RCI Hospitality Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2022; filed August 9, 2022. Amounts are in U.S. dollars. The company operates adult nightclubs, Bombshells restaurants and bars, and smaller related businesses.
Financial performance
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Nine months ended June 30, 2022 | Nine months ended June 30, 2021 |
|---|---|---|---|---|
| Revenue | $70.7 million | $57.9 million | $196.2 million | $140.3 million |
| Income from operations | $20.5 million | $18.5 million | $53.5 million | $34.9 million |
| Operating margin | 29.0% | 32.0% | 27.3% | 24.9% |
| Net income attributable to RCIHH common shareholders | $13.9 million | $12.3 million | $35.4 million | $28.0 million |
| Diluted EPS | $1.48 | $1.37 | $3.76 | $3.11 |
| Adjusted EBITDA (non-GAAP) | $24.6 million | $20.4 million | $62.5 million | $42.7 million |
- Quarterly revenue mix and performance: Nightclubs revenue rose 33.3% to $54.7 million, including $11.8 million from newly acquired clubs. Bombshells revenue declined 1.8% to $15.8 million. Same-store sales were down 0.1% overall: up 4.8% at nightclubs and down 12.3% at Bombshells.
- Year-to-date performance: Nightclubs revenue increased 54.2% to $149.6 million; Bombshells increased 8.7% to $45.9 million. Same-store sales rose 8.4% overall, with nightclubs up 13.2% and Bombshells down 1.6%.
- Margins and costs: Quarterly operating margin fell to 29.0% from 32.0%, reflecting higher expenses, including a $1.7 million impairment charge, insurance and professional fees. Nine-month operating margin improved to 27.3% from 24.9%, helped by higher-margin service revenue and fixed-cost leverage. Quarterly Bombshells operating margin declined to 19.4% from 27.4%; year-to-date it was 20.3% versus 24.3%.
- Cash flow: Nine-month operating cash flow was $46.8 million, up from $32.2 million. Company-defined free cash flow, which deducts maintenance capital expenditures but excludes growth investment, was $44.4 million versus $27.6 million. Quarterly operating cash flow was $18.9 million versus $15.0 million, and quarterly free cash flow was $18.0 million versus $13.0 million.
- Liquidity and debt: Cash was $37.5 million at June 30, versus $35.7 million at September 30, 2021. Working capital was reported as $20.5 million. Debt obligations, net of discounts and issuance costs, totaled $188.0 million, compared with $125.2 million at September 30, 2021. Total liabilities were $270.5 million. The company reported no unused credit facilities.
- Capital investment and returns: Nine-month investing cash outflow was $56.2 million, including $44.3 million for acquisitions and $17.2 million for property, equipment and intangibles. The company repurchased $12.1 million of shares and paid $1.3 million in dividends during the period.
Material changes, acquisitions and unusual items
- Revenue growth reflected post-pandemic recovery, new units and acquisitions. In October 2021, the company acquired 11 clubs, six related properties and intellectual property for approximately $88.4 million in preliminary fair value, funded with cash, seller notes and 500,000 shares. The acquired clubs contributed $10.3 million of quarterly revenue and $24.7 million for the nine-month period.
- The company acquired a Miami club in May 2022 for $16.0 million, including $11.0 million in seller-financed notes, with preliminary asset and debt valuations still pending. The filing also reports July acquisitions in Odessa, Texas, and Hallandale Beach, Florida, totaling $26.8 million, largely financed with seller notes.
- Year-to-date non-operating gains were $0.2 million, compared with $5.4 million a year earlier, when the prior-year period included substantial PPP loan forgiveness gains. The current period included $1.7 million of impairment charges and $0.7 million of lawsuit settlements.
- Debt increased to fund acquisitions and other needs. A $17.0 million private note financing carries a 12% interest rate. The company’s debt maturity schedule includes balloon payments, including $20.5 million scheduled in the 12 months ending June 30, 2025. A bank loan has a minimum 1.4-times debt-service-coverage covenant; the filing does not indicate a covenant breach.
Outlook, risks and contingencies
- Management expects adequate operating cash flow for the next 12 months, but cautions that additional borrowing may not be available on favorable terms, or at all. No specific financial guidance for future periods is provided.
- Management identifies inflation and a potential economic slowdown, COVID-19 effects, competition, regulation of adult entertainment businesses, cybersecurity and key-person dependence as risks. The Russia-Ukraine conflict could affect global conditions and cybersecurity; software developers in Ukraine had delayed deliverables for an internet venture.
- The company recorded impairment after evaluating forecast cash flows under potential economic slowdown assumptions. It describes nightclub operations as seasonal, with historically lower revenue from April through September.
- A shareholder class action had a settlement pending final court approval as of the filing; a hearing was set for August 12, 2022. A separate shareholder derivative action was in a preliminary phase, and potential loss could not yet be estimated. Other litigation includes an image-infringement matter and a dram-shop case remanded for a new trial. The company states that some claims may not be insured or reimbursed.
- Disclosure controls were deemed ineffective as of June 30, 2022 due to a previously reported material weakness concerning the design and precision of controls over impairment estimates. Management reported remediation efforts were underway; the acquired businesses’ controls were still being incorporated.
Important facts for investors to verify
- Whether the newly acquired clubs and the July acquisitions meet expected returns, and whether provisional purchase-price allocations materially change goodwill, intangible assets or debt values.
- Bombshells’ continued same-store sales weakness and margin decline, alongside the stronger nightclub results.
- Debt repayment capacity, balloon maturities, the 12% private financing, covenant compliance and access to additional liquidity.
- Final approval and financial impact of the shareholder class settlement, the potential exposure from other litigation, and progress in remediating the material weakness.
- Whether inflation, economic conditions and any renewed pandemic-related restrictions affect customer traffic, costs or cash generation.