Business context and reporting period
RCI Hospitality Holdings, Inc. filed this unaudited Form 10-Q for the fiscal third quarter and nine months ended June 30, 2018. The company operated 43 establishments across its Nightclubs and Bombshells segments, as well as a business communications operation.
Financial results and key metrics
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2017 period.
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $42.6; up 13.9% | $125.1; up 18.3% |
| Operating income / margin | $9.5 / 22.3% (prior 21.1%) | $26.9 / 21.5% (prior 20.5%) |
| Net income attributable to RCIHH common shareholders | $5.4; $0.55 diluted EPS | $24.4; $2.51 diluted EPS |
| Adjusted EBITDA (non-GAAP) | $11.9 (prior $10.5) | $35.4 (prior $27.7) |
| Cash from operating activities | Not separately reported | $22.4 (prior $17.9) |
| Capital expenditures | Not separately reported | $18.8 (prior $9.0) |
| Free cash flow (non-GAAP) | Not separately reported | $20.6 (prior $16.6) |
Quarterly same-store sales rose 5.1% at Nightclubs and 4.1% at Bombshells. For the nine months, segment revenue was $105.9 million for Nightclubs and $18.6 million for Bombshells; operating income was $37.8 million and $3.2 million, respectively. Nine-month operating cash flow exceeded maintenance capital expenditures, but total capital spending increased substantially, largely for new facilities and future Bombshells locations.
At June 30, cash was $13.2 million, versus $9.9 million at September 30, 2017. Total debt before unamortized issuance costs was $133.0 million; the balance-sheet carrying amounts were $12.3 million current and $119.0 million long-term. Working capital was negative $1.6 million excluding assets held for sale, compared with negative $10.6 million at fiscal year-end. The company reported compliance with all debt covenants. It paid quarterly dividends of $0.03 per share and made no share repurchases during the nine months.
Material changes versus prior period
- Nine-month revenue growth reflected a 14.4% contribution from new units and 5.5% same-store sales growth, partly offset by closed units and other factors. Quarterly growth was attributed to new units and 5.0% same-store sales growth.
- Operating margins improved year over year in both reported periods. Management cited sales leverage, improved food purchasing and inventory controls, and stronger Bombshells unit margins; higher insurance, labor, legal and other corporate costs partly offset the gains.
- Nine-month GAAP net income increased to $24.5 million from $10.5 million, but included a $9.7 million discrete deferred-tax benefit from remeasuring deferred taxes after the Tax Act lowered the federal corporate tax rate. The company estimated a fiscal 2018 annual effective tax rate of approximately 26.5%.
- Debt refinancing replaced numerous notes with an $81.2 million bank loan and eliminated scheduled balloon payments of $2.9 million in fiscal 2018, $19.4 million in 2020 and $5.3 million in 2021. Refinancing-related costs and prepayment penalties increased nine-month interest expense by $827,000.
- Property and equipment additions rose to $18.8 million from $9.0 million. The company acquired land for planned Bombshells development, opened Bombshells Pearland, acquired a club in Illinois, and closed an underperforming Philadelphia club.
Outlook, risks and unusual items
Management described the near-term outlook as strong and expected substantial operating cash flow for the remainder of fiscal 2018. It planned to open Bombshells I-10 East toward fiscal year-end and at least three additional Bombshells in fiscal 2019, while continuing to consider nightclub acquisitions. These plans depend on execution and, for future growth, access to financing.
- Unusual items: The company recorded a $1.55 million impairment related to the Drink Robust note receivable after the borrower indicated it would not make future payments; the remaining recorded balance was $450,000. Nine-month lawsuit settlements totaled $1.3 million. A Dallas property was classified as held for sale, with estimated fair value less selling costs of approximately $2.0 million.
- Contingencies: A subsidiary is appealing an Arizona dram-shop judgment; the company estimated possible loss of $0–$5.0 million. Several civil claims remain unresolved following the insolvency of a former insurer, with no assurance of reimbursement. Sales-tax audits are ongoing and potential loss could not be estimated. The company also disclosed a landlord dispute and accrued approximately $937,000 for lawsuit settlements.
- Controls: Management concluded disclosure controls were not effective as of June 30, 2018, due to previously reported material weaknesses involving staffing and financial-reporting expertise, complex accounting and estimates, reporting controls, and IT access and segregation of duties. Remediation was in progress; management expected outside consulting work on controls to be completed by September 30, 2018.
- Other risks: The filing identifies regulatory and operating risks associated with adult entertainment, entertainer classification, competition, key personnel, real estate and cybersecurity. Management also notes nightclub seasonality, with historically weaker results from April through September.
Important facts for investors to verify
- How much of the reported nine-month earnings improvement is sustainable after excluding the $9.7 million tax benefit and other adjustments; compare GAAP results with the company’s non-GAAP reconciliations.
- Whether same-store sales and operating margins remain strong as recent acquisitions and openings enter the comparable-sales base and new locations mature.
- Debt repayment, interest-rate reset terms, refinancing effects and liquidity needs alongside the substantial development and acquisition spending.
- Outcomes and potential cash exposure from the Arizona appeal, sales-tax audits, insurer-related claims and other litigation.
- Whether the disclosed internal-control remediation is completed, tested and found effective; the filing states the material weaknesses remained unresolved at quarter-end.