RCI Reports 1Q19 Results and Files 10-Q

HOUSTON – February 11, 2019 – RCI Hospitality Holdings, Inc. (Nasdaq: RICK) today reported results for the Fiscal 2019 first quarter ended December 31, 2018 and the filing of its 10-Q.

1Q19 vs. 1Q18

• Diluted EPS of $0.65 compared to $1.47
• Diluted Non-GAAP* EPS of $0.61 compared to $0.53
• 1Q19 GAAP results included $1.2 million pre-tax gain on the sale of three non-income producing assets and $447K pre-tax non-operating loss reflecting the implementation of a new accounting standard
• 1Q18 GAAP results included $9.7 million deferred tax credit due to the new tax law and $827K in interest expense for debt issuance costs write-off and prepayment penalties related to a bank refinancing
• Free cash flow (FCF) totaled $11.1 million based on net cash provided by operating activities of $11.5 million, less maintenance capital expenditures of $0.4 million
• Total revenues of $44.0 million compared to $41.2 million on 46 and 45 units, respectively

Other News

• RCI reactivated its share buyback program in line with its capital allocation strategy, acquiring 28,211 shares from October 2018 to January 2019 for $660,000, or an average price of $23.39
• A subsidiary sold another non-income producing asset for an estimated $383K pre-tax gain in late January

Conference Call Today at 4:30 PM ET

• A conference call to discuss 1Q19 results, outlook and related matters will be held today at 4:30 PM ET
• Live Participant Dial In: Toll Free at 877-407-9210 and International at 201-689-8049
• To access the live webcast, slides or replay, visit: https://www.investornetwork.com/event/presentation/42936
• Phone replay: Toll Free at 877-481-4010 and International at 919-882-2331 (Passcode: 42936)

CEO Comment

"We generated strong first quarter results," said Eric Langan, President & CEO. "Total revenues increased 6.8% year over year, led by our Nightclubs segment, with increases of 4.3% in same-store sales, 7.1% in total revenues, and only a partial quarter contribution from newly acquired clubs in Chicago and Pittsburgh.

"Non-GAAP operating income increased 9.9% as operating margin expanded 64 basis points due to increased operating leverage from higher revenues, in particular, higher service revenues, which were up 9.1%. This was despite legal, advertising and marketing costs related to the acquisitions of new clubs. Accordingly, non-GAAP EPS increased 15.1% to $0.61 and free cash flow increased 47.0% to $11.1 million.

"In line with our capital allocation strategy, during and subsequent to 1Q19 we rein

"We look forward to the balance of the year. Our FY19 plan calls for:

• Continuing to integrate our new clubs in Chicago and Pittsburgh
• Opening three more Bombshells Restaurant & Bars in the Houston area
• Improving Bombshells same-store sales
• Selling excess land developed around several of the new Bombshells
• Further reducing costs, and
• Continuing our capital allocation strategy as it applies to buybacks."

Asset Management

• 1Q19: Subsidiaries sold the former Club Onyx Philadelphia business, the company's former office in Houston, and a small parcel in San Antonio for a total of $1.9 million, consisting of $1.2 million in cash and $625K in a 9%, 10-year note receivable, for a pre-tax gain of $1.2 million. Most of the cash proceeds were used to pay down $945K in bank debt on the real estate sold.
• January 2019: A subsidiary sold an excess parking lot near the site of the former Club Onyx Dallas for $1.4 million, consisting of $250K in cash and $1.15 million in an 8%, 3-year note receivable, for an estimated preliminary pre-tax gain of approximately $383K, after closing costs.

1Q19 REVIEW

(All comparisons to year ago periods unless otherwise noted)

