RCI Hospitality Holdings, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019. The filing also reports fourth-quarter results for the three months ended September 30, 2019; it is an annual report, not a standalone quarterly filing. Financial amounts are in U.S. dollars.
Business context
RCI operates adult-entertainment nightclubs, Bombshells restaurants and sports bars, and smaller media and energy-drink businesses. At fiscal year-end, it reported 46 establishments, including one temporarily closed by fire, and eight operating Bombshells. Its two principal segments are Nightclubs and Bombshells.
Key financial results
| Metric | FY2019 | FY2018, revised | Change |
|---|---|---|---|
| Revenue | $181.1 million | $165.7 million | +9.2% |
| Operating income / margin | $34.7 million / 19.2% | $27.6 million / 16.6% | Income +25.9% |
| Net income attributable to RCIHH | $19.2 million | $20.9 million | -8.2% |
| Diluted EPS | $1.99 | $2.15 | -7.4% |
| Adjusted EBITDA (non-GAAP) | $46.2 million | $44.4 million | +4.2% |
| Operating cash flow | $37.2 million | $25.8 million | +44.3% |
| Free cash flow (non-GAAP) | $33.3 million | $23.2 million | +43.3% |
Revenue growth came principally from acquired and newly opened units; consolidated same-store sales declined 0.3%. Nightclubs revenue rose 6.1% to $148.6 million, with same-store sales up 0.6%; segment operating income increased 16.3% to $50.7 million. Bombshells revenue increased 27.9% to $30.8 million, largely from new openings, while same-store sales fell 6.1%; segment operating income rose 13.1% to $2.3 million. Bombshells operating margin declined to 7.4% from 8.5%, with management citing pre-opening costs and food-cost inflation.
Consolidated operating margin improved, in part because other charges fell to $2.6 million from $9.2 million. FY2019 included $6.0 million of impairment charges, partly offset by a $2.9 million net gain on asset and business sales and a $0.8 million insurance gain. Net income and GAAP EPS declined despite higher operating income, largely reflecting FY2018’s $8.8 million deferred-tax benefit from federal tax-rate changes; FY2019 recorded $4.9 million of income tax expense.
In the fourth quarter, revenue was $45.2 million, operating income $2.4 million, net income attributable to RCIHH $0.5 million, and diluted EPS $0.05. The quarter included $6.0 million of impairments and an unusually large reported effective tax benefit rate, as well as gains on asset sales and insurance.
Cash, debt and capital allocation
At September 30, 2019, cash was $14.1 million, total assets $353.6 million, and total liabilities $185.3 million. Debt was $145.0 million before unamortized discounts and issuance costs; the balance-sheet carrying amount, including current debt, was $143.5 million. Cash declined by $3.6 million during the year as operating cash flow was outweighed by investing and financing outflows. Investing included $20.7 million in property and equipment and $13.5 million in business acquisitions; financing included $22.9 million of debt repayments.
Management reported negative working capital of $2.3 million, excluding $2.9 million of assets held for sale, versus positive working capital of $55,000 on the same basis in FY2018. It said cash flows and other liquidity sources should cover operations and growth plans for the next 18–24 months. Debt maturities include $16.0 million due in FY2020, including balloon payments. Approximately $90.3 million of debt was secured by real estate. The CEO personally guarantees the company’s commercial bank debt.
FY2019 dividends were $0.13 per share, and the company repurchased 128,040 shares for $2.9 million. After year-end, it repurchased a further 332,671 shares for $6.4 million; the board then added $10 million to the repurchase authorization. Management’s capital-allocation framework considers buybacks when free-cash-flow yield exceeds 10%, and acquisitions or development where expected cash-on-cash returns are generally 25%–33%.
Changes, outlook and notable items
- Growth included the November 2018 acquisitions of clubs in Chicago and Pittsburgh for a combined $25.5 million, partly seller-financed, and two Bombshells openings. Two additional Bombshells opened after year-end.
- Management described the near-term outlook as strong and expected substantial operating cash flow in FY2020 and beyond. No numerical earnings or revenue guidance was provided.
- A proposed $15 million acquisition of a Northeast Corridor nightclub and related real estate was pending at filing; planned financing included seller financing and an anticipated bank loan.
- FY2018 comparative financial statements were revised for an $834,000 goodwill impairment-testing error assessed by the company as immaterial. The revision reduced FY2018 net income and EPS to $20.9 million and $2.15, respectively.
- The SEC formal investigation remained ongoing. The company said it could not predict the investigation’s duration, outcome, or costs; potential outcomes could include penalties or other relief. Related securities class actions were consolidated, and a derivative suit was pending; potential losses could not yet be estimated.
- The independent auditor gave an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting. Management identified a material weakness in financial-statement close and reporting controls, including management review, journal-entry review, related-party disclosures, and loss-contingency accounting. Remediation was in progress, not yet validated as effective.
- The filing disclosed that the company was not in compliance with Nasdaq’s timely-filing requirement and intended to regain compliance. The filing’s cover also indicates the company had not filed all required Exchange Act reports during the preceding 12 months.
- Other risks include adult-business and alcohol licensing regulation, entertainer worker-classification claims, seasonality, competition, cyber incidents, impairment risk, and reliance on key personnel. The CEO’s employment agreement expired January 31, 2020; new agreements were under negotiation.
Most important facts for investors to verify
- Progress and independent testing of the internal-control remediation, and the accuracy and timeliness of subsequent SEC filings.
- Developments, potential costs, and possible consequences of the SEC investigation and related shareholder litigation.
- Whether same-store sales—particularly Bombshells—and new-unit economics improve, and whether expansion delivers returns consistent with management’s stated targets.
- Debt repayment capacity, upcoming balloon maturities, covenants, and financing terms for the proposed acquisition and planned growth.
- The sustainability of reported earnings and cash generation after separating recurring operations from impairments, asset-sale gains, insurance recoveries, and tax effects.