RCI Hospitality Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2015, compared with the three months ended December 31, 2014. The company operates adult nightclubs and Bombshells restaurants and bars. Financial amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Revenue | $33.48 | $34.20 | Down 2.1% |
| Operating income | $5.72 | $6.14 | Down 6.9% |
| Operating margin | 17.1% | 18.0% | Down 0.9 percentage points |
| Income before taxes | $3.81 | $5.11 | Down 25.5% |
| Net income attributable to RCIHH | $2.55 | $3.36 | Down 24.0% |
| Basic / diluted EPS | $0.25 / $0.25 | $0.33 / $0.32 | Lower year over year |
| Cash from operations | $4.20 | $5.09 | Down 17.5% |
| Adjusted EBITDA (non-GAAP) | $8.19 | $9.73 | Down 15.8% |
Consolidated net income was $2.44 million versus $3.27 million. The statement reports $2.55 million attributable to RCIHH shareholders after the noncontrolling-interest adjustment; the filing’s cash-flow statement uses consolidated net income. Total revenue includes beverage sales of $14.60 million, food and merchandise of $4.33 million, service revenue of $12.64 million, and other revenue of $1.90 million.
Balance sheet, liquidity and cash flows
- Cash and cash equivalents were $8.38 million at December 31, 2015, up from $8.02 million at September 30, 2015. Total assets were $267.11 million.
- Long-term debt was $85.16 million, with $9.20 million current, for total reported debt of $94.36 million. This was 35.7% above the comparable year-earlier amount cited in MD&A. Interest expense was $1.92 million, versus $1.62 million.
- Current assets of $18.12 million were below current liabilities of $22.28 million, resulting in negative working capital of approximately $4.16 million; management reported $4.2 million negative working capital.
- Operating cash flow of $4.20 million and investing outflows of $0.89 million were offset partly by financing outflows of $2.95 million, including $2.80 million of treasury-stock purchases. Cash increased $0.36 million during the quarter.
- Capital expenditures were $0.89 million. The company repurchased and retired 282,762 shares for approximately $2.79 million; $3.8 million remained under the repurchase authorization.
Changes and management commentary
- Management attributed the revenue decline primarily to a $2.0 million, or 6.3%, decline in same-store sales. Nightclub revenue fell to $28.17 million from $29.17 million; Bombshells revenue was $4.38 million versus $4.53 million.
- Nightclub segment operating income rose to $8.51 million from $8.28 million, while Bombshells operating income declined to $0.49 million from $0.54 million. Corporate costs increased to $2.63 million from $2.14 million.
- Management cited higher club cost of goods sold and same-location payroll as a share of revenue, along with increased legal/professional, depreciation, insurance, and other costs. Lower rent partly reflected the prior purchase of Miami Gardens real estate.
- GAAP results included $0.54 million of lawsuit settlements and other one-time costs, versus $0.25 million in the prior period. The prior-year quarter included a $1.36 million asset impairment and a $0.58 million acquisition gain; neither occurred in the current quarter. Adjusted EBITDA and other non-GAAP measures exclude selected items and should be considered alongside GAAP results.
- The company reported revenue net of sales and related taxes in both periods, reclassifying $2.3 million of taxes per quarter from revenue and expense. It also early-adopted guidance changing presentation of debt issuance costs and deferred taxes; the filing says these were balance-sheet reclassifications.
Outlook, risks and contingencies
- Management said the near-term outlook remained strong and expected substantial operating cash flow in fiscal 2016. It did not provide numerical earnings or revenue guidance.
- Management intends to pursue club and restaurant growth, including acquisitions, and anticipates further nightclub acquisitions. Growth may require additional borrowing or equity issuance; the company had no established credit lines and cautioned that future financing on reasonable terms is not assured.
- A subsidiary acquired the land and building housing Rick’s Cabaret New York on January 13, 2016, for $10.0 million, financed through a 5.0% bank loan with 25-year amortization and a 10-year balloon.
- The Texas Patron Tax settlement requires $10.0 million in installments over 84 months, without interest; the discounted recorded balance was $6.8 million at quarter-end. The company also continues monthly remittance at the then-current $5-per-customer rate.
- The New York wage-and-hour settlement was expensed in fiscal 2015; $3.6 million remained accrued at December 31, 2015. The company guarantees the relevant subsidiaries’ settlement obligations.
- The prior liability insurer, IIC, was liquidated. The company says it is funding litigation costs and has filed claims with the receiver, but recovery is uncertain; multiple claims or lawsuits concerning pre-October 25, 2013 incidents remain pending or possible. A separate landlord dispute involving a Houston Bombshells location was unresolved, and its financial effect was unclear.
- Other key risks include competition, regulation of adult entertainment businesses, entertainer worker classification, dependence on key personnel, financing availability, and the timing and performance of new locations. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether same-store sales and operating margins stabilize, and how cost pressures affect nightclub and Bombshells performance.
- Debt maturities, interest terms, covenant requirements, and financing capacity for planned acquisitions and restaurant growth.
- Cash requirements and ultimate resolution of the Texas Patron Tax settlement, New York settlement, IIC-related claims, and Houston landlord dispute.
- Performance and capital needs of Bombshells and newer locations, plus the results of the Manhattan property acquisition.
- The basis and exclusions used in management’s non-GAAP measures, particularly Adjusted EBITDA, and the reconciliation to GAAP results.