• Total Revenues: Total revenues of $44.0 million rose $2.8 million. By revenue line, growth reflected increases of $1.4 million (+9.1%) in service, $505K (+2.8%) in alcoholic beverages, $481K (+21.8%) in other, and $383K (+7.2%) in food. The other increase reflected the continued revitalization of Drink Robust.
• Operating Income: Operating income increased 21.8% to $11.1 million (25.3% of revenues) from $9.1 million (22.2%). Expenses increased $819K, but as a percent of revenues, declined 310 basis points to 74.7%. Most of the dollar increase reflected the addition of two nightclubs and legal, advertising and marketing costs related to their acquisition. This was partially offset by net gains of $1.1 million primarily from the sale of non-income producing assets. On a non-GAAP basis, which excludes such gains as well as other items in both periods, operating income increased 9.9% to $10.2 million compared to $9.3 million, and operating margin expanded to 23.1% compared to 22.5%.
• Nightclubs Segment: Revenues of $37.7 million increased 7.1%, with 39 units compared to 40. Same-store sales increased 4.3%. New clubs added approximately $1.9 million from acquisitions. Operating income increased 15.1% to $15.4 million (40.8% of revenues) from $13.4 million (38.0%). Operating income included the gain on sale of the former Club Onyx Philadelphia business. On a non-GAAP basis, operating income increased 6.6% to $14.3 million from $13.4 million, with operating margin approximately level at 37.8% compared to 38.0%.
• Bombshells Segment: Revenues of $6.0 million increased 3.2%, with 7 units compared to 5. New units added approximately $1.4 million from Houston area locations opened in April 2018 (Pearland) and December 19th (I-10). This more than offset the previously reported decline in comparable same-store sales of 20.5%, which reflected in part tough year-over-year comparisons to business generated in October 2017 when the Houston Astros won the pro baseball championship. As a result of reduced operating leverage, segment income was $119K (2.0% of revenues) compared to $891K (15.3%).
• Other Metrics
  • Adjusted EBITDA of $12.0 million increased 8.4% compared to $11.1 million.
  • Occupancy Costs (rent and interest expense as a percentage of total revenues) were 8.0% compared to 7.7%. 1Q19 reflects higher debt raised in advance of two club acquisitions and multiple Bombshells units under construction. 1Q18 excludes $827K in interest expense related to a bank refinancing.
  • ASU 2016-01, a newly adopted accounting guidance, required classification to current income of the change in market value of equity securities starting the quarter ended December 31, 2018. This resulted in the $447K loss in non-operating gains/losses.
  • Effective Tax Rate was an expense of 22.0% compared to a benefit of 134.3%. 1Q18 included $9.7 million deferred tax credit due to the new tax law.
  • Cash and Cash Equivalents were $9.4 million at December 31, 2018 compared to $17.7 million at September 30, 2018. The September position included proceeds from debt used to finance the acquisitions in November of clubs in Chicago and Pittsburgh and related real estate.
  • Long-Term Debt of $153.1 million at December 31, 2018 increased $12.5 million from $140.6 million at September 30, 2018. The increase was primarily due to $12.0 million in seller-financing used to close the Chicago and Pittsburgh acquisitions.
  • RCI's FY19 FCF Target of $26 million is based on estimated net cash provided by operating activities of approximately $29 million, less projected maintenance capex of approximately $3 million.

*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 (or including) some items that management believes are not representative of the ongoing business operations of the Company, but are included in (or excluded from) 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 calculate non-GAAP operating income and non-GAAP operating margin by excluding the following items from income from operations and operating margin: amortization of intangibles, gains or losses on sale of assets, gain on insurance, and settlement of lawsuits. 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.
• Non-GAAP Net Income and Non-GAAP Net Income per Diluted Share. We calculate non-GAAP net income and non-GAAP net income per diluted share by excluding or including certain items to net income attributable to RCIHH common shareholders and diluted earnings per share. Excluded items are: amortization of intangibles, costs and charges related to debt refinancing, income tax expense (benefit), gains or losses on sale of assets, gain on insurance, and settlement of lawsuits. Included item is the non-GAAP provision for current and deferred income taxes, calculated at 22.2% and 26.5% effective tax rate of the pre-tax non-GAAP income before taxes for the quarter ended December 31, 2018 and 2017, respectively. We believe that excluding and including such items help management and investors better understand our operating activities.
• Adjusted EBITDA. We calculate adjusted EBITDA by excluding the following items from net income attributable to RCIHH common shareholders: depreciation expense, amortization of intangibles, income tax expense (benefit), net interest expense, gains or losses on sale of assets, gain on insurance, and settlement of lawsuits. We believe that adjusting for such items helps management and investors better understand our 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. 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.
• Management also uses non-GAAP cash flow measures such as free cash flow. Free cash flow is derived from net cash provided by operating activities less maintenance capital expenditures. We use free cash flow as the baseline for the implementation of our capital allocation strategy.

Notes

• Unit counts above are at period end.
• All references to the "company," "we," "our," and similar terms include RCI Hospitality Holdings, Inc. and its subsidiaries, unless the context indicates otherwise.
• Planned opening dates are subject to change due to weather, which could affect construction schedules, and scheduling of final municipal inspections.

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

With more than 40 units, RCI Hospitality Holdings, Inc., through its subsidiaries, is the country's leading company in gentlemen's clubs and sports bars/restaurants. Clubs in New York City, Miami, Philadelphia, Charlotte, Dallas/Ft. Worth, Houston, Minneapolis and other cities operate under brand names, such as Rick's Cabaret, XTC, Club Onyx, Vivid Cabaret, Jaguars, Tootsie's Cabaret, and Scarlett's Cabaret. Sports bars/restaurants operate under the brand name Bombshells Restaurant & Bar. Please visit http://www.rcihospitality.com

Media & Investor Contacts

Gary Fishman and Steven Anreder at 212-532-3232 or gary.fishman@anreder.com and steven.anreder@anreder.com