RCI Continues Rebound with 2Q16 EPS at $0.54 GAAP & $0.40 Non-GAAP

Cash Dividend & Share Buy Backs

  • RCI accelerated its share buyback program in FY16, taking advantage of its strong FCF to return capital to shareholders.
  • Through April 30, 2016, the company purchased 566,921 common shares to date in FY16 at a cost of $5.4 million, reducing shares outstanding to 9.889 million from 10.348 million a year ago.
  • RCI yesterday announced a $5.0 million increase in its authorization to repurchase common shares, resulting in a total of $6.2 million available to buy back stock.
  • RCI also announced yesterday the company’s 3Q16 $0.03 dividend will be paid June 27, 2016 to shareholders of record June 10, 2016.

Conference Call

  • A conference call to discuss these results, outlook and related matters will be held today at 4:30 PM ET
  • Dial In: 877-407-9210 (toll free) or 201-689-8049 (domestic or international)
  • Webcast URL: http://www.investorcalendar.com/event/174973

Meet Management Tonight

Eric Langan, President & CEO, invites investors to meet management and tour one of the company’s top clubs.

  • When: Tonight, May 10, 2016, 6:00 PM to 8:00 PM ET
  • Where: Rick’s Cabaret New York, at 50 W. 33rd Street, between Fifth Avenue and Broadway
  • RSVP: With your contact information to gary.fishman@anreder.com

CEO Comment

“We are pleased 2Q16 revenues, margins, profits and free cash flow performed better than our original expectations,” Mr. Langan said.

“This is especially encouraging as we were up against our largest sales quarter ever in the year ago period. Moreover, two clubs were closed in 2Q16 undergoing reformatting and remodeling.

“Our FY16 plan is to continue to grow margins, EPS and FCF on what we expect to be flattish revenues on an annual basis, while adhering to our capital allocation policy.

“Costs as a percentage of revenues are going down. Operating margin has improved two quarters in a row.

“Sales are moving in the right direction. Same store sales were nearly level with the year-ago quarter. 3Q16 should benefit from reopening of the two reformatted clubs, and we anticipate opening the first sports-themed club in Manhattan in 4Q16.

“As a result of our first six months’ performance, we have increased our FY16 free cash flow target to $16-$19 million.

“The company remains committed to our capital allocation policy of using FCF to enhance shareholder value through share repurchases and dividends. As part of this policy, we will continue to evaluate the risk adjusted returns on capital expenditures or acquisitions relative to the after tax yield on free cash flow we can obtain by repurchasing our own shares.

“While opportunities may arise to acquire or open new units or pay down debt ahead of schedule, we generally believe the best allocation of our capital is the risk-adjusted, after-tax, FCF yield of buying our own shares as long as our stock stays at this low valuation relative to RCI’s cash flow generation.”

2Q16 Analysis

Total Revenues

  • Total revenues of $34.4 million increased $0.9 million or 2.8% from 1Q16, reflecting improvements in almost all major categories.
  • High-margin service revenues increased $0.6 million or 4.5% from 1Q16 as club customers began to spend more per visit and new marketing strategies started to prove effective. Food sales increased $0.3 million or 6.3% from 1Q16 due to Bombshells’ growing business.
  • Same store sales of $32.9 million declined only 0.9% year over year, representing a significant increase from our performance in 1Q16 and 4Q15.

Operating Income & Margin

  • Income from operations was $7.6 million, or 22.0% of revenues, up from 17.1% in 1Q16.
  • Excluding non-recurring items, non-GAAP operating income was $7.9 million, or 23.1% of revenues, up from 19.7% in 1Q16.
  • The improvement in operating income as compared to 1Q16 reflects the increase in sales, in particular service revenues, as well as reduced costs as a percentage of revenues.

2Q16 Segment Analysis

Nightclubs

  • Sales of $29.1 million compared to $29.9 in the year ago quarter, with 36 units in operation compared to 40.
  • Operating income was $9.7 million, or 33.5% of revenues, compared to a loss of ($0.8) million, or (2.7%), in 2Q15.
  • Non-GAAP operating income was $9.8 million, or 33.7% of revenues, compared to $9.5 million, or 31.7%, in 2Q15.

Bombshells

  • Sales of $4.6 million compared to $4.4 million in the year ago quarter, with five units in operation in both periods.
  • Operating income was $0.64 million compared to $0.46 million in 2Q15.
  • Operating margin was 13.9% compared to 10.3% in 2Q15.

