RCI Hospitality Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2023; filed May 10, 2023. The company operates adult nightclubs, Bombshells restaurants and bars, and smaller related businesses. Financial statements are unaudited.
Financial performance
| Metric | Three months ended March 31, 2023 | Prior-year quarter | Six months ended March 31, 2023 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $71.5 million | $63.7 million | $141.5 million | $125.5 million |
| Income from operations | $13.4 million | $17.1 million | $30.3 million | $33.0 million |
| Net income attributable to RCIHH common shareholders | $7.7 million | $11.0 million | $18.0 million | $21.5 million |
| GAAP diluted EPS | $0.83 | $1.15 | $1.94 | $2.28 |
| Adjusted EBITDA | $21.7 million | $19.9 million | $42.1 million | $37.9 million |
| Operating cash flow | $16.8 million | $11.6 million | $31.7 million | $27.9 million |
Quarterly GAAP operating margin fell to 18.8% from 26.8%; six-month margin fell to 21.4% from 26.3%. Non-GAAP diluted EPS, as defined and reconciled by the company, was $1.30 versus $1.19 for the quarter and $2.50 versus $2.29 for the six-month period. Adjusted EBITDA and other non-GAAP measures are not substitutes for GAAP results.
Nightclubs revenue rose 18.4% in the quarter and 19.4% year to date; Bombshells revenue declined 6.6% and 7.8%, respectively. Same-store sales were up 0.2% for the quarter and down 1.2% year to date; quarterly Nightclubs same-store sales increased 3.7%, while Bombshells fell 12.1%. Management attributed Bombshells weakness largely to elevated prior-year customer spending associated with government stimulus.
Balance sheet, cash flow and capital
- At March 31, cash was $22.8 million, down from $36.0 million at September 30, 2022. Total debt, net of discounts and issuance costs, was $245.8 million, compared with $202.5 million at September 30, 2022. Current debt maturities were $21.0 million.
- Working capital was negative $11.4 million, versus positive $18.6 million at September 30; management attributed the change principally to acquisition-related borrowing and current maturities. The company reported no unused credit facilities, although it had drawn a new $10 million line of credit in March.
- Six-month investing cash outflow was $48.1 million, including $30.2 million for acquisitions and $20.9 million in property, equipment, and intangible-asset spending. Financing cash flow was positive $3.2 million; cash decreased $13.2 million over the period.
- Six-month free cash flow, a company-defined non-GAAP measure, was $27.8 million versus $26.3 million; it excludes maintenance capital expenditures but not spending on new facilities and growth projects. Dividends were $0.06 per share in the quarter.
Material changes, outlook and risks
Growth in revenue reflected acquired clubs and new Bombshells locations, while earnings were pressured by higher operating costs and unusual items. The quarter included $3.1 million of lawsuit settlements, $662,000 of asset impairment, $706,000 of stock-based compensation, and increased amortization of intangible assets. Wage inflation and higher average debt drove higher labor costs and interest expense; quarterly interest expense rose 28.4% to $3.7 million.
On March 16, the company acquired five Texas clubs and related assets for stated consideration of $66.5 million, funded with $25.0 million cash, $25.5 million in seller notes, and 200,000 restricted shares. The preliminary allocation included $14.0 million of goodwill; valuation was incomplete at filing. The acquired clubs contributed $1.2 million revenue and a $154,000 operating loss after acquisition. Management also acquired a franchised Bombshells in San Antonio and purchased real estate for future development.
Management expects operating cash flows to be adequate for the next 12 months, but cautioned that additional financing may not be available on favorable terms. It cited wage and other cost inflation, possible economic downturn, rising interest rates, and the risks of operating adult-entertainment businesses. The company noted seasonal softness historically during fiscal third and fourth quarters. No specific revenue or earnings guidance was provided.
Disclosure controls were deemed ineffective as of March 31, 2023 because of a previously reported material weakness in controls over accounting for acquired intangible assets in business combinations. Management described remediation steps, including expanded reviews of purchase documents and valuation assumptions. Legal matters include a $2.8 million New York unemployment-tax judgment recorded in the quarter, ongoing shareholder derivative litigation, and other unresolved claims and contingencies.
Important facts for investors to verify
- Whether Bombshells same-store sales and operating margins stabilize after the reported declines.
- Final purchase accounting, valuation assumptions, and post-acquisition performance for the five-club acquisition.
- Debt maturities, borrowing costs, covenant compliance, and liquidity needs given negative working capital and acquisition spending.
- Progress in remediating the material weakness and whether disclosure controls become effective.
- Cash and earnings effects of the New York tax judgment, lawsuit settlements, and other unresolved litigation.