RCI Hospitality Holdings, Inc. — Q1 FY2024 Form 10-Q
Reporting period: Three months ended December 31, 2023; unaudited. Comparisons are with the three months ended December 31, 2022 unless stated otherwise. Amounts are in U.S. dollars.
Business context
RCI operates adult nightclubs and Bombshells restaurants and bars, with smaller media and energy-drink businesses. At quarter-end, it operated 69 establishments, including one food hall. The company reported Nightclubs and Bombshells as its principal segments.
Financial performance and liquidity
- Revenue: $73.9 million, up 5.6%. Nightclubs revenue rose 8.4% to $61.0 million; Bombshells revenue fell 5.2% to $12.7 million.
- Same-store sales: Down 9.8% overall: Nightclubs down 7.2% and Bombshells down 20.3%. Management attributed revenue growth mainly to acquired clubs and new openings, which offset same-store declines.
- Profitability: Operating income was $13.2 million, down from $16.9 million; operating margin was 17.8%, versus 24.2%. Net income attributable to RCIHH common stockholders was $7.2 million, versus $10.2 million. Diluted EPS was $0.77, versus $1.11.
- Non-GAAP measures: Adjusted EBITDA was $17.5 million, down 14.6%; non-GAAP diluted EPS was $0.87, versus $1.19. Free cash flow, as defined by the company, was $12.7 million, down 2.9%.
- Cost and margin trends: Operating expenses rose 14.5% to $60.7 million, faster than revenue. Salaries and wages increased 14.2%, with management citing added staffing, wage increases and wage inflation. SG&A increased 10.9%. Interest expense rose 14.3% to $4.2 million.
- Cash flow: Operating cash flow was $13.6 million, versus $14.9 million. Investing used $5.1 million, including $5.1 million of property, equipment and intangible spending. Financing used $8.4 million, including $6.4 million of debt payments and $2.1 million of share repurchases. Cash ended at $21.2 million.
- Debt and liquidity: Reported debt, net of discounts and issuance costs, totaled $234.1 million at December 31, 2023. Current assets were $45.6 million and current liabilities $54.6 million, or negative working capital of $9.0 million. The company said it had no unused credit facilities, but expects operating cash flows to be adequate for the next 12 months.
- Capital returns: RCI repurchased 37,954 shares for approximately $2.1 million at an average $54.59 per share and paid a $0.06-per-share dividend. Approximately $14.6 million remained under the repurchase authorization.
Material changes and notable items
- Revenue growth was driven by acquisitions and new Bombshells locations, while same-store sales weakened. Nightclubs segment operating income declined to $20.4 million from $22.7 million; Bombshells operating income declined to $0.1 million from $1.8 million.
- On October 25, 2023, holders of $15.7 million of unsecured notes agreed to extend maturities; the amended notes continue to bear 12% interest. The company also closed a $7.2 million construction loan at 8.5% for a Bombshells location in Rowlett, Texas.
- Prepaid expenses and other current assets increased to $11.0 million from $1.9 million, largely reflecting prepaid insurance. Accrued liabilities increased to $26.6 million from $16.1 million, including $9.0 million of insurance accruals.
- The company recorded no lawsuit settlements during the quarter and reported $2.1 million accrued for lawsuit settlements. It expects payments under a shareholder derivative action settlement to be covered by insurance, but recovery on claims involving insolvent former insurer IIC is uncertain.
Outlook, risks and controls
- No specific revenue or earnings guidance was provided. Management described plans to pursue club acquisitions, new locations, Bombshells growth and share repurchases subject to its capital allocation criteria. It noted that growth may require additional debt or equity financing and that such financing may not be available on favorable terms.
- Management cited commodity and labor inflation, the macroeconomic environment, debt and lease commitments, seasonal variation, and the regulatory and operating risks of the adult-entertainment industry. It said price increases may help offset higher costs, but future recovery is not assured.
- Disclosure controls and procedures were reported as ineffective at December 31, 2023, reflecting previously identified material weaknesses involving business-combination accounting, impairment reviews, and IT general controls, including outsourced IT controls. Management expects remediation before the end of fiscal 2024, subject to testing and confirmation that controls operate effectively.
- Legal and regulatory exposures include entertainer classification disputes, a remanded Arizona dram-shop case, and the New York unemployment-tax assessments recorded in prior quarters. The filing says no material risk-factor changes were reported other than matters described in the filing.
Important facts for investors to verify
- Whether the steep same-store sales declines, particularly at Bombshells, persist and how new locations and acquisitions perform.
- Whether margins and earnings recover as wage, insurance, tax and other operating costs evolve.
- Debt maturities, balloon payments, borrowing availability and compliance with the construction loan’s financial covenants.
- Cash-flow and working-capital trends, including the timing and nature of the large prepaid insurance and accrued insurance balances.
- Progress and independent testing of internal-control remediation, plus developments in material litigation and insurance recoveries.