RCI Hospitality's 1Q16 EPS Rebounds from 4Q15, Declares $0.03 Per Share Quarterly Dividend, to Open Third Club in New York City

HOUSTON, Feb. 9, 2016 /PRNewswire/ -- RCI Hospitality Holdings, Inc. (Nasdaq: RICK) today announced results for the fiscal 2016 first quarter ended December 31, 2015, its first dividend, latest share buybacks, and plans to open a third gentlemen's club in Manhattan.

1Q16 Highlights

• GAAP and Non-GAAP* results rebounded from 4Q15, but were below the year ago record quarter in 1Q15.
• GAAP EPS was $0.25 fully diluted compared to $0.05 in 4Q15 and $0.32 in 1Q15.
• Non-GAAP EPS was $0.30 fully diluted compared to $0.17 in 4Q15 and $0.42 in 1Q15.
• Free cash flow (FCF) remained strong at $3.9 million compared to $5.0 million in 1Q15 and is on track to reach approximately $15-18 million in FY16. RCI defines FCF as operating cash flow less maintenance capex.

Cash Dividend & Share Buy Backs

• Starting in 1Q16, the company stepped up its previously authorized share buyback program, taking advantage of its strong free cash flow to return capital to shareholders.
• In line with this program, RCI has declared a quarterly common stock dividend of $0.03 per share, or $0.12 per share annually. The declared dividend for the fiscal 2016 second quarter is payable on March 25, 2016, to holders of record on March 10, 2016, with an ex-dividend date of March 8, 2016.
• To date in FY16, the company has purchased 336,714 common shares at a cost of $3.3 million, reducing shares outstanding to 9.948 million at January 31, 2016 from 10.295 million a year ago.

New Club in NYC

• An RCI subsidiary plans to open a sports-themed gentlemen's club in the Madison Square Garden area in the second half of FY16, to complement its highly successful Rick's Cabaret New York and Vivid Cabaret New York.
• The new club is being developed through a joint venture that requires only $1.5 million investment and is expected to generate a risk-adjusted after tax return better than buying back shares.

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 (both domestic or international)
• Webcast URL: http://www.investorcalendar.com/IC/CEPage.asp?ID=174652

Meet Management Tonight

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

• When: Today, February 9, 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 we were nicely profitable in 1Q16 and generated strong free cash flow, but this was still very much a transition quarter," Mr. Langan said. "We have more work to do on costs and efficiencies. Our plan is to expand margins to grow profits and free cash flow on what we expect to be flattish revenues in 2016.

"While legal costs and settlements were still high, we are down to a handful of open insurance cases, and these expenses should begin to decline. With the 2Q16 acquisition of the Rick's Cabaret New York real estate, we anticipate further reductions in occupancy costs. We have initiated additional saving initiatives, which we anticipate will kick in in the upcoming quarters.

"We also have work to do to resume same store sales growth, but we have significant experience dealing with such situations. We have already begun to test new marketing strategies and tactics with success and are working on how to best implement them at other units. As part of this effort, we closed two gentlemen clubs in January for re-concepting and remodeling to what we believe will be a better use.  Both should reopen in March.

"Regarding new units, we have formed a joint venture to develop the first sports-themed gentlemen's club in Manhattan, which has been a great market for RCI. The new club only requires a relatively modest $1.5 million investment on our part.

"In addition, we are pleased to announce we are declaring a quarterly dividend of $0.03 per share and have begun to make a noticeable reduction in our share count to below 10 million. Our current intent is to continue to retire our shares until our stock, in our view, is more fully valued.

"We are dedicated to improving our valuation. With major legal issues behind us, we are free to use our superior cash generating power to return capital to shareholders by buying back shares and paying a dividend. While opportunities may arise, such as the new club announced today, we generally believe the best allocation of our capital is the risk-adjusted, after-tax, free cash flow yield of buying our own shares, versus acquiring or opening new units or paying down debt ahead of schedule, for as long as our stock stays at this low valuation relative to RCI's cash flow generation."

