RCI Hospitality Holdings, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended September 30, 2023. This is an annual report, not a standalone fourth-quarter filing. RCI operates adult-entertainment nightclubs, Bombshells restaurants and bars, and related media and beverage businesses. At year-end it operated 69 establishments in 13 states.
Financial performance
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Revenue | $293.8 million | $267.6 million | +9.8% |
| Operating income | $51.5 million | $71.5 million | -28.0% |
| Operating margin | 17.5% | 26.7% | -9.2 percentage points |
| Net income attributable to RCIHH common stockholders | $29.2 million | $46.0 million | -36.5% |
| Diluted EPS | $3.13 | $4.91 | Lower |
| Adjusted EBITDA | $85.0 million | $86.7 million | -2.0% |
| Cash from operations | $59.1 million | $64.5 million | -8.3% |
| Free cash flow | $53.2 million | $58.9 million | -9.7% |
Free cash flow is a company-defined non-GAAP measure: operating cash flow less maintenance capital expenditures. FY2023 maintenance capital expenditures were $6.0 million. Interest expense was $15.9 million, up from $12.0 million; interest paid was $15.2 million. The filing reports debt obligations of $242.7 million before unamortized discounts and issuance costs ($239.8 million net debt at period-end), compared with $205.8 million gross in FY2022.
At September 30, 2023, cash was $21.0 million, down from $36.0 million. Working capital was negative $10.5 million, versus positive $18.6 million a year earlier. The company says it expects operating cash flows to be adequate for the 12 months following the report, but had no unused credit facilities and gives no assurance that additional financing would be available on favorable terms. It was in compliance with debt covenants at year-end.
Segments and material changes
- Nightclubs: Revenue rose 14.8% to $236.7 million, primarily reflecting acquisitions; same-store sales fell 3.5%. Operating income declined 11.6% to $73.2 million. Six clubs acquired during FY2023 contributed $18.2 million of revenue.
- Bombshells: Revenue fell 7.0% to $55.7 million; same-store sales declined 14.6%. Operating income fell 43.5% to $6.5 million. The company attributed the results principally to weaker same-store sales and related operating leverage.
- Consolidated sales mix: Alcohol revenue increased 12.3%, service revenue increased 10.3%, food and merchandise revenue decreased 0.9%, and other revenue increased 18.1%.
- Consolidated same-store sales declined 6.0%, compared with a 5.6% increase in FY2022. Operating expenses rose to 82.5% of revenue from 73.3%, including higher salaries and SG&A and significantly higher other charges.
- FY2023 investing cash outflow was $64.8 million, including $40.4 million for property, equipment and intangibles and $29.0 million cash consideration for business acquisitions. Capital expenditures, excluding acquisitions, were $40.4 million.
Fourth-quarter results
For the three months ended September 30, 2023, revenue was $75.3 million, operating income $5.6 million, net income attributable to RCIHH stockholders $2.2 million, and diluted EPS $0.23. The quarter included $9.3 million of asset impairments and $576,000 of lawsuit settlements, according to the filing’s quarterly disclosure. The company notes that nightclub results are typically seasonally weaker from April through September.
Outlook, risks and unusual items
- Spending and capital allocation: Management expects FY2024 capital expenditure payments of $35 million to $40 million, including $6 million to $8 million for maintenance. It expects approximately $2.2 million in FY2024 dividend payments at the then-current rate. No earnings or revenue guidance is provided.
- Acquisitions and development: The company plans to pursue club acquisitions and Bombshells development as opportunities and financing permit. It opened a Stafford, Texas Bombshells after year-end in November 2023. Management’s stated acquisition return target is generally 25%–33% cash-on-cash, absent other strategic rationale.
- Impairments and settlements: FY2023 included $12.6 million of impairment charges: $4.2 million goodwill, $6.5 million sexually oriented business licenses, and approximately $1.9 million for a lease asset, property and equipment, and software. Lawsuit settlements were $3.8 million, including approximately $3.1 million associated with New York Department of Labor unemployment-insurance assessments.
- Debt developments after year-end: In October 2023, holders of $15.7 million of 12% unsecured notes agreed to extend maturities, with principal and maturity terms varying by note. In November 2023, the company closed a $7.2 million construction loan at 8.5% for a planned Rowlett, Texas Bombshells location.
- Controls and audit: Management concluded internal control over financial reporting and disclosure controls were ineffective at September 30, 2023. The auditor issued an adverse opinion on internal controls, identifying weaknesses in acquisition accounting, impairment reviews, and IT general controls. The auditor separately gave an unqualified opinion on the financial statements. Management expects remediation before FY2024 year-end. Acquired businesses representing approximately 7% of assets and 6% of revenue were excluded from the internal-control assessment.
- Principal risks: Adult-business and alcohol licensing regulation; entertainer classification as independent contractors; competition and volatile consumer demand; inflation and labor availability; cyber and data-security risks; litigation and dram-shop exposure; acquisition and construction execution; key-person dependence; and debt covenant, refinancing, and liquidity risks. Variable-rate debt is also exposed to interest-rate changes.
Important facts for investors to verify
- How much of the nightclub revenue growth and future earnings depends on acquired locations, and whether same-store sales recover.
- Whether Bombshells’ same-store sales and operating profitability improve after the sharp FY2023 decline.
- The nature and assumptions behind the $12.6 million impairment charges, and whether further impairment is possible.
- Debt maturities, refinancing needs, covenant headroom, and the cost and availability of future financing, particularly for 12% notes and development plans.
- Progress and testing of the FY2024 remediation plan for the three material weaknesses, including IT controls and acquisition and impairment accounting.
- Status and financial exposure of legal matters, including the New York assessments, the unresolved legacy insurance claim, and other litigation.
- Whether planned capital spending, acquisitions, and restaurant openings generate returns consistent with management’s stated investment criteria.