2Q16 Other Metrics

  • Occupancy Costs: Occupancy costs, which the company measures as a combination of rent plus interest expense, declined to 8.2% of revenues compared to 8.5% in 2Q15. The decline reflects significantly lower rent due to the acquisitions of club real estate in New York City in early 2Q16 and of Miami Gardens in 4Q15.
  • Effective Tax Rate: $1.75 million was deducted from income tax expense, due to the benefit of certain FICA credits not previously claimed. Excluding this deduction, RCI would have paid an effective tax rate of 36.6%.
  • Adjusted EBITDA & Free Cash Flow: RCI’s cash generating power, as reflected by adjusted EBITDA, amounted to $9.7 million compared to $8.2 million in 1Q16. As a result, RCI generated FCF of $6.4 million compared to $3.9 million in 1Q16.
  • Balance Sheet (March 31, 2016 compared to December 31, 2015): Total stockholders’ equity increased to $131.9 million from $128.2 million due to the increase in retained earnings partially offset by share buy backs.

*Non-GAAP Financial Measures

In addition to our financial information presented in accordance with GAAP, management uses certain “non-GAAP financial measures” within the meaning of the SEC Regulation G, to clarify and enhance understanding of past performance and prospects for the future. Generally, a non-GAAP financial measure is a numerical measure of a company’s operating performance, financial position or cash flows that excludes or includes amounts that are included in or excluded from the most directly comparable measure calculated and presented in accordance with GAAP. We monitor non-GAAP financial measures because it describes the operating performance of the company and helps management and investors gauge our ability to generate cash flow, excluding some non-recurring charges that are included in the most directly comparable measures calculated and presented in accordance with GAAP. Relative to each of the non-GAAP financial measures, we further set forth our rationale as follows:

  • Non-GAAP Operating Income and Non-GAAP Operating Margin. We exclude from non-GAAP operating income and non-GAAP operating margin amortization of intangibles, gain on settlement of patron tax case, pre-opening costs, gains and losses from asset sales, gain on settlement of patron tax issue, impairment of assets, pre-opening costs, stock-based compensation charges, litigation and other one-time legal settlements and acquisition costs. We believe that excluding these items assists investors in evaluating period-over-period changes in our operating income and operating margin without the impact of items that are not a result of our day-to-day business and operations. While we were in litigation in the patron tax case, we also included patron taxes as an exclusion, but after settlement of the case, we no longer exclude patron taxes from operating income.
  • Non-GAAP Net Income and Non-GAAP Net Income per Basic Share and per Diluted Share. We exclude from non-GAAP net income and non-GAAP net income per diluted share and per basic share amortization of intangibles, gain on settlement of patron tax case, pre-opening costs, income tax expense, impairment charges, gains and losses from asset sales, stock-based compensation, litigation and other one-time legal settlements, gain on contractual debt reduction and acquisition costs, and include the Non-GAAP provision for income taxes, calculated as the tax-effect at 35% effective tax rate of the pre-tax non-GAAP income before taxes less stock-based compensation, because we believe that excluding such measures helps management and investors better understand our operating activities. While we were in litigation in the patron tax case, we also included patron taxes as an exclusion, but after settlement of the case, we no longer exclude patron taxes from net income.
  • Adjusted EBITDA. We exclude from Adjusted EBITDA depreciation expense, amortization of intangibles, income tax, interest expense, interest income, gains and losses from asset sales, pre-opening costs, acquisition costs, litigation and other one-time legal settlements, gain on settlement of patron tax case, gain on contractual debt reduction and impairment charges because we believe that adjusting for such items helps management and investors better understand operating activities. Adjusted EBITDA provides a core operational performance measurement that compares results without the need to adjust for Federal, state and local taxes which have considerable variation between domestic jurisdictions. Also, we exclude interest cost in our calculation of Adjusted EBITDA. The results are, therefore, without consideration of financing alternatives of capital employed. We use Adjusted EBITDA as one guideline to assess our unleveraged performance return on our investments. Adjusted EBITDA is also the target benchmark for our acquisitions of nightclubs.

Other Notes

  • Starting with 1Q16, total revenues (including prior comparable periods) are being reported net of sales taxes and other revenue related taxes, RCI having chosen to early adopt new revenue accounting standards.
  • Free cash flow is defined as cash flows from operating activities less maintenance capex.
  • Unit counts are at period end.

