first question comes from Joshua Long with Stephens. Please proceed.

Joshua Long, Analyst

Great. Thank you for taking the questions. Good afternoon. I was wondering if you could talk through the trends that you saw through the quarter in terms of understanding that there's certainly some substantial year-over-year comparisons that you were lapping up against. But underlying that, did you see any kind of pushes and pulls that things progress through the quarter? What can you tell us there? And then when we think just broadly about the consumer's demand and overall appetite for experiential dining, which your portfolio embodies, what are you seeing there? And how should we be thinking about that in the back half of the year?

Emanuel Hilario, CEO

On that question, I would say that the softer part of the quarter was probably earlier in the quarter, and the reason was with Omnicom many conventions got deferred and pushed into the second quarter. So there was a little bit of a shift in convention business. So we did benefit last year early on with the convention business of just people accelerating the conventions at that point. So I would say that probably was the in-quarter big comparison year-over-year. It was lapping over just a catch-up on conventions. And then I think that as we've gotten back closer to today, I think the sales momentum has become not the momentum, but I would say the lapping has become easier for us. And in terms of trends and what we see in the environment, not anything different from what we've seen earlier, which is we do see a continued interest on Friday Saturday business in the 6:30-8:30-time frame. So the dinner hour on the weekends continues to be very strong. And then we do have a slight drop-off in the late hours in terms of demand for dining. And then on weekdays, as I mentioned earlier, because we were getting the benefit of conventions and convention traffic. We do see a slight impact on Monday, Tuesday morning. By the way, that is STK. In relation to Kona Grill, actually, I think the momentum on Kona Grill is very strong. And actually, on the year-over-year lap, we have seen very strong performance in June and July. As a matter of fact, as Tyler mentioned in his prepared statements, the momentum has been strong enough that we feel pretty confident in taking pricing with that impact in transactions. As we've spoken in the past, preserving traffic is paramount for us because we view that as our long-term strategy of keeping market share. So we feel really good about the trends with Kona Grill.

Joshua Long, Analyst

And Tyler, in your prepared comments on the forward look, you offered some context on 3Q and 4Q. Curious, is that at the kind of the total combined level? Can you provide any sort of additional color there by STK or Kona as we think about either the pricing or other menu initiatives that you might have replace?

Tyler Loy, CEO

Thank you for the question. I believe that the information pertains to a combined basis. Manny mentioned the strength of Kona Grill, along with the pricing adjustments we have implemented. From an STK perspective, you can observe the patterns and comparisons; we were at an 82% increase compared to last year in the second quarter, which drops to 70% in the third quarter and then to 61% in the fourth quarter. This illustrates how we are modeling our performance, as we were 70% above our 2019 figures in the second quarter, and you can see a visible trend in the comparisons.

Joshua Long, Analyst

Can you discuss the investments you have made or plan to make to support the strong unit growth potential? Opening one location every four to six weeks is quite impressive, especially considering the permitting delays others in the industry are facing. Can you elaborate on the efforts and strategies your team is implementing to overcome these challenges and achieve your unit growth targets?

Tyler Loy, CEO

Yes, there are two key points to discuss. First, we've been carrying a significant number of extra managers, especially at STK, where we've chosen to open restaurants with staff who are already familiar with the brand. This strategy involves training employees in existing restaurants, which unfortunately puts pressure on STK's restaurant margins. We initially aimed to start operations with at least two managers who are already part of the system. Currently, we have around 15 to 25 extra managers to support this approach. The second point involves our training team, which consists of about 25 to 30 of our top employees from existing restaurants, tasked with opening new locations. This necessitates backfilling their positions, meaning we are investing in the restaurants to replace top talent with additional hires. Consequently, labor costs are increasing, but fine dining demands a high level of execution, which is critical for us. In the second quarter, while we didn't highlight it, our operational quality received extremely positive feedback from consumers. We're preparing for growth while still providing excellent experiences in our current restaurants, which is beneficial for long-term success. Regarding permitting, the environment is challenging due to competition from large projects in major cities. Our restaurants often face lengthy permitting processes; some have been in the system for up to nine months or even approaching a year. The complexity of our restaurant builds adds to this timeframe, requiring extensive clearance from governmental agencies. Fortunately, we have signed a considerable amount of real estate, which is akin to priming a pump. We’ve aligned this new real estate with areas where permitting isn’t a significant issue anymore, creating a robust backlog for potential builds. Now, it's about training and ensuring our teams are well-equipped as we proceed with operations. Our focus remains on labor and maintaining high-quality experiences, which is critical for us moving forward.

