RCI Hospitality Holdings, Inc. (then Rick’s Cabaret International, Inc.) — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2011, compared with the periods ended June 30, 2010. Financial amounts below are in millions of dollars unless stated otherwise. The filing identifies the registrant as Rick’s Cabaret International, Inc.
Business context
The company operated 21 adult nightclubs, alongside smaller Internet and media businesses. Nightclubs generated the large majority of revenue. During the quarter it closed its Las Vegas club while seeking a buyer, and classified Las Vegas and the Austin operation planned for partial sale as discontinued operations.
Financial performance
| Metric | Quarter ended June 30, 2011 | Quarter ended June 30, 2010 | Nine months ended June 30, 2011 | Nine months ended June 30, 2010 |
|---|---|---|---|---|
| Revenue | $20.8 | $18.0 | $62.0 | $54.9 |
| Operating income (margin) | $4.4 (21.0%) | $3.5 (19.5%) | $14.4 (23.2%) | $11.4 (20.8%) |
| Continuing-operations income | $2.5 | $1.1 | $8.2 | $5.3 |
| Net income attributable to Rick’s shareholders | $0.9 | $0.9 | $5.9 | $4.6 |
| EPS attributable to Rick’s shareholders | $0.09 | $0.09 | $0.59 | $0.48 |
| Adjusted EBITDA (non-GAAP) | $6.0 | $3.9 | $18.4 | $13.8 |
Quarterly revenue rose 15.4%; management attributed growth to acquired clubs, NBA championship-related activity in Dallas and Miami, and strength at San Antonio and Minneapolis locations. Same-location club revenue increased 9.0% for the quarter and 5.1% for the nine-month period. Nine-month revenue grew 12.9%. Operating margins improved in both comparisons. Quarterly net income was nearly flat because the improvement in continuing operations was substantially offset by discontinued-operation losses.
Cash flow, debt and liquidity
- Cash: $12.4 at June 30, 2011, down from $18.6 at September 30, 2010. The company also held $0.5 of marketable securities.
- Cash flow, nine months: Operating activities provided $13.7, investing activities used $11.6, and financing activities used $8.4. Capital expenditures were $7.1; acquisitions, net of cash acquired, used $2.0.
- Debt: Current and long-term debt totaled $36.9 at June 30, 2011, versus $40.3 at September 30, 2010. These figures exclude derivative liabilities.
- Working capital: Approximately $4.1, down from $8.9 at fiscal year-end. Current assets were $21.7 and current liabilities $17.6.
- Management attributed the working-capital decline chiefly to club and property purchases, debt repayments, and put-option-related payments. It reported no credit lines or other financing beyond existing debt and notes.
Material changes, outlook and risks
- Las Vegas closure and settlement: The club was shuttered in June; the filing records a $2.0 million closure loss in discontinued operations. Separately, settlement of litigation with former sellers involved approximately $1.6 million cash against a $2.5 million debt balance, producing a $0.9 million gain. The settlement also cancelled an obligation relating to 70,000 shares.
- Acquisitions: The company acquired the Gold Club of Indy for approximately $1.7 million in April 2011 and had acquired a Fort Worth club and property near DFW Airport earlier. After quarter-end, on July 28, it acquired Schiek’s Palace Royale assets for $2.875 million and its real estate for $3.25 million.
- Texas patron surcharge litigation: The company had accrued approximately $6.1 million for the disputed $5-per-visitor fee. The Texas Supreme Court had heard argument and had not yet ruled. The company reported more than $2 million paid under protest and sought repayment in a separate lawsuit.
- Outlook: No specific financial guidance was provided. Management expected to pursue club acquisitions and organic growth, and said it believed the media division could become profitable through cost control and increased marketing revenue as the economy improved. Management cautioned that nine-month results were not necessarily indicative of full-year results.
- Risks: Management cited regulatory and sexually oriented business ordinances, competition, club-opening timing, access to acceptable financing, Internet operations and dependence on key personnel. Results are seasonal, with historically stronger operations from October through March. The filing reported no material change in disclosed risk factors and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the Texas Supreme Court resolves the patron-fee case, and the eventual treatment of the $6.1 million accrued liability and amounts paid under protest.
- The ultimate sale or disposition of the Las Vegas operation and the planned Austin ownership transaction, including any further costs or proceeds.
- Post-quarter acquisition funding, integration costs and the contribution of the Indianapolis and Schiek’s Palace Royale locations.
- Cash generation and liquidity after acquisitions, debt repayments, share repurchases and put-option obligations; the filing estimated $2.6 million of scheduled put-related obligations at the June 30 share price and a $4.0 million maximum obligation if the stock price were zero.
- Underlying earnings excluding the $0.9 million debt-settlement gain and discontinued-operation losses, and the limitations of management’s non-GAAP adjusted EBITDA measure.