The ONE Group Reports First Quarter 2018 Results

The ONE Group Hospitality, Inc. (NASDAQ:STKS), yesterday reported financial results for the first quarter ended March 31, 2018.

Highlights for the first quarter ended March 31, 2018 were as follows:

• Total GAAP revenue was $19.5 million compared to $20.4 million in the same period last year;
• Comparable sales* globally increased 6.6% compared to the same period last year. Domestic comparable sales for STK restaurants rose 7.3% and international comparable sales rose 4.5%;
• GAAP net income from continuing operations before income taxes was $143,000 compared to a loss of $511,000 for the same period last year;
• GAAP net income attributable to The ONE Group Hospitality, Inc. was $231,000 or $0.01 per share compared to GAAP net loss of $402,000 or $0.02 loss per share for the same period last year;
• Adjusted EBITDA** increased 11.6% to $1.8 million compared to $1.6 million the same period last year; and,
• Total restaurant expenses decreased 410 basis points to 89.0% from 93.1% as a percentage of revenues.

Emanuel “Manny” Hilario, Chief Executive Officer, said, “The ONE Group is off to a strong start this year with a notable 6.6% gain in comparable sales coupled with an 11.6% increase in Adjusted EBITDA despite a non-recurring Super Bowl event from 2017 that negatively impacted year over year revenues by $1.7 million and Adjusted EBITDA by $0.7 million. We are particularly pleased with the 7.3% increase in comparable sales for the domestic STK restaurants and the 410 basis points increase in margin for our domestic STK restaurants. Our results demonstrate that we are making headway executing our four-point strategy of driving comparable sales; focusing growth on license and management deals; improving operational efficiency in the restaurants; and reducing corporate G&A expenses, excluding stock-based compensation. We believe that the momentum we have achieved should continue and that there is still room for further sales improvements and greater profitability. We believe that 2018 is poised to be a highly productive year for our business.”

*Comparable sales or same store sales (“SSS”), represents total food and beverage sales at owned and managed units opened for a full 18-month period. This metric includes total revenue from our US owned and managed STK locations as well as the revenue reported to us with respect to comparable sales at our international locations (measured in constant currency), and excludes revenues where we do not directly control the event sales force (Royalton Hotel in NY and The W Hotel in Westwood, CA).

Total food and beverage sales at owned and managed units, a non-GAAP measure, represents our total revenue from our owned operations as well as the revenue reported to us with respect to sales at our managed locations, where we earn management and incentive fees at these locations. For a reconciliation of our GAAP revenue to total food and beverage sales at our owned and managed units and a discussion of why we consider it useful, see the financial information accompanying this release.

** Adjusted EBITDA, a non-GAAP measure, represents net loss before interest expense, provision for income taxes, depreciation and amortization, non-cash impairment loss, deferred rent, pre-opening expenses, non-recurring gains and losses, stock based compensation, losses from discontinued operations and certain transactional costs. Not all of the aforementioned items defining Adjusted EBITDA occur in each reporting period, but have been included in our definitions of terms based on our historical activity. For a reconciliation of Adjusted EBITDA to the most directly comparable financial measure presented in accordance with GAAP and a discussion of why we consider it useful, see the financial information accompanying this release.

Unaudited First Quarter 2018 Financial Results

Total GAAP Revenues were $19.5 million in the first quarter of 2018 compared to $20.4 million in the same period last year. This decrease was primarily driven by a Super Bowl event hosted in Houston, TX in the prior year that generated $1.7 million in revenues. We did not host a Super Bowl event in 2018. This was partially offset by the increase in comparable sales and increased revenues from management, license and incentive fee revenues.

Total owned restaurant net revenues increased 6.0% to $15.1 million in the first quarter of 2018 compared to $14.2 million in the first quarter of 2017. The increase was primarily due an increase in comparable sales.

Comparable sales from owned STK units increased 8.7%, while comparable sales from both owned and managed STK units increased 7.3%. These increases reflect strong performances of the STK brand.

Management, license and incentive fee revenues increased 5.3% to $2.4 million in the first quarter of 2018 compared to $2.3 million in the first quarter of 2017. The increase was driven by higher management and incentive fees reflecting the strong performances of our European locations along with the launch of the licensed STK in Dubai in December 2017.

GAAP net income attributable to The ONE Group Hospitality, Inc. in the first quarter of 2018 was $231,000 or $0.01 per share compared to GAAP net loss of $402,000 or $0.02 loss per share in the first quarter of 2017.

Adjusted EBITDA** increased 11.6% to $1.8 million in the first quarter of 2018 from $1.6 million in the first quarter of 2017. The Super Bowl event hosted in the prior year’s first quarter in Houston, TX generated $700,000 in Adjusted EBITDA and we did not participate in a Super Bowl Event during 2018.

