Business context and reporting period
RCI Hospitality Holdings, Inc. filed this unaudited Form 10-Q for the first quarter of fiscal 2017, the three months ended December 31, 2016, with comparisons to the quarter ended December 31, 2015. The company operated 41 establishments, including adult nightclubs and Bombshells restaurants and bars, and a business communications operation. Unless noted otherwise, dollar figures below are in millions.
Financial and operating performance
- Revenue: $33.739, up 0.8% year over year. Service revenue rose 6.6% to $13.475; alcoholic beverage sales fell 1.5% to $14.375 and food and merchandise sales fell 2.9% to $4.207. Management attributed growth mainly to 3.6% same-store sales growth. Nightclub same-store sales rose 2.8%; Bombshells same-store sales rose 9.6%.
- Profit and margins: Operating income was $6.333, up 10.8%, with operating margin of 18.8% versus 17.1%. Net income was $2.905 versus $2.439; net income attributable to RCIHH common shareholders was $2.898 versus $2.552. Basic and diluted EPS were both $0.30 versus $0.25. The lower weighted-average share count contributed to per-share growth. Interest expense increased to $2.015 from $1.915.
- Segment performance: Nightclub revenue was $29.282 and operating income $9.216, versus $28.170 and $8.508. Bombshells revenue was $4.295 and operating income $0.638, versus $4.379 and $0.487. Corporate expense increased to $3.180 from $2.630.
- Additional performance measures: Adjusted EBITDA, a non-GAAP measure, was $8.006 versus $8.187. Non-GAAP net income was $2.986 versus $3.150; non-GAAP diluted EPS was $0.31 versus $0.30. GAAP operating margin improved, while non-GAAP operating margin decreased to 19.1% from 19.7%.
- Cash flow and investment: Operating cash flow was $5.521 versus $4.202. Investing cash outflow was $2.988, including $3.008 of capital expenditures, compared with $0.889 of capex a year earlier. Management-defined free cash flow (operating cash flow less maintenance capex) was $5.127 versus $3.851. Cash increased by $0.737 to $12.064.
- Liquidity and debt: Current assets were $28.992 and current liabilities $24.192; management reported negative working capital of $2.9 million excluding $7.671 million of assets held for sale. Total debt was $105.620 ($9.957 current and $95.663 long-term), compared with $94.356 at December 31, 2015. The company refinanced $8.0 million of debt in October with $9.9 million of new unsecured debt at 12% interest, monthly payments of $118,817, and a five-year maturity with a balloon payment.
Material changes versus the prior comparable period
- Revenue increased modestly, while operating income and GAAP net income grew faster, supported by a higher mix of service revenue, cost-of-goods savings, and lower lawsuit settlement costs.
- Operating expenses declined to 81.2% of revenue from 82.9%. Cost of goods sold decreased to 14.5% of revenue from 15.5%; salaries and wages and SG&A increased as a share of revenue.
- Adjusted EBITDA declined 2.2% despite higher GAAP operating income. Capital expenditures increased substantially, primarily for three new locations and a new corporate office.
- The company repurchased 89,685 shares for approximately $1.1 million, versus 282,762 shares for $2.8 million a year earlier. It paid a $0.03-per-share dividend, totaling approximately $0.290 million; no dividend was reported in the comparable quarter.
Outlook, commentary, risks and unusual items
- Management described the near-term outlook as strong and expected substantial operating cash flows for the remainder of fiscal 2017, but provided no specific revenue or earnings guidance.
- Three Bombshells locations were in development, with openings expected in the second half of fiscal 2017. A Dallas club reconcept was scheduled to open in the second quarter. Management cited seasonality: historically, results are strongest October through March and weaker April through September.
- Management cited risks associated with adult-entertainment regulation and operations, competition, dependence on key personnel, real estate transactions, cyber security, and the availability and terms of financing. The company said it had no credit lines beyond existing debt and notes.
- Legal matters include the continuing New York wage-and-hour settlement, with $1.9 million accrued at quarter-end for future attorney payments; a landlord dispute involving a Houston Bombshells site, whose outcome could have a material effect; and civil claims connected with former insurer IIC, now in liquidation. The company is funding litigation costs and cannot assure recovery from the receiver. Other routine claims were not expected to materially affect results or financial position.
- The IRS was examining federal income tax returns for fiscal 2013–2015. The company settled a city tax audit for approximately $0.6 million during the quarter, against a previously recorded uncertain-tax-position liability; the settlement did not affect the annual effective tax rate.
- After quarter-end, the company paid off $0.392 million of convertible notes. On January 13, 2017, it sold a non-income-producing property for $2.2 million, recognizing an approximately $0.116 million loss, and used proceeds to repay a related $1.5 million balloon note, plus a $0.075 million prepayment penalty.
- Management concluded disclosure controls were effective as of December 31, 2016 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether same-store sales momentum and planned Bombshells and nightclub openings translate into sustained revenue and cash-flow growth.
- Debt service capacity and the implications of the 12% unsecured refinancing, balloon maturity, and debt increase; consider subsequent repayments separately from quarter-end balances.
- Execution and returns on the elevated capital spending, alongside share repurchases and dividends.
- Resolution and potential costs of the landlord litigation, IIC-related claims, New York settlement obligations, and IRS examination.
- How much of reported earnings growth reflects ongoing operations, given lower one-time lawsuit charges, share-count reductions, and the decline in adjusted EBITDA.