Joshua Long, Analyst

Appreciate the context. Thanks a lot.

Operator, Operator

Our next question is from Nick Setyan with Wedbush Securities. Please proceed.

Nick Setyan, Analyst

Just to clarify, the flat competency again at 4% to 8% in Q4, is that consolidated? Or is that in reference to the specific brands?

Tyler Loy, CEO

That's on a consolidated basis.

Nick Setyan, Analyst

I think can you break it out by brand.

Tyler Loy, CEO

I think what I was referring to regarding Josh's question is that STK is currently performing at over 70% compared to 2019. Looking at last year, they are lapping last year's performance, which was also around 70%, and then 62% for the third and fourth quarters of last year. Regarding Kona Grill, Manny mentioned it, and we are seeing strong results from the Kona Grill brand right now, which gives us confidence to implement some additional pricing this month.

Nick Setyan, Analyst

That basically implies flattish comp at STK up in Q4 and then Kona actually up in Q3.

Emanuel Hilario, CEO

I mean, right now, as I think I said, this is Manny speaking, not Tyler anymore. Our growth performance is very strong at the moment, and there has been a lot of work that we've put into it. So I really believe that we're executing at a high level. I'm feeling very positive about the same-store sales growth this year, especially for the end of the year.

Nick Setyan, Analyst

And then the 17% margin exiting the year, is that for the full year, 17% or Q4, 17%?

Emanuel Hilario, CEO

It's a full year version. And I think that the fourth quarter for this year will be a very good margin quarter. We will have a lot more STKs in operation this fourth quarter. So I think that bodes very well for the margin in the fourth quarter.

Nick Setyan, Analyst

And I think you guys have said for Q1, there was about 6% pricing and 2% to 3% mix for both brands. What was the pricing and mix in Q2?

Emanuel Hilario, CEO

So pricing is still running around 6 points positive for both brands and mix is down plus 2 to 3 right.

Tyler Loy, CEO

Yes. I think mix shifted down just slightly. I'm sorry, right, down 2% to 3%.

Nick Setyan, Analyst

So down 2% to 3%.

Tyler Loy, CEO

Yes, that's correct.

Mark Smith, Analyst

Hi, guys. Just curious, just big picture here as you look at the consumer, are you guys seeing any different trends from kind of metro versus suburban as we look at maybe Kona versus STK or even some of your STK restaurants. Are you seeing any trends that way in kind of consumer trends? Or is there anything else big picture that you see as far as changes in behavior during the quarter?

Tyler Loy, CEO

Matt, I think just right now, I would say that the predictability in the suburban is better. So I would say that department sales seem to be more consistent and with lots more visibility. I think urban sales continue to be a little bit less visible just because of the business and convention business. So I would say that right now, the consistency is more on those super locations. Also on smaller cities, I do see a little bit more strength than perhaps in the bigger cities. I think the biggest cities that benefit a lot from tourism. Last year, I think there was a lot of U.S. tourism, where this year, you'll see more of a global tourism business. So I do think the big cities with lots of tourism exposure are a little tougher this year. But again, I would just say that probably the suburban markets are really where the strength is.

Mark Smith, Analyst

And then as you guys are taking price, are we going to see most or all of this at Kona or do you have plans to take any price in the second half year.

Tyler Loy, CEO

So right now, our planned pricing that Tyler mentioned is going to grow, and that's going in here in the next couple of weeks. STK, we always look in November. And so we will take another look in the fourth quarter, mid-fourth quarter and take a look and see where the opportunities may be. Again, I think that, as we've said in the past, the pricing strategy is always has to be really thoughtful because obviously, you always get the short-term margin bump ups when you do that, but then we think about the longer term. So you're sometimes trading short-term margin for long-term traffic and market share. And as you know, we're a market share long-term driver of sales, and we try to protect our pricing position and keep much pricing power because I think that's good for the brands in the long term. Allows you to do the right decisions for the brand and really work on the experiences.