Development Update - Projected 2018

Owned Restaurants - STK San Diego

Licensed Units - STK Dubai- Downtown, STK Doha, STK Puerto Rico, and STK Mexico City

2018 Targets

The Company is providing the following targets for 2018:

• Total GAAP revenues between $80 million and $85 million;
• Total food and beverage sales at all our owned and managed units to be between $170 million and $180 million;
• Comparable sales growth of about 2% to 3%;
• Total food and beverage costs to be approximately 25% to 26%;
• Adjusted EBITDA between $9 million and $10 million, representing approximately 30% - 40% growth compared to the prior year; and,
• Total capital expenditures of approximately $3 million, which is significantly less than prior years and reflective of our capital-light strategy.

Long-Term Growth Targets

The Company is reiterating the following long-term growth targets:

• Three to five licensed restaurant units and one to two food and beverage hospitality deals annually;
• Comparable sales growth of 2% to 3%;
• Consistent Adjusted EBITDA growth of at least 20%; and,
• Continued focus on our asset light model and disciplined G&A management, while benefitting from economies of scale and operating efficiencies.

We have not reconciled guidance for Adjusted EBITDA to the corresponding GAAP financial measure because we do not provide guidance for the various reconciling items. We are unable to provide guidance for these reconciling items because we cannot determine their probable significance, as certain items are outside of our control and cannot be reasonably predicted since these items could vary significantly from period to period. Accordingly, reconciliations to the corresponding GAAP financial measure are not available without unreasonable effort.

About The ONE Group

The ONE Group (NASDAQ:STKS) is a global hospitality company that develops and operates upscale, high-energy restaurants and lounges and provides hospitality management services for hotels, casinos and other high-end venues both nationally and internationally. The ONE Group’s primary restaurant brand is STK, a modern twist on the American steakhouse concept with locations in major metropolitan cities throughout the U.S. and Europe. ONE Hospitality, The ONE Group’s food and beverage hospitality services business, provides the development, management and operations for premier restaurants and turn-key food and beverage services within high-end hotels and casinos.

Reconciliation of Non-GAAP Measures

We prepare our financial statements in accordance with generally accepted accounting principles (GAAP). In this press release, we also make references to the following non-GAAP financial measures: total food and beverage sales at owned and managed units and adjusted EBITDA.

Total food and beverage sales at owned and managed units. Total food and beverage sales at owned and managed units represents our total revenue from our owned operations as well as the revenue reported to us with respect to sales at our managed locations, where we earn management and incentive fees at these locations. We believe that this measure represents a useful internal measure of performance as it identifies total sales associated with our brands and hospitality services that we provide. We believe that this measure also represents a useful internal measure of performance. Accordingly, we include this non-GAAP measure so that investors can review financial data that management uses in evaluating performance, and we believe that it will assist the investment community in assessing performance of restaurants and other services we operate, whether or not the operation is owned by us. However, because this measure is not determined in accordance with GAAP, it is susceptible to varying calculations and not all companies calculate these measures in the same manner. As a result, this measure as presented may not be directly comparable to a similarly titled measure presented by other companies. This non-GAAP measure is presented as supplemental information and not as an alternative to any GAAP measurements. The following table includes a reconciliation of our GAAP revenue to total food and beverage sales at our owned and managed units (in thousands):

The following table presents the elements of the Comparable sales measure for Fiscal 2017 and Fiscal 2018 through March 2018 on a quarterly basis. Note that comparable sales for international managed business is determined on a constant currency basis.

Adjusted EBITDA. We define adjusted EBITDA as net loss before interest expense, provision for income taxes, depreciation and amortization, non-cash impairment loss, deferred rent, pre-opening expenses, non-recurring gains and losses, stock based compensation, losses from discontinued operations and certain transactional costs. Not all of the aforementioned items defining Adjusted EBITDA occur in each reporting period, but have been included in our definitions of terms based on our historical activity. Adjusted EBITDA has been presented in this press release and is a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP.

We believe that adjusted EBITDA is an appropriate measure of operating performance, as it provides a clear picture of our operating results by eliminating certain non-cash expenses that are not reflective of the underlying business performance. We use this metric to facilitate a comparison of our operating performance on a consistent basis from period to period and to analyze the factors and trends affecting our business as well as evaluate the performance of our units. Adjusted EBITDA has limitations as an analytical tool and our calculation thereof may not be comparable to that reported by other companies; accordingly, you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Adjusted EBITDA is included in this press release because it is a key metric used by management. Additionally, adjusted EBITDA is frequently used by analysts, investors and other interested parties to evaluate companies in our industry. We use adjusted EBITDA, alongside other GAAP measures such as net income (loss), to measure profitability, as a key profitability target in our annual and other budgets, and to compare our performance against that of peer companies. We believe that adjusted EBITDA provides useful information facilitating operating performance comparisons from period to period.

The following table presents a reconciliation of net income to Adjusted EBITDA for the periods indicated (unaudited, in thousands):