RCI Hospitality Holdings Inc (RICK)

[Drmicrocap]

RCI Continues Rebound with 2Q16 EPS at $0.54 GAAP & $0.40 Non-GAAP
PR Newswire RCI Hospitality Holdings, Inc.
May 10, 2016 4:05 PM
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HOUSTON, May 10, 2016 /PRNewswire/ -- RCI Hospitality Holdings, Inc. (RICK) today announced its performance continued to rebound in the fiscal 2016 second quarter ended March 31, 2016.

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.RCI Hospitality Holdings Corporate Logo (PRNewsFoto/RCI Hospitality Holdings, Inc.)
2Q16 Highlights

GAAP EPS diluted was $0.54, which included a $1.75 million tax credit. Excluding non-recurring items, non-GAAP* EPS diluted was $0.40.
In the year ago quarter, GAAP EPS was a loss of ($0.28), which included a $10.3 million pre-tax expense for a legal settlement. Non-GAAP EPS diluted was $0.44. 2Q15 was a record quarter for sales and non-GAAP earnings.
2Q16 results reflect a continued recovery in performance following a falloff after 2Q15.
2Q16 free cash flow (FCF) totaled $6.4 million, the second largest quarter on record, and $10.3 million for the first half of FY16.
As a result, RCI has revised its FY16 FCF target upward to $16-$19 million from $15-18 million.
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 [e-mail]
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. (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

-

-

-

1,358

-
Depreciation and amortization

1,826

1,886

3,643

3,531

1,817
Adjusted EBITDA

$9,650

$10,203

$17,837

$19,831

$8,187











Reconciliation of GAAP net income (loss) to non-GAAP net income










GAAP net income (loss)

$5,505

($2,841)

$8,057

$519

$2,552
Amortization of intangibles

197

336

399

579

202
Gain on Drink Robust investment

-

-

-

(577)

-
Stock-based compensation

120

120

240

240

120
Litigation and other one-time settlements

62

10,303

602

10,550

540
Pre-opening costs

-

268

-

328

-
Income tax expense

293

(1,265)

1,660

581

1,367
Acquisition costs

-

95

-

178

-
Impairment of assets

-

-

-

1,358

-
Non-GAAP provision for income taxes

(2,120)

(2,414)

(3,751)

(4,731)

(1,673)
Non-GAAP net income

$4,057

$4,602

$7,207

$9,025

$3,108











Reconciliation of GAAP diluted net income per share to non-GAAP diluted net income per share










Fully diluted shares

10,215

10,275

10,356

10,273

10,635
GAAP net income (loss)

$0.54

($0.28)

$0.78

$0.05

$0.25
Amortization of intangibles

0.02

0.03

0.04

0.06

0.02
Gain on Drink Robust investment

-

-

-

(0.06)

-
Stock-based compensation

0.01

0.01

0.02

0.02

0.01
Litigation and other one-time settlements

0.01

1.00

0.06

1.03

0.05
Pre-opening costs

-

0.03

-

0.03

-
Income tax expense

0.03

(0.12)

0.16

0.06

0.13
Acquisition costs

-

0.01

-

0.02

-
Impairment of assets

-

-

-

0.13

-
Non-GAAP provision for income taxes

(0.21)

(0.23)

(0.36)

(0.46)

(0.16)
Non-GAAP diluted net income per share

$0.40

$0.44

$0.70

$0.88

$0.30











Reconciliation of GAAP operating income to non-GAAP operating income










GAAP operating income (loss)

$7,550

($2,616)

$13,267

$3,524

$5,717
Amortization of intangibles

197

336

399

579

202
Stock-based compensation

120

120

240

240

120
Impairment of assets

-

-

-

1,358

-
Litigation and other one-time settlements

62

10,303

602

10,550

540
Pre-opening costs

-

268

-

328

-
Acquisition costs

-

95

-

178

-
Non-GAAP operating income

$7,929

$8,506

$14,508

$16,757

$6,579











Reconciliation of GAAP operating margin to non-GAAP operating margin










GAAP operating income

22.0%

-7.5%

19.5%

5.1%

17.1%
Amortization of intangibles

0.6%

1.0%

0.6%

0.8%

0.6%
Stock-based compensation

0.3%

0.3%

0.4%

0.3%

0.4%
Impairment of assets

0.0%

0.0%

0.0%

2.0%

0.0%
Litigation and other one-time settlements

0.2%

29.4%

0.9%

15.2%

1.6%
Pre-opening costs

0.0%

0.8%

0.0%

0.5%

0.0%
Acquisition costs

0.0%

0.3%

0.0%

0.3%

0.0%
Non-GAAP operating margin

23.1%

24.3%

21.4%

24.2%

19.7%


RCI HOSPITALITY HOLDINGS, INC.
SEGMENT INFORMATION


















FOR THE THREE MONTHS


FOR THE SIX MONTHS


ENDED MARCH 31,


ENDED MARCH 31,
(in thousands)

2016


2015


2016


2015
















Business segment sales:















Nightclubs

$
29,062


$
29,916


$
57,514


$
59,030
Bombshells


4,629



4,448



9,008



8,982
Other


705



625



1,349



1,182


$
34,396


$
34,989


$
67,871


$
69,194
















Business segment operating income (loss):















Nightclubs

$
9,734


$
(818)


$
18,195


$
6,836
Bombshells


643



457



1,245



882
Other


(799)



(724)



(1,504)



(1,189)
General corporate


(2,028)



(1,531)



(4,669)



(3,005)


$
7,550


$
(2,616)


$
13,267


$
3,524
















Reconciliation of Nightclubs GAAP operating income to non-GAAP operating income















Nightclubs operating income

$
9,734


$
(818)


$
18,195


$
6,836
Impairment of assets


-



-



-



1,358
Settlement of lawsuits and other one-time costs


62



10,303



602



10,550
Nightclubs non-GAAP operating income

$
9,796


$
9,485


$
18,797


$
18,744
















Nightclubs non-GAAP operating margin


33.7%



31.7%



32.7%



31.8%