Mark Smith, Analyst

And then last one for me. Just looking at restaurant cost of sales here, you've been around about 24%. Anything that you see that changes that? Any changes in commodities? Anything to call out, are there either good or bad that you see kind of near term on the horizon?

Tyler Loy, CEO

I believe that our performance regarding food and beverage commodities has been exceptional, especially in terms of the cost of goods. This is typically a challenging area to manage in a hyperinflationary environment, but we have performed well, staying within the 24% range, which is on the lower end of our long-term guidance for that category. We've noticed a cooling in the pace of commodity price increases, which is encouraging. While wage inflation is evident in our numbers, the main pressure on our margins comes from our choice to invest in labor ahead of opening new restaurants. We want to ensure that these new locations start with top-quality management and crew to effectively drive strong revenue and maximize profitability in the fourth quarter, which is crucial for us, as it is our most important period for margin and profitability results.

Mark Smith, Analyst

Excellent. Thank you.

Tyler Loy, CEO

Thank you, Mark.

Operator, Operator

Our next question is from JP Willem with ROTH. Please proceed.

JP Willem, Analyst

Great guys. Thanks for taking the questions. If we could start just STK I think you've been pretty clear that you're lapping some big conventions in 2022 that may have been delayed. But maybe if we could just talk a little bit more about what you're seeing at STK in terms of the different groups of customers and maybe it's relative to your expectation instead of a sort of comp basis. But I'm just wondering if you could provide a little more clarity about where you're seeing some trouble or some strength between, let's call it, the convention groups, maybe the expensed accounts, the suits and then social dining. If you could just kind of frame each of those relative to maybe where you thought you'd be at this point in the year.

Emanuel Hilario, CEO

We'll start with the business-oriented consumers at STK. For this brand, we've noticed a decline in traffic, particularly during the week due to fewer conventions impacting restaurant attendance. This tends to be most noticeable on Mondays, Tuesdays, and Wednesdays. However, on Fridays and Saturdays, social occasions remain strong, and there is still a desire among consumers to dine out and enjoy elevated experiences. The overall industry trend shows that some restaurants now have capacity in the 6:30 to 8:30 time frame, prompting customers to prefer later reservations at 9 or 10 o'clock since they have other options earlier in the day. For social occasions, especially on weekends, we see robust initial turnout, but later in the evening, we experience a decrease in dining traffic. To adapt, we’ve started offering late-night happy hours across all our restaurants, which has resulted in a resurgence of business after 10 o'clock, and we are noticing positive growth from that initiative. Additionally, there’s been an increase in the sharing of products in our restaurants, which Tyler mentioned earlier has slightly lowered our check mix, although the change is not significant. Nonetheless, this sharing trend is becoming more apparent in our dining spaces.

JP Willem, Analyst

Great. Thank you. Moving over to Kona Grill. Something I think we've kind of been looking for a little while. And just curious if there's any update. But can you just share or maybe quantify at all kind of the Columbus Kona Grill if you prefer and have numbers from Riverton, that's great, but I imagine it's early. Just kind of anything to point to how much better on maybe margin side, the remodeled Columbus Kona Grill is relative to the average?

