RCI Hospitality Holdings, Inc. (Rick’s Cabaret International, Inc.) — Form 10-Q
Reporting period: Fiscal second quarter and six months ended March 31, 2013; filed May 9, 2013. Unless noted otherwise, dollar amounts below are in millions. The company operated 35 adult nightclubs and two restaurant-and-bar businesses as of period-end.
Financial performance
| Metric | Three months ended March 31, 2013 | Prior-year quarter | Six months ended March 31, 2013 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $28.7 | $25.4 | $55.9 | $47.4 |
| Operating income | $6.2 | $4.5 | $12.1 | $8.8 |
| Operating margin | 21.5% | 17.5% | 21.7% | 18.6% |
| Net income attributable to RCI | $2.7 | $2.1 | $5.4 | $4.3 |
| EPS attributable to RCI | $0.29 | $0.22 | $0.56 | $0.44 |
| Adjusted EBITDA (non-GAAP) | $7.5 | $7.5 | $14.7 | $13.0 |
- Quarter revenue rose 13.0%; six-month revenue rose 17.9%, principally reflecting acquired clubs. Same-location club revenue declined about $0.9 million in the quarter and $0.5 million for the six months.
- Quarterly operating margin benefited from the absence of the $1.8 million lawsuit settlement recorded in the prior-year quarter. Excluding that settlement, prior-year quarterly margin was 24.7%; the comparable six-month margin was 22.5% versus 21.7% in 2013.
- Management attributed same-store softness to the Super Bowl being outside a company club market and weaker attendance from certain other sporting events. Cost of goods sold as a share of revenue improved, while interest expense, insurance, stock compensation, and certain operating costs increased.
Cash flow, balance sheet and debt
- For the six months, operating cash flow was $10.9 million, compared with $12.0 million a year earlier. Investing activities used $5.8 million, including $3.0 million for a business acquisition and $3.3 million of property and equipment additions. Financing activities used $1.4 million.
- Cash increased to $9.2 million at March 31 from $5.5 million at September 30, 2012. Working capital, excluding the Texas patron-tax liability, was $3.2 million versus $1.7 million.
- Total debt was approximately $75.0 million ($6.8 million current and $68.2 million long-term), up from approximately $63.5 million at September 30. Total liabilities were $122.8 million. The balance sheet also reported a $11.6 million Texas patron-tax accrual.
- Debt additions included a $3.0 million, 10% convertible debenture issued in January and a $1.5 million note bearing 13% interest. The company also incurred seller-financed debt in connection with real estate and club acquisitions. Interest expense for the six months increased to $3.4 million from $2.1 million.
Outlook, developments and risks
- Management said the near-term outlook remained strong and expected substantial operating cash flow in 2013. Expansion plans included new clubs and restaurant concepts; several locations were under construction, remodeling, or awaiting permits. The company cautioned that operating results for the six-month period are not necessarily indicative of the full fiscal year.
- The company completed a $3.0 million acquisition of a licensed Manhattan location in March, funded with $1.5 million cash and convertible notes. It also had a $23.0 million agreement to acquire the building occupied by its New York club, scheduled to close by June 4, 2013. On April 25, the board authorized up to $3.0 million in additional share repurchases after the prior $5.0 million program was completed.
- The Texas patron-tax litigation remained unresolved. The company continued accruing, but not paying, the tax; the recorded liability was approximately $11.6 million. A favorable final ruling could result in a gain, while an adverse ruling would require payment of accrued amounts.
- Nevada tax authorities asserted approximately $2.1 million, including penalties and interest, for live-entertainment taxes. The company disputed the assessment and had not accrued it. A New York wage-and-hour lawsuit remained pending, with summary-judgment motions pending; the company denied liability.
- Other stated risks included legal and regulatory changes affecting adult-entertainment businesses, competition, opening delays and permits, reliance on independent-contractor treatment, key personnel, and access to acceptable financing. Management reported disclosure controls were effective and no material changes to internal control during the quarter.
Investor verification points
- Track same-store sales and whether acquired locations and new concepts generate the expected earnings and cash flow.
- Review the Texas patron-tax case and the company’s accrued liability, and monitor the disputed Nevada assessment and pending wage litigation.
- Assess debt levels, borrowing costs, scheduled repayments, convertible-note dilution, and financing required for the New York property purchase and expansion.
- Reconcile management’s non-GAAP measures, including Adjusted EBITDA, with GAAP results; the filing notes these measures exclude costs that remain relevant to operations.