RCI Hospitality Holdings, Inc. (Rick’s Cabaret International, Inc.) — Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2012; fiscal year ends September 30. The filing identifies the registrant as Rick’s Cabaret International, Inc., despite the request metadata naming RCI Hospitality Holdings, Inc. Figures below are in U.S. dollars; financial statement amounts are generally shown in millions.
Business context and results
The company operated 24 adult nightclubs, alongside Internet and media businesses. Nightclubs generated nearly all revenue. Management attributed growth to acquisitions and stronger performance at several existing clubs. Same-location club revenue rose 5.0% for the quarter and 5.8% for the nine-month period.
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $23.92m vs. $20.79m, up 15.0% | $71.35m vs. $62.04m, up 15.0% |
| Operating income / margin | $4.04m / 16.9%; prior $4.38m / 21.1% | $12.86m / 18.0%; prior $14.42m / 23.2% |
| Continuing operations income | $1.90m vs. $2.53m | $6.44m vs. $8.22m |
| Net income attributable to Rick’s shareholders | $1.82m vs. $0.89m | $6.12m vs. $5.89m |
| Diluted EPS | $0.19 vs. $0.09 | $0.63 vs. $0.59 |
| Adjusted EBITDA, non-GAAP | $5.36m vs. $5.99m | $16.53m vs. $18.31m |
Revenue growth did not translate into higher operating income: operating costs grew faster, including cost of goods, taxes and permits, legal and professional fees, and depreciation and amortization. The quarter included a $0.20m lawsuit settlement and a $0.33m aircraft-sale loss. The nine-month period included $2.03m of lawsuit settlements and the same aircraft-sale loss. Management said operating margins excluding those items would have been 18.3% for the quarter and 20.2% year to date.
Cash flow, liquidity and debt
- Cash was $9.65m at June 30, 2012, compared with $9.70m at September 30, 2011. Nine-month operating cash flow was $14.13m, versus $13.75m a year earlier.
- Investing activities used $5.78m; financing activities used $8.40m. Cash declined by $0.05m over the nine months.
- Working capital was a deficit of approximately $1.8m, compared with positive working capital of approximately $2.0m at fiscal year-end.
- Current and long-term debt totaled approximately $43.49m ($6.12m current and $37.36m long-term), up from $35.55m at September 30, 2011. Acquisitions and real estate purchases included seller financing.
- Current assets were $19.16m and current liabilities $21.00m. The company said it had no established credit lines and cautioned that additional financing might not be available on reasonable terms.
Material changes and management outlook
- Fiscal 2012 acquisitions included the Silver City club and related real estate in Dallas, a Fort Worth club, and real estate for existing clubs. Management said acquisitions and stronger club performance drove revenue growth; acquisition-related depreciation also increased.
- On August 3, 2012, the company agreed to acquire 11 Foster Clubs and their real estate, subject to permits and other closing conditions. Stated consideration was $26m for club operations and $10m for real estate, largely through secured notes bearing 9.5% interest, with cross-default provisions. The club note includes a potential adjustment related to the Texas patron tax.
- Management intends to pursue club acquisitions, selective new openings, real estate ownership and lower-cost Internet growth. No quantified earnings or revenue guidance was provided. Management’s operating outlook is subject to financing availability, regulation, competition, seasonality and other risks.
- The company described April–September as historically weaker for nightclub operations, with stronger results typically October–March. Its media division reported losses of $0.13m for the quarter and $0.30m for nine months; management expected possible improvement through cost control and increased advertising revenue.
Risks, contingencies and unusual items
- Texas patron tax: The company accrued approximately $9.1m at June 30 and had not paid the tax for periods after the first quarter of 2009 while litigation continued. On July 9, 2012, the district court ruled the fee constitutional as an occupations tax; the company said the plaintiff planned to appeal. A favorable ultimate outcome could produce a gain and/or repayment or credit of amounts paid under protest; an adverse result could require payment of accrued amounts.
- Nevada tax dispute: Nevada authorities asserted approximately $2.1m, including penalties and interest, in Las Vegas entertainment taxes. The company disputed the assessment and had not accrued it; the filing said the eventual effect was uncertain.
- Other litigation: The company settled one text-message lawsuit for $0.20m; a second settlement was awaiting a judge’s ruling, with the amount uncertain. A federal wage-and-hour case remained in discovery. A Las Vegas lease dispute was not accrued because the company believed the parent was not liable for the subsidiary’s obligations.
- A separate shareholder lawsuit was settled for $2.65m, funded by about $0.85m of insurance proceeds and approximately $1.8m paid by the company; the company made no admission of liability. The company also reported a $0.90m gain on settlement of debt in the prior-year period, affecting comparisons.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Texas patron-tax ruling is appealed and how the approximately $9.1m accrued liability and amounts paid under protest are ultimately resolved.
- Whether the Foster Clubs and real-estate transactions close, required permits are obtained, and the company can service the associated secured notes.
- Debt maturities, financing capacity and liquidity needs, particularly given the working-capital deficit and acquisition-led expansion.
- Underlying operating trends apart from acquisitions and unusual costs; compare GAAP income and margins with management’s non-GAAP adjusted EBITDA.
- Outcomes and potential costs of the Nevada tax assessment and remaining litigation, including the text-message and wage-and-hour matters.