Emanuel Hilario, CEO

Yes. I wouldn't describe it as remodeled since we actually built a brand new restaurant at the same location. If you visit it now, you wouldn't even recognize it as the same place. In relation to your question, I can share that this restaurant, with its new design and layout, has seen over a 30% increase in volume. This is a significant test we conducted by using the same property with a new platform and operations, resulting in more than 30% sales growth per week. This is encouraging as it indicates the effectiveness of the revised brand. We're confident about the strengths of the new menu and service style, and the more dynamic environment we've created. I'm really thrilled with these results, which suggest that we are making the right moves with the brand. Regarding Riverton, it's still early days. However, we opened it without any real marketing efforts; we simply opened the doors and have already surpassed the system average in weekly volume for that restaurant, despite not implementing any of our marketing strategies. It's an impressive project, with excellent real estate, and it's beautiful – you can see that from the videos customers have shared. We received outstanding feedback on our benchmarks related to the atmosphere and overall experience. Overall, I'm excited about the positive same-store sales momentum at Kona Grill. The revenues from the new locations are impressive, and we’re also focused on achieving strong results in margin. The new restaurants feature smaller kitchens, with the sushi bars positioned closer to the kitchen, which reduces the space previously dedicated to the sushi bar in older locations and improves the margin profile substantially. Labor costs are notably lower because we now operate with one kitchen plus a sushi extension, which will enhance our margins. Additionally, we've invested in kitchen technology for our new prototypes, ensuring all our new restaurants are equipped with efficient equipment that requires fewer staff to operate while delivering better quality products. This approach positions us to improve both quality and costs over the long term with the new kitchen layouts and equipment packages.

JP Willem, Analyst

Great. That's very helpful. And one last question, if I could squeeze it in. In terms of digital marketing, is there anything specific you can highlight that has been really successful? Is it driving traffic and proving to be worthwhile? Any particular successes you can mention?

Emanuel Hilario, CEO

Yes, we've always emphasized that digital marketing is the foundation of our company, which we assess through click-through rates and the resulting reservations. It's somewhat variable for STK, but we're very enthusiastic about it. This is one of the reasons we've increased our digital efforts. Our digital strategy is evolving from our previous approach, and I'm pleased with that. We're focusing more on influencers to gain a competitive edge. Unlike the usual ads on platforms like Instagram and Facebook, we're now building integrated influencer networks. You'll see us continue to develop this strategy, and we're very excited about it. We had great success with our influencer network during our Solstice parties, which exceeded expectations. We're committed to the new direction of digital marketing and influencer engagement. It’s cost-effective, measurable, and we can track what produces results, so we are dedicated to continuing our investment in digital.

JP Willem, Analyst

Yes, appreciate the color. Best of luck, guys.

Emanuel Hilario, CEO

Thank you, sir.

Operator, Operator

The next question comes from David Kanen with Kanen Wealth Management. Please proceed.

David Kanen, Analyst

Thanks for taking my questions. First one is in regards to the second half of the year in your guidance, what are the levers or the initiatives that you're deploying to grow same-store sales that you referenced in the prepared remarks? And then what are the initiatives that you have underway to drive up restaurant level margin on the cost front?

Emanuel Hilario, CEO

There are probably three key points to consider. First, as Tyler mentioned earlier, the comparisons in the third and fourth quarters are more favorable than what we have experienced thus far, making it easier for us. This should positively impact our traffic. Second, our ongoing focus on digital strategies, especially in influencer networks, will support same-store sales. We are also launching our neighborhood Perks program, which is a digital app that centralizes our local store marketing efforts, introducing an element of newness that we previously lacked. I believe this will benefit our business significantly. Third, from a margin perspective, opening new restaurants allows us to assign many of our restaurant managers to these new locations, which should relieve some pressure on labor costs. Additionally, we have restructured our training teams, which has been beneficial. As Tyler pointed out, we are implementing cost-saving initiatives related to operating expenses, including changes to our paper products. We are also addressing credit card processing fees and plan to stop using some outside vendors, opting to handle tasks internally instead. These measures combined should help improve our margins, although it’s important to note that the management of labor for existing locations and transferring staff to new sites will have the most significant impact. Also, Kona Grill's same-store sales and pricing will contribute positively to our margins. I believe that the new restaurants with more efficient kitchens and reduced fixed labor costs align well with our goals. The addition of three new units at Kona Grill, including a soon-to-open location in Phoenix, represents over 10% growth for the brand. These new locations are set up with an effective labor model and lower lease costs, which should further enhance our margins. Overall, I am confident that we have sufficient strategies in place to restore our margins.

David Kanen, Analyst

Okay. That makes sense. Year-to-date, you have spent $24 million on capital expenditures. You have an aggressive growth plan for the second half of the year. What do you expect the additional capital expenditures to be in the second half of 2023?

