RCI Hospitality Holdings, Inc. — Q1 FY2015 10-Q
Reporting period: Three months ended December 31, 2014; comparisons are with the three months ended December 31, 2013 unless otherwise noted. The company operates adult nightclubs and Bombshells restaurants and bars. Figures below are in millions, except per-share data.
Financial results
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Revenue | $36.49 | $29.42 |
| Operating income / margin | $6.14 / 16.8% | $5.61 / 19.1% |
| Income before taxes | $5.11 | $3.68 |
| Net income attributable to RCIHH | $3.36 | $2.40 |
| Diluted EPS | $0.32 | $0.25 |
| Cash from operating activities | $5.09 | $5.83 |
| Adjusted EBITDA (non-GAAP) | $9.73 | $7.34 |
Revenue rose 24.0%, driven primarily by about $6.0 million from clubs and restaurants opened or acquired in 2013–14, plus $1.1 million growth in same-store sales (4.1%). Nightclub revenue was $31.1 million; Bombshells revenue was $4.9 million versus $0.7 million, as the brand expanded from one open location to five. Bombshells segment operating income improved to $0.43 million from a $0.14 million loss.
Operating income increased, but operating margin fell 2.3 percentage points. The period included a $1.36 million impairment of Lubbock club intangible assets and $0.25 million of lawsuit settlements and other one-time costs; these items were absent in the prior-year quarter. Cost of goods sold increased to 14.0% of revenue from 12.7%. Interest expense declined to $1.62 million from $2.01 million; a $0.58 million gain on the prior investment in Drink Robust also contributed to pretax income.
Cash, liquidity, and debt
Cash was $13.17 million at December 31, 2014, up from $9.96 million at September 30. Working capital was $8.1 million excluding the Texas patron-tax liability; including that liability, current liabilities exceeded current assets. Operating cash flow fell 12.7% to $5.09 million, while investing used $0.99 million and financing used $0.89 million; cash increased $3.21 million overall.
Total debt, including current maturities, was approximately $69.8 million at December 31 ($9.4 million current and $60.4 million long-term), versus approximately $70.4 million at September 30. The filing’s comparison of $69.8 million with $87.6 million refers to December 2013. The quarter included new borrowing and refinancing, including a $2.0 million note at 12% and a $1.0 million real-estate-secured note at 10%. The company repurchased 109,616 shares for approximately $1.08 million; $7.8 million remained under its repurchase authorization.
Outlook, risks, and notable items
- Management described the near-term outlook as strong and expected substantial operating cash flow, but provided no quantified earnings or revenue guidance. Results are seasonal, historically strongest October–March.
- The company had accrued approximately $16.2 million for the Texas patron tax and continued accruing the charge while litigation proceeded. The Texas Entertainment Association’s petition for U.S. Supreme Court review was filed February 5, 2015. Management said a favorable final outcome could result in a one-time gain; the outcome is uncertain.
- In New York wage-and-hour litigation, the court granted summary judgment for approximately $10.87 million in damages on certain claims. Other issues remained for trial, and the company intended to appeal. The filing does not establish the ultimate liability.
- Former insurer IIC was liquidated; the company filed claims but disclosed no assurance of recovery. Multiple pending or threatened claims involving incidents before October 25, 2013 may be affected by the loss of that coverage.
- On October 30, 2014, a 51%-owned subsidiary acquired Robust Energy assets for stated consideration of approximately $5.0 million, including cash and subsidiary shares; the company recognized a $0.58 million gain on its earlier investment. A contingent issuance of 50,000 RCIHH shares depends on Robust achieving at least $1 million of 2015 net income.
- After quarter-end, the company acquired Down in Texas Saloon and related real estate for $6.8 million, funded with cash, seller financing, and bank financing. Purchase-price allocation was not yet determined.
- Management identified competition, financing availability, key-person dependence, regulation of adult entertainment businesses, and the ability to manage expansion as risks. It also noted that additional acquisitions may require debt or equity financing.
Most important facts for investors to verify
- Progress and potential exposure in the Texas patron-tax case, including the $16.2 million accrued balance and any further court decisions.
- Developments in the New York wage-and-hour litigation, including trial outcomes, appeals, and insurance recovery prospects.
- Operating performance and cash needs as Bombshells locations mature, and whether same-store growth persists.
- Debt terms, refinancing needs, and funding requirements for expansion and the Down in Texas acquisition.
- Impact of the Lubbock impairment and any further impairment or one-time charges.
The company stated that interim results are not necessarily indicative of full-year results. Management reported disclosure controls were effective and no material changes in internal control over financial reporting during the quarter.