RCI Hospitality Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2019 (fiscal Q2 and first half of FY2019). The unaudited filing was signed September 24, 2019. Unless otherwise noted, amounts are in millions.
Business context and results
RCI operated 47 adult-entertainment and restaurant/bar establishments, with Nightclubs and Bombshells as its principal segments. Second-quarter growth reflected acquired and newer units, while same-store sales declined. The company completed acquisitions of clubs in Chicago ($10.5 million) and Pittsburgh ($15.0 million) in November 2018.
| Metric | Three months ended March 31, 2019 | Three months ended March 31, 2018 | Six months ended March 31, 2019 | Six months ended March 31, 2018 |
|---|---|---|---|---|
| Revenue | $44.8 (+8.7%) | $41.2 | $88.8 (+7.8%) | $82.4 |
| Operating income | $11.2 | $8.2 | $22.3 | $17.4 |
| Operating margin | 24.9% | 20.0% | 25.1% | 21.1% |
| Net income | $6.7 | $4.7 | $13.1 | $19.0 |
| Net income attributable to RCIHH common stockholders | $6.7 | $4.7 | $13.1 | $19.0 |
| GAAP diluted EPS | $0.70 | $0.48 | $1.35 | $1.95 |
| Adjusted EBITDA (non-GAAP) | $12.4 | $12.4 | $24.4 | $23.5 |
| Non-GAAP diluted EPS | $0.63 | $0.65 | $1.24 | $1.18 |
| Operating cash flow | $9.5 | $5.9 | $21.0 | $14.1 |
| Free cash flow (non-GAAP) | $8.8 | $5.3 | $19.9 | $12.8 |
Quarterly same-store sales fell 2.8% overall: Nightclubs declined 1.2% and Bombshells 12.7%. For the first half, same-store sales fell 1.1% overall, with Nightclubs up 1.5% and Bombshells down 16.7%. Bombshells' first-half operating margin was 6.3%, versus 16.2% a year earlier; management attributed the decline mainly to weaker same-store sales.
Financial position, cash flow and capital allocation
- At March 31, 2019, cash was $8.3 million, down from $17.7 million at September 30, 2018. Total assets were $350.9 million and total stockholders’ equity was $163.9 million.
- Total debt, including current maturities and net of stated debt discounts and issuance costs, was approximately $149.8 million, up from $140.6 million at September 30, 2018. Current debt maturities were $10.4 million. The filing lists $86.7 million of maturities thereafter and identifies substantial balloon payments across the schedule.
- Working capital was negative $2.8 million, excluding assets held for sale. Management stated that current liabilities commonly exceed current assets in its industry and that it views cash flow, profitability, revenue trends and long-term debt as more relevant indicators.
- Six-month investing cash use was $24.9 million, including $13.9 million of capital expenditures and $13.5 million cash paid for acquisitions. Financing cash use was $5.6 million; cash declined by $9.5 million overall.
- The company repurchased 84,811 shares for approximately $2.0 million in the first half and paid $0.03 per share quarterly dividends. Approximately $11.2 million remained authorized for repurchases at March 31.
- Management said it expected substantial operating cash flow for the next 12 months and believed cash generation provided flexibility to meet commitments. This is not a quantified earnings or revenue forecast.
Material changes, unusual items and outlook
- First-half GAAP net income fell 31.0% and GAAP EPS fell 30.8%, despite higher revenue and operating income. The prior-year period included a $9.7 million deferred-tax benefit related to the Tax Act; the current period recorded $3.7 million of income-tax expense. This makes the GAAP comparison unusually tax-sensitive.
- Operating results also benefited from gains on asset and business sales: other charges (gains), net was a gain of $1.0 million in Q2 and $2.1 million for the first half, versus charges of $2.3 million and $2.4 million in the corresponding prior periods. These included property-sale gains; 2018 comparisons included impairment and lawsuit-settlement costs. Non-GAAP measures exclude selected items and should be considered alongside GAAP results.
- Management attributed revenue growth primarily to new units. It said Bombshells' same-store decline improved sequentially, but noted that new-unit opening and training costs weighed on labor expense. Two Bombshells projects under construction were expected to open in early fiscal Q1 2020.
- Debt increased alongside acquisitions and development. New financing included 12% unsecured notes, seller-financed acquisition notes and an aircraft loan. The chairman personally guarantees the company’s commercial bank debt; a $500,000 note in the November financing was borrowed from a related party.
- The company revised previously reported FY2018 results for an $834,000 goodwill impairment-analysis error it deemed immaterial. The revision reduced FY2018 net income and EPS by $834,000 and $0.08, respectively. The filing also reports that disclosure controls were ineffective and identifies material weaknesses in financial reporting controls; remediation was ongoing.
- Risk and contingency matters include an ongoing formal SEC investigation, putative securities class actions and a shareholder derivative action filed after the quarter, as well as other litigation. The company said it could not predict the SEC investigation’s outcome or costs and could not estimate potential losses in the securities and derivative cases. A landlord judgment of about $1.0 million was on appeal, with $690,000 deposited with the court in April 2019.
- The filing’s cover indicates the company had not filed all required Exchange Act reports during the preceding 12 months. The company identified regaining and maintaining SEC and Nasdaq filing compliance as a risk. It also warned of industry regulation, entertainer classification, competition, cybersecurity and real-estate transaction risks.
Most important facts for investors to verify
- Progress and independent testing of remediation for the disclosed material weaknesses, and the status of SEC and Nasdaq filing compliance.
- Developments, potential costs and any financial exposure from the SEC investigation, class actions, derivative action and other litigation.
- Whether Bombshells same-store sales and operating margins recover, and whether new openings achieve management’s return objectives.
- Debt maturities, balloon-payment requirements, refinancing access and the effect of further acquisitions or construction on cash and liquidity.
- The contribution of asset-sale gains and tax items to reported results, and how GAAP performance compares with management’s non-GAAP measures.