RCI Hospitality Holdings, Inc. — Q3 FY2017 Form 10-Q
Period: Fiscal quarter and nine months ended June 30, 2017; comparisons are to the corresponding 2016 periods. Amounts are in millions of dollars unless otherwise noted. The company operates adult nightclubs, Bombshells restaurants and bars, and smaller related businesses.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $37.4, up 10.2% | $105.7, up 3.8% |
| Operating income | $7.9, up 18.4%; 21.1% margin vs. 19.6% | $21.7, up 8.9%; 20.5% margin vs. 19.6% |
| Net income attributable to RCIHH common shareholders | $3.8 vs. $2.7; diluted EPS $0.40 vs. $0.27 | $10.5 vs. $10.7; diluted EPS $1.08 vs. $1.06 |
| Adjusted EBITDA (non-GAAP) | $10.5 vs. $8.6 | $27.7 vs. $26.3 |
| Operating cash flow | Not provided separately for the quarter | $17.9 vs. $18.5 |
| Cash and cash equivalents | $10.8 at June 30, 2017, versus $11.3 at September 30, 2016 |
For the quarter, revenue growth reflected 6.8% same-store sales growth and contributions from new units, partly offset by closed units and lower other revenue. Nightclub revenue rose 15.0%; Bombshells revenue fell 7.9%, principally following the closure of the Webster location. For the nine-month period, service revenue increased 11.3%, while food and merchandise and other revenue declined.
For the nine months, free cash flow, as defined by the company as operating cash flow less maintenance capital expenditures, was $16.6 million versus $16.7 million. Investing used $16.4 million, including $9.5 million for acquisitions and $9.0 million for property and equipment. Financing used $2.1 million. Cash decreased by $0.5 million over the period.
Balance sheet, debt and liquidity
Total assets were $302.7 million at June 30, compared with $276.5 million at September 30, 2016. Total debt was $125.9 million, including $16.2 million current and $109.0 million long-term net of debt costs, versus $106.6 million at September 30. The company reported negative working capital of $11.3 million, excluding assets held for sale, compared with negative $2.7 million at September 30. It stated that negative working capital is typical for its cash- and payment-card-based operations and that it expected substantial operating cash flow for the remainder of fiscal 2017. A $1.0 million revolving credit line was undrawn at quarter-end; the company reported compliance with its debt covenants.
Material changes and notable items
- Two acquisitions were completed: the Hollywood Showclub and related real estate in the Greater St. Louis area for approximately $4.2 million cash, and Scarlett’s Cabaret Miami for approximately $26.0 million, funded with $5.4 million at closing and seller notes of $5.0 million at 5% and $15.6 million at 8%. Acquisition accounting was not finalized for either transaction. The acquisitions contributed $2.2 million of revenue after closing.
- Debt increased in connection with acquisitions and financing activity. The company issued $5.4 million of unsecured 12% notes due in 2020 and entered into seller financing for Scarlett’s. Scheduled debt maturities total $16.2 million in the 12 months ending June 30, 2018; the filing lists $59.3 million of balloon payments across all maturity periods.
- A Dallas club was closed after quarter-end and its property was classified as held for sale. The company recorded a $1.4 million goodwill impairment in the quarter. It also recognized a $0.9 million gain on a property sale and a $116,000 loss on another property sale during the nine months.
- Quarterly SG&A increased 11.1%, including higher professional fees, card fees and marketing. Interest expense rose to $2.2 million in the quarter, which management attributed to higher average debt. The nine-month effective tax rate increased to 33.3% from 26.0%, principally reflecting lower FICA tax credits.
- The company repurchased 89,685 shares for $1.1 million during the nine months and paid $0.09 per share in dividends. It reported $3.1 million remaining under its share repurchase authorization at June 30.
Outlook, risks and contingencies
Management said the near-term outlook remained strong and expected substantial operating cash flow for the remainder of fiscal 2017, but provided no numerical earnings or revenue guidance. Growth plans include acquisitions, new club openings and Bombshells development. One Bombshells location opened in July 2017; two others were in development, with openings then expected in November 2017 and March or April 2018. The company also reported opening a second Studio 80 in Houston during the third quarter.
Risks highlighted include regulation and legal treatment of adult-entertainment businesses and entertainers, competition, local business conditions, key-personnel dependence, cybersecurity, real-estate transaction conditions, and the availability and terms of future financing. The company disclosed ongoing litigation, including a landlord dispute concerning a Houston Bombshells location. It also continued to fund litigation relating to claims against a former insurer in liquidation; recovery from the receiver was uncertain. Accrued legal settlement liabilities were $1.9 million, principally remaining payments under the New York wage-and-hour settlement.
Important facts for investors to verify
- Whether acquired-club results, final purchase-price allocations and related goodwill or intangible valuations develop as anticipated.
- Debt-service and refinancing capacity, particularly the $5.0 million seller note due six months after the Scarlett’s acquisition and near-term maturities.
- Progress and returns from new club and Bombshells openings, and whether same-store growth offsets closures and seasonal softness.
- The effect of the Dallas closure, property sale and impairment, and the timing and proceeds of the planned property disposition.
- Developments in legal proceedings, entertainer classification and the uncertain potential recovery from the former insurer’s receiver.
- How reported GAAP results compare with management’s non-GAAP measures, which exclude specified charges and gains; quarterly operating results are not necessarily indicative of full-year results.