RCI Hospitality Holdings, Inc. — Q1 FY2023 Form 10-Q
Business context and reporting period: The unaudited quarter ended December 31, 2022, compared with the quarter ended December 31, 2021. RCIHH operates adult nightclubs, Bombshells restaurants and bars, and smaller related businesses. It reported 64 establishments at quarter-end.
Financial results
| Metric | Q1 FY2023 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $70.0 million | $61.8 million | +13.2% |
| Income from operations | $16.9 million | $15.9 million | +6.2% |
| Operating margin | 24.2% | 25.7% | Down 1.5 percentage points |
| Net income attributable to RCIHH common shareholders | $10.2 million | $10.6 million | Down 3.2% |
| GAAP diluted EPS | $1.11 | $1.12 | Down $0.01 |
| Adjusted EBITDA (non-GAAP) | $20.5 million | $18.0 million | +13.9% |
| Operating cash flow | $14.9 million | $16.3 million | Down 8.4% |
| Free cash flow (non-GAAP) | $13.0 million | $15.3 million | Down 14.6% |
Revenue and margins: Nightclubs generated $56.3 million, up 20.4%; Bombshells generated $13.4 million, down 9.1%. Consolidated same-store sales fell 2.7%, with Nightclubs up 1.2% and Bombshells down 13.9%. Nightclub operating margin was 40.4% (40.1% prior year); Bombshells operating margin declined to 13.8% from 19.0%. Higher sales and service/alcohol mix supported revenue and cost-of-goods margins, but increased SG&A and depreciation, including stock-based compensation and acquired/intangible-asset amortization, reduced consolidated operating margin.
Cash, liquidity and debt: Cash was $34.1 million at December 31, 2022, versus $36.0 million at September 30, 2022. Working capital was $12.8 million, down from $18.6 million. Debt obligations, net of discounts and issuance costs, totaled approximately $211.2 million; the balance sheet reports $13.3 million current and $197.9 million long-term. Interest expense rose 41.6% to $3.7 million, primarily reflecting higher average debt. The debt maturity schedule includes $13.9 million due in the 12 months ending December 31, 2023, with balloon payments included in several maturity years. Operating lease liabilities were $38.1 million in principal payments.
Investing cash outflow was $13.7 million, including $12.6 million of capital expenditures and $4.0 million for business acquisitions, partly offset by asset-sale proceeds. Financing cash outflow was $3.1 million. The company paid $0.05 per share in dividends. It stated that it expects operating cash flows to be adequate for the next 12 months, but had no unused credit facilities and could not assure favorable availability of additional financing.
Material changes and notable items
- Revenue growth was mainly attributable to acquired clubs and a new Bombshells opening; newly acquired clubs contributed $9.0 million of the $9.5 million increase in Nightclubs revenue. Management attributed Bombshells’ same-store decline in part to unusually strong prior-year customer spending following government stimulus.
- SG&A increased 23.0% to $22.7 million, including $0.9 million of stock-based compensation. Depreciation and amortization increased 50.7% to $3.3 million. Higher interest expense also weighed on earnings.
- During the quarter, RCIHH acquired the Heartbreakers club and real estate for $9.0 million, including a $5.0 million seller note, and made several real estate purchases. A planned $66.5 million acquisition of five Texas clubs and related properties had not closed by the filing date. Subsequent to quarter-end, the company acquired a Bombshells location in San Antonio for $3.2 million, including $2.0 million seller financing.
- Capital spending was $12.6 million, of which $10.7 million related to new facilities, equipment and intangible assets and $1.9 million to maintenance. The company reported $18.8 million of remaining share repurchase authorization and repurchased 1,500 shares during the quarter.
Outlook, risks and controls
The filing provides no specific revenue or earnings guidance. Management cited inflation, supply-chain disruption and the possibility of an economic downturn as risks to operations and cash flow; it may seek to recover cost increases through pricing but cannot assure it will be able to do so. The business is seasonal, with historically stronger results in October through March. Growth plans include acquisitions, new locations and Bombshells development, which may require additional debt or equity financing.
Legal matters include a shareholder derivative action for which potential loss could not yet be estimated, one remaining unresolved claim associated with a former insurer, and other litigation matters. The company reported that disclosure controls were not effective at December 31, 2022 because of a previously identified material weakness in controls over accounting for acquired intangible assets in business combinations. Remediation efforts were underway; management stated it believed the added controls would address the weakness.
Important facts for investors to verify
- Whether the material weakness in acquisition accounting is remediated and whether later purchase-price valuations require adjustments.
- Closing, financing terms and integration performance of the announced five-club acquisition, as well as results from recent acquisitions and developments.
- Bombshells same-store sales and margins, and whether consolidated growth continues to depend substantially on acquisitions.
- Debt maturities, balloon-payment requirements, interest costs and access to financing, given the absence of unused credit facilities.
- Progress and potential financial exposure in the disclosed litigation and other contingencies.