RCI Hospitality Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2017; comparisons are with the periods ended March 31, 2016. Amounts are in U.S. dollars. Financial statements are unaudited.
Business context
RCI operated 41 establishments as of March 31, 2017, principally adult nightclubs and Bombshells restaurants and bars, plus a business communications operation. Nightclubs and Bombshells are its principal reportable segments.
Financial performance
| Metric | Three months ended March 31, 2017 | Year-over-year | Six months ended March 31, 2017 | Year-over-year |
|---|---|---|---|---|
| Revenue | $34.5 million | +0.4% | $68.3 million | +0.6% |
| Operating income / margin | $7.5 million / 21.7% | $7.6 million / 22.0% | $13.8 million / 20.2% | $13.3 million / 19.5% |
| Net income | $3.8 million | −29.0% | $6.7 million | −13.9% |
| Net income attributable to RCIHH common shareholders | $3.8 million; diluted EPS $0.39 | Prior-year diluted EPS $0.54 | $6.7 million; diluted EPS $0.68 | Prior-year diluted EPS $0.79 |
| Adjusted EBITDA (non-GAAP) | $9.2 million | Prior year $9.5 million | $17.2 million | Prior year $17.7 million |
For the quarter, service revenue rose 7.3% to $14.2 million, while alcohol and food/merchandise sales declined. Same-store sales increased 2.7% overall; nightclub same-store sales rose 2.7% and Bombshells rose 3.2%. For the six months, same-store sales increased 3.2%; nightclub same-store sales rose 2.7% and Bombshells rose 6.2% across the four remaining locations.
Six-month operating margin improved as higher-margin service revenue and fixed-cost leverage outweighed wage and corporate staffing increases. Net income fell despite higher operating income, mainly because income tax expense rose to $3.4 million from $1.7 million. The six-month effective tax rate was 33.5%, versus 17.7%, primarily reflecting lower FICA tip credits. Management also changed its interim tax calculation method beginning in the December 2016 quarter.
Cash flow and liquidity: Operating cash flow was $11.0 million for the six months, compared with $11.1 million. Capital expenditures were $5.7 million; free cash flow, as defined by the company as operating cash flow less maintenance capital expenditures, was $10.0 million. Investing activities used $3.6 million and financing activities used $5.6 million, producing a $1.9 million increase in cash.
Cash was $13.2 million at March 31, versus $11.3 million at September 30, 2016. Working capital was negative $3.8 million excluding assets held for sale, compared with negative $2.7 million at September 30. Assets held for sale were $5.5 million. Total debt, including current maturities, was approximately $102.3 million, versus $105.9 million at September 30; total liabilities were $141.0 million. A $1.0 million revolving credit line was undrawn at quarter-end.
Material changes and capital allocation
- Nightclub revenue for the six months increased to $59.2 million from $57.5 million; Bombshells revenue declined to $8.7 million from $9.0 million. Segment operating income improved for both businesses, while general corporate operating costs increased to $6.8 million from $4.7 million.
- During the six months, the company refinanced $8.0 million of debt by borrowing $9.9 million. The new unsecured debt bears 12% interest, requires monthly payments of approximately $118,817, and matures in five years with a balloon payment.
- RCI repurchased and retired 89,685 shares for $1.1 million and paid dividends totaling $584,000 ($0.06 per share). At March 31, $3.1 million remained under its share repurchase authorization.
- In January, the company sold a non-income-producing property for $2.2 million, recording a $116,000 loss, and used proceeds to repay a related $1.5 million balloon note; it incurred a $75,000 prepayment penalty.
Outlook, risks and contingencies
Management said the near-term outlook remained strong and expected substantial operating cash flow for the remainder of fiscal 2017; no specific financial guidance was provided. Nightclub operations are seasonal, with historically lower revenue from April through September. Three Bombshells were in development, with two expected to open in the second half of fiscal 2017 and the third in January 2018. The company also reported openings/re-concepting activity in the third quarter.
Subsequent to quarter-end, RCI acquired a St. Louis-area club and related real estate for $4.2 million cash and planned to seek mortgage financing. On May 1, it issued $5.4 million of 12% unsecured notes, interest-only with principal due in May 2020. On May 8, it acquired the company owning Scarlett’s Cabaret Miami and related intellectual property for $25.952 million: $5.4 million at closing, $5.0 million due in six months under a 5% note, and $15.552 million under a 12-year amortizing 8% note.
Key disclosed risks include regulation and legal classification of entertainers, competition, operating conditions in local markets, real-estate transaction risks, cybersecurity, and dependence on key personnel. The company warned that future financing may not be available on reasonable terms. It has ongoing litigation, including a landlord dispute relating to a Bombshells site. The $1.9 million remaining accrual for the New York wage-and-hour settlement relates to future attorneys’ payments. Separately, several civil claims relate to former insurer IIC, which was liquidated; RCI is funding litigation costs and cannot assure recovery from the receiver. The IRS was examining federal income tax returns for fiscal years 2013–2015.
Important facts for investors to verify
- Whether modest revenue growth and improved segment margins can continue, particularly given seasonality and the weaker quarter-over-quarter Bombshells revenue.
- Cash generation, negative working capital, and the capacity to service approximately $102.3 million of debt, including high-interest borrowings and balloon maturities.
- Funding and performance of the post-quarter acquisitions, especially the Miami transaction’s debt financing and repayment obligations.
- Whether the lower FICA tip credit, tax examinations, and interim tax method materially affect future effective tax rates and earnings.
- Possible outcomes and financial exposure from the IIC-related claims, landlord litigation, and remaining New York settlement payments.
- Execution of planned Bombshells openings and the company’s stated expectation of substantial operating cash flow for the rest of fiscal 2017.