RCI Hospitality Holdings, Inc. — Q3 FY2023 Form 10-Q
Reporting period: Three and nine months ended June 30, 2023; unaudited. Fiscal third quarter. RCI operates adult nightclubs, Bombshells restaurants and bars, and smaller related businesses. It reported 70 establishments at quarter-end, including two under renovation or remodeling.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $77.1M | $70.7M | $218.5M | $196.2M |
| Operating income / margin | $15.5M / 20.1% | $20.5M / 29.0% | $45.8M / 21.0% | $53.5M / 27.3% |
| Net income attributable to RCIHH stockholders | $9.1M | $13.9M | $27.1M | $35.4M |
| Diluted EPS | $0.96 | $1.48 | $2.91 | $3.76 |
| Adjusted EBITDA, non-GAAP | $22.7M | $24.6M | $64.8M | $62.5M |
| Operating cash flow | $15.3M | $18.9M | $47.0M | $46.8M |
| Free cash flow, non-GAAP | $14.3M | $18.0M | $42.1M | $44.4M |
Revenue grew 9.0% in Q3 and 11.4% year to date, mainly from acquired clubs and new Bombshells locations. Same-store sales declined 9.6% for the quarter and 4.3% year to date. Nightclubs revenue increased 14.2% in Q3, while Bombshells revenue fell 8.8%; same-store sales declined 7.3% and 18.2%, respectively. Management attributed Bombshells weakness partly to stronger prior-year spending associated with government stimulus.
Profitability weakened despite revenue growth. Q3 operating margin fell to 20.1% from 29.0%; year-to-date margin fell to 21.0% from 27.3%. Management cited wage inflation, stock-based compensation, acquired-license amortization, legal settlements, and impairment charges. Q3 interest expense increased 42.5% to $4.3M; nine-month interest expense rose 37.5% to $11.7M. Reported nine-month diluted EPS was $2.91 versus non-GAAP diluted EPS of $3.80; the filing’s non-GAAP measures exclude specified items and should be considered alongside GAAP results.
Financial position and cash flows
- Cash was $23.6M at June 30, 2023, down from $36.0M at September 30, 2022. Nine-month operating cash flow was $47.0M; investing used $57.0M and financing used $2.4M, producing a $12.4M decrease in cash.
- Total debt, net of discount and issuance costs, was $243.8M, including $23.8M current and $220.0M long-term, compared with $202.5M at September 30, 2022. Debt increased with acquisitions and property investment. Debt maturities include balloon payments; the filing lists $135.5M of maturities thereafter.
- Current assets were $40.9M and current liabilities $52.2M; management reported negative working capital of $11.4M, largely due to acquisition-related borrowings with current maturities. The company says it expects adequate operating cash flows for the next 12 months, but had no unused credit facilities and cannot assure additional financing will be available on favorable terms.
- Capital expenditures were $29.9M year to date, including $5.0M of maintenance spending. Dividends were $0.06 per share in Q3. RCI had approximately $18.8M of repurchase authorization remaining at June 30 and repurchased 10,440 shares after quarter-end through August 4.
Material developments, outlook, and risks
- In March, RCI acquired five Texas clubs, related real estate and other assets for agreed consideration of $66.5M, funded with cash, $25.5M of 7% seller notes and 200,000 restricted shares. Preliminary fair value was $63.3M; purchase accounting remained provisional. The acquired clubs contributed $7.0M of Q3 revenue and $2.0M of Q3 operating income.
- Other acquisitions and property investments included a club in Dickinson, Texas; a San Antonio Bombshells location; and several properties for planned Bombshells, casino, club, or other development. The company also sold two properties during the period.
- Q3 impairment charges were $2.6M, including impairment related to two clubs, one of which was permanently closed. Year-to-date asset impairment was $3.3M. The company recorded a $2.8M New York State Department of Labor assessment in Q2 for unemployment taxes covering 2009–2022; year-to-date lawsuit settlements totaled $3.2M, with $1.9M accrued at quarter-end.
- Management describes wage and other cost inflation as an ongoing pressure and warns a major economic downturn could materially affect operations and cash flow. It may raise prices where competition permits, but cannot assure it can recover future cost increases. Nightclub results are historically seasonally weaker from April through September.
- The filing provides no numerical earnings or revenue guidance. Management’s stated expectation is adequate operating cash flow for the next 12 months. Its growth strategy includes acquisitions, new locations, development and Bombshells expansion; future acquisitions may require more debt or equity financing.
- Disclosure controls and procedures were deemed ineffective at June 30 because of a previously reported material weakness in controls over business-combination accounting, particularly identifying and valuing acquired intangible assets. Management described remediation steps, including enhanced purchase-document review and more precise review of valuation assumptions.
- Other risks include regulation and litigation affecting adult entertainment businesses, competition, key-person dependence, cybersecurity, real estate conditions, and potential financing constraints. The CEO personally guarantees the company’s commercial bank indebtedness.
Important facts for investors to verify
- Whether same-store sales and Bombshells trends stabilize, and how much reported growth depends on acquisitions and new openings.
- Whether cost inflation, higher debt service and acquired-intangible amortization continue to pressure margins and earnings.
- Final purchase-price allocations and any subsequent measurement adjustments for the five-club acquisition; monitor impairment and integration outcomes.
- Debt maturity and balloon-payment schedule, covenant compliance, refinancing availability, and liquidity given negative working capital and no unused credit facilities.
- Resolution and insurance coverage of legal matters, including the New York labor assessment and shareholder derivative settlement, and progress remediating the material weakness.