1Q16 Analysis (all comparisons to year ago periods unless otherwise noted)

Total Revenues

• Total revenues of $33.5 million declined 2.1% or $0.7 million from $34.2 million in 1Q15, which was the second biggest revenue quarter in the last two years.
• Starting with 1Q16, total revenues (including prior periods) are being reported net of sales taxes and other revenue related taxes, RCI having chosen to early adopt new revenue accounting standards.
• There were 43 units in operation at the end of 1Q16, the same as at the end of 1Q15.
• Same store net sales totaled $30.0 million, down 6.3% or $2.0 million from $32.0 million. The decline reflected big spenders spending less per visit at some adult clubs, adult clubs located in energy producing areas in Texas coming down off their peak, and tough comparisons in the Bombshells segment due to strong initial sales at two units opened in late 4Q14 and in 1Q15.
• Units opened less than a year added approximately $2.3 million in total revenues. This included the November 2014 opening of Bombshells Houston-South, the January 2015 acquisition of Down in Texas Saloon in Austin, and the May 2015 acquisition of The Seville Club of Minneapolis.
• Liquor sales increased $0.6 million from both the nightclubs and Bombshells segments. Service revenues declined $0.9 million reflecting the spending trend at a number of adult clubs. Food and merchandise declined $0.5 million reflecting tough comparisons in the Bombshells segment.

Operating Income & Margin

• GAAP income from operations was $5.7 million (17.1% of revenues) compared to $6.1 million (18.0%).
  • Operating income was generally lower due to reduced high-margin service revenues and slightly higher costs as the company's effort to expand margins has only just begun.
  • As part of this effort, rent declined 16.9%, partially offset by an increase in depreciation and amortization. This was the result of the August 2015 acquisition of the Miami Gardens Square retail plaza, where Tootsie's Cabaret Miami is located.
  • Legal and professional expenses increased 15.2% primarily due to work related to settlements leftover from RCI's prior insurance company. Actual settlement costs were $0.54 million compared to $0.25 million.
  • Operating income in 1Q15 was affected by a $1.4 million impairment related to the elimination of underperforming units.
• Non-GAAP income from operations was $6.6 million (19.7%) compared to $7.8 million (22.7%). RCI's standard non-GAAP operating income and margin calculations exclude some, but not all of the non-recurring expenses listed above.

Occupancy Costs (Rent+Interest)

• Occupancy costs, which the company measures as a combination of rent plus interest expense, were 8.6% of revenues compared to 8.1% in the year ago quarter. The increase reflects a different mix of debt in the quarter, partially offset by the decline in rent.
• With the Rick's Cabaret New York real estate acquisition, RCI anticipates occupancy costs resuming their decline based on a significant drop in rent partially offset by an increase in interest.
• As previously announced, an RCI subsidiary in mid-January 2016 acquired the land and building where Rick's Cabaret New York is located for $10.0 million, financed through a 5.00% bank loan. Instead of $1.2 million annually in rent, there will be $0.5 million in interest, for an initial $0.7 million in cash savings.

Adjusted EBITDA & Free Cash Flow

• RCI's cash generating power for the quarter, as reflected by adjusted EBITDA, amounted to $8.2 million compared to $9.7 million in the year ago period.
• As a result, RCI generated free cash flow of $3.9 million compared to $5.0 million and is on track to total approximately $15-18 million in FY16.

Nightclubs Segment

• 38 units in operation at the end of the quarter, the same as a year ago.
• Sales declined 3.4%, to $28.2 million from $29.2 million.
• GAAP operating income was $8.5 million (30.2% of revenues) compared to $8.3 million (28.4%).
• Non-GAAP operating income, which excludes legal settlements and impairment of assets, was $9.1 million (32.1%) compared to $9.9 million (33.9%).

Bombshells Segment

• Five units in operation at the end of the quarter, the same as a year ago.
• Sales declined 3.4%, to $4.4 million from $4.5 million.
• GAAP operating income was $0.48 million (11.1% of revenues) compared to $0.54 million (11.9%).

Balance Sheet (December 31, 2015 compared to September 30, 2015)

• Total stockholders' equity declined slightly to $128.2 million from $128.5 million as the company spent more to buy back shares than the increase in retained earnings.

*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.

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

With 43 units, RCI Hospitality Holdings, Inc., through its subsidiaries, is the country's leading company in adult gentlemen clubs and sports bars/restaurants. Adult 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 the operational and financial results of its Web sites, 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.

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SOURCE RCI Hospitality Holdings, Inc.