Emanuel Hilario, CEO

I mean so that $24 million reflects investment already in a lot of restaurants opening even in the fourth quarter. And in some cases, we paid for some things already in the first quarter of next year development because we pay for architectural and permitting and other. We order lead items much earlier now because some of these items not take 6, 9, 12 months to get in there. So we do a lot more of the capital we invest in the front. I think, Tyler, on the capital guidance, what do you think for the year, the range on the capital?

Tyler Loy, CEO

So I think the guidance implies something between $35 million and $40 million net. And remember, the $23 million is a gross number, so it does not include TI that we've received from landlords versus several million dollars.

David Kanen, Analyst

So the back half of the year, we'll spend $10 million to $16 million versus roughly $24 million in the first half of the year. So therefore, we will generate more significant free cash flow in the second half of the year. Is that safe to say?

Tyler Loy, CEO

Yes. I think that's right. And just from the math on the CapEx, I think that's right. Remember, that's a net number. And then from a free cash flow perspective, we do expect positive free cash flow for the backup.

Emanuel Hilario, CEO

Also, just from an analysis perspective, we do provide in our 10-Q a table that shows the TI amounts by quarter, so we kind of get a perspective on what the actual net investment is on a new restaurant, so you can always get down on the net number on that.

David Kanen, Analyst

In your updated guidance, the first half of the year generated $19.6 million in EBITDA. The new projection indicates you expect to achieve between $25 million and $30 million in the second half of the year, which reflects an increase of over 50% if you reach the higher end of that range. This is positive news. My question is about the run rate as we approach the end of the year, considering the new stores that are up and running, improved margins, and some cost-saving measures. What do you anticipate the run rate will be before you add another 10 stores in 2024?

Emanuel Hilario, CEO

I mean, I think, again, depending on how they all come off to shoot, but I would say our run rate is north of $55 million, anywhere from $55 million to over $60 million, depending on the new units that come in. If they come at model closer to 55%, it's there above the model lack experience with the new STKs, probably closer to 60%. Again, we didn't provide formal guidance in there, but it's a number closer to $55 million to $60 million coming out of run rate.

David Kanen, Analyst

And is that reasonable to do another 10 stores next year in 2024? Or is that too aggressive?

Emanuel Hilario, CEO

We have 18 leases, and 12 of them are currently in the design or construction phase and nearly completed. Moving into the middle of next year, we'll have options available, and we can adjust our approach based on whether the pace of openings remains strong. So far, our new restaurant volumes have been consistently positive and above our expectations. However, it's important to recognize that we can't assume this trend will last indefinitely, as that would not be realistic. The quality of our pipeline is excellent, featuring high-quality locations such as Boston, Washington, D.C., Charlotte, Aventura Mall, and Topanga. We also have a significant percentage, 95%, of our Kona Grill sites run by landlords, indicating a strong trend where high-quality landlords support our new prototype and the Kona Grill concept. This is very encouraging, and we have a robust pipeline prepared to move forward. We now have many restaurants ready, and it's just a matter of training our teams and getting them opened.

David Kanen, Analyst

It sounds like the prospects for the long haul are very positive. Now based on CapEx being less in the second half of the year, EBITDA being higher, you'll generate significant free cash flow, you have $38 million in cash at the end of the quarter. You've been actively buying back the stock, which I love. However, there's only about, I think, just under $4 million left, maybe $3.7 million. And the stock, I'm looking, I don't know if this will sustain itself into tomorrow. But when I look at the stock right now, based on the headline, it's trading down to like $6. Given the prospects that you're articulating the free cash flow, is it safe to say that you will be more aggressive in retiring shares in the back half of the year if the stock continues to be weak like this, getting down to $6 or you'll probably kind of move at the same pace and just increase the buyback slightly?

Emanuel Hilario, CEO

Yes. I mean, I think probably the way for me to answer that question is, we'll continue focusing on growth and...

Operator, Operator

Please hold. It appears that our speaker line has dropped. And excuse me, everyone. This is the operator. We are not able to get the speaker line back at this time, and this does end the question-and-answer session and the call for today. I would like to thank you for attending today's presentation. And you may now disconnect.