About RCI Hospitality Holdings, Inc. (Nasdaq: RICK)

With 43 units, RCI Hospitality Holdings, Inc., through its subsidiaries, is the country’s leading company in gentlemen clubs and sports bars/restaurants. Clubs in New York City, Miami, Philadelphia, Charlotte, Dallas/Ft. Worth, Houston, Minneapolis, Indianapolis and other cities operate under brand names, such as “Rick’s Cabaret,” “XTC,” “Club Onyx,” “Vivid Cabaret,” “Jaguars” and “Tootsie’s Cabaret.” Sports bars/restaurants operate under the brand name “Bombshells.” Please visit http://www.rcihospitality.com/

Forward-Looking Statements

This press release may contain forward-looking statements that involve a number of risks and uncertainties that could cause the company’s actual results to differ materially from those indicated in this press release, including the risks and uncertainties associated with operating and managing an adult business, the business climates in cities where it operates, the success or lack thereof in launching and building the company’s businesses, risks and uncertainties related to cybersecurity, conditions relevant to real estate transactions, and numerous other factors such as laws governing the operation of adult entertainment businesses, competition and dependence on key personnel. The company has no obligation to update or revise the forward-looking statements to reflect the occurrence of future events or circumstances.

 

RCI HOSPITALITY HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF INCOME



















FOR THE THREE MONTHS



FOR THE SIX MONTHS


ENDED MARCH 31,

ENDED MARCH 31,

(in thousands, except per share data)


2016



2015



2016



2015



(UNAUDITED)



(UNAUDITED)

Revenues:
















  Sales of alcoholic beverages


$

14,581



$

14,311



$

29,178



$

28,316

  Sales of food and merchandise



4,609




4,837




8,943




9,670

  Service revenues



13,205




13,847




25,846




27,376

  Other



2,001




1,994




3,904




3,832

    Total revenues



34,396




34,989




67,871




69,194

















Operating expenses:
















  Cost of goods sold



5,227




5,381




10,411




10,492

  Salaries and wages



7,917




8,115




16,052




16,147

  Stock compensation



120




120




240




240

  Other general and administrative:
















    Taxes and permits



3,274




3,288




6,501




6,399

    Charge card fees



557




544




1,170




1,091

    Rent



859




1,184




1,807




2,325

    Legal and professional



982




1,064




2,087




2,023

    Advertising and marketing



1,225




1,312




2,530




2,679

    Insurance



907




801




1,781




1,621

    Utilities



694




708




1,404




1,442

    Depreciation and amortization



1,826




1,886




3,643




3,531

    (Gain) loss on sale of property and marketable securities



(127)




(18)




(127)




(18)

    Impairment of assets



-




-




-




1,358

    Settlement of lawsuits and other one-time costs



62




10,303




602




10,550

    Other



3,323




2,917




6,503




5,790

    Total operating expenses



26,846




37,605




54,604




65,670

Operating income (loss)



7,550




(2,616)




13,267




3,524

















Other income (expense):
















  Interest income



1




26




3




39

  Interest expense



(1,965)




(1,783)




(3,878)




(3,402)

  Gain from acquisition of controlling interest in subsidiary



-




-




-




577

Income (loss) before income taxes



5,586




(4,373)




9,392




738

Income taxes (benefit)



293




(1,265)




1,660




581

Net income (loss)



5,293




(3,108)




7,732




157

Less: net loss attributable to noncontrolling interests



212




267




325




362

Net income (loss) attributable to RCI Hospitality Holdings, Inc.


$

5,505



$

(2,841)



$

8,057



$

519

















Basic earnings (loss) per share attributable to RCIHH shareholders:
















  Net income


$

0.55



$

(0.28)



$

0.79



$

0.05

Diluted earnings (loss) per share attributable to RCIHH shareholders:
















  Net income


$

0.54



$

(0.28)



$

0.78



$

0.05

















Weighted average number of common shares outstanding:
















  Basic



10,013




10,275




10,154




10,269

  Diluted



10,215




10,275




10,356




10,273

















Dividends per share


$

0.03



$

-



$

0.03



$

-

 

RCI HOSPITALITY HOLDINGS, INC.

NON-GAAP FINANCIAL MEASURES














FOR THE THREE MONTHS


FOR THE SIX MONTHS


FOR THE THREE MONTHS



ENDED MARCH 31,


ENDED MARCH 31,


ENDED DECEMBER 31,

($ in thousands, except per share data)


2016


2015


2016


2015


2015












Reconciliation of GAAP net income to Adjusted EBITDA 











GAAP net income (loss)


$5,505


($2,841)


$8,057


$519


$2,552

Income tax expense


293


(1,265)


1,660


581


1,367

Interest expense and income and gain on Drink Robust investment


1,964


1,757


3,875


2,786


1,911

Litigation and other one-time legal settlements


62


10,303


602


10,550


540

Pre-opening costs


-


268


-


328


-

Acquisition costs


-


95


-


178


-

Impairment of assets


-


-


-