RCI Hospitality Holdings, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2022; filed May 9, 2022. The interim financial statements are unaudited. The company operates adult nightclubs, Bombshells restaurants and bars, and smaller related businesses; it reported 59 establishments at quarter-end.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Revenue | $63.7m (+44.6%) | $44.1m | $125.5m (+52.2%) | $82.5m |
| Operating income / margin | $17.1m / 26.8% | $9.8m / 22.3% | $33.0m / 26.3% | $16.4m / 19.9% |
| Net income attributable to RCIHH shareholders | $11.0m | $6.1m | $21.5m | $15.7m |
| Diluted EPS | $1.15 | $0.68 | $2.28 | $1.75 |
| Operating cash flow | $11.6m | $11.0m | $27.9m | $17.2m |
Quarterly same-store sales rose 9.0% (Nightclubs 12.1%; Bombshells 2.3%); six-month same-store sales rose 14.8% (Nightclubs 20.0%; Bombshells 5.0%). New units and recovery from prior-year COVID-related disruption also drove growth. Nightclubs generated $48.2m of Q2 revenue and $19.1m operating income; Bombshells generated $15.3m and $3.5m, respectively. Nightclubs’ higher-margin service revenue and fixed-cost leverage supported consolidated margin expansion. Bombshells’ operating margin declined year over year, which management attributed to new-unit inefficiencies and preopening costs.
Six-month adjusted EBITDA, a non-GAAP measure, was $37.9m versus $22.3m; free cash flow, defined as operating cash flow less maintenance capital expenditures, was $26.3m versus $14.7m. For Q2, management reported free cash flow of $11.1m versus $9.0m. These non-GAAP measures exclude certain items and should be considered alongside GAAP results.
Liquidity, debt and capital allocation
Cash was $38.1m at March 31, 2022, versus $35.7m at September 30, 2021. Reported current assets were $61.0m and current liabilities $35.3m; management cited working capital of $23.1m after excluding net assets held for sale, versus $26.1m at fiscal year-end. Six-month investing cash outflow was $49.8m, including $39.3m for acquisitions and $14.0m for property, equipment and intangible assets. Financing cash inflow was $24.3m; cash increased $2.4m.
Debt, net of discount and issuance costs, totaled $178.1m, up from $125.2m at September 30, 2021; operating lease liabilities were an additional $37.8m. The company borrowed $18.7m from a bank in January for working capital at an initial 5.25% rate, secured by 11 properties, with a debt-service-coverage covenant of at least 1.4x. The CEO personally guarantees commercial bank debt. Management said it expects sufficient operating cash flow for the next 12 months, but noted it had no unused credit facilities and cannot assure that additional financing would be available on favorable terms.
The company paid $0.09 per share in dividends during the six months and repurchased 45,643 shares for approximately $2.8m. It issued 500,000 shares valued at $30.4m as part of acquisition consideration. After quarter-end, it repurchased another 37,700 shares for $2.4m.
Acquisitions, outlook and risks
In October 2021, the company acquired 11 clubs, six properties and related intellectual property for approximately $88.4m of preliminary fair-value consideration, funded with cash, seller notes and shares. The acquired clubs contributed $8.8m of Q2 revenue and $15.1m for the six-month period. The purchase price allocation remains preliminary. Other property and club acquisitions occurred during the period.
After quarter-end, the company acquired a Miami club for $16.0m, using cash and seller notes bearing 10% interest, including substantial balloon payments. It also signed a Bombshells franchise development agreement for three Alabama locations. Management described continued nightclub acquisition, new development and Bombshells franchising as growth avenues, but gave no quantified earnings or revenue guidance. It noted that nightclub revenue is historically stronger October–March and weaker April–September, and that inflationary cost recovery through pricing may not continue.
Management said all COVID-related operating restrictions had been lifted as of the report date, while warning that future closures or restrictions could adversely affect results. The filing also cites adult-entertainment regulation, competition, cyber risk, key-person dependence, real-estate conditions and the Russia–Ukraine conflict; the conflict had delayed work by Ukraine-based software developers and could increase cyber and macroeconomic risks.
Contingencies include a securities class action for which a settlement was preliminarily approved after quarter-end, with final approval still pending, and a shareholder derivative action for which potential loss could not yet be estimated. Other litigation includes image-infringement and dram-shop matters; the company reports one unresolved claim related to a former insurer in liquidation. The company recorded $577,000 of lawsuit settlements for the six-month period.
Disclosure controls and procedures were deemed ineffective at March 31, 2022 because of a previously reported material weakness in controls over impairment-estimate assumptions. Management is adding review controls; remediation was not yet complete. The company reported no impairment of goodwill, indefinite-lived intangibles or long-lived assets at quarter-end.
Material period-over-period context
- Revenue and operating income rose substantially, reflecting improved same-store sales, reopening-related recovery and acquired/new locations; operating margin expanded.
- Interest expense increased with higher average debt. Debt increased materially to fund acquisitions and working capital.
- Six-month 2021 results included a $5.3m gain from PPP loan forgiveness; this boosted prior-period non-operating income and reduced its effective tax rate. The comparison is therefore affected by this unusual prior-year item.
- Acquisition-related goodwill and intangible assets increased substantially, and their valuations remain provisional.
Important facts for investors to verify
- Whether the acquired locations meet expected returns after final purchase-price allocations, integration costs and added interest expense.
- Debt maturity and balloon-payment exposure, covenant compliance, and availability of financing given the lack of unused credit facilities.
- Final approval and financial terms of the securities class-action settlement, and developments in the derivative and other legal matters.
- Progress in remediating the material weakness and the effectiveness of controls over impairment estimates.
- Whether same-store growth and cost recovery persist through the seasonally weaker half of the fiscal year, amid inflation and other operating risks.