RCI Hospitality Holdings, Inc. (issuer named in filing: Rick’s Cabaret International, Inc.) — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended June 30, 2013; unaudited. Unless noted otherwise, dollar amounts are in millions. The filing identifies the registrant as Rick’s Cabaret International, Inc.
Business context
The company operated 37 nightclubs as of June 30, 2013, with nightclub operations as its sole reportable segment. Growth included acquired and newly opened clubs, alongside real estate purchases and development of additional locations.
Key financial results
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue, 2013 | $28.3 | $84.2 |
| Revenue, 2012 | $23.9 | $71.4 |
| Revenue growth | 18.3% | 18.0% |
| Operating income, 2013 | $5.65 | $17.76 |
| Operating margin, 2013 | 20.0% | 21.1% |
| Net income attributable to Rick’s, 2013 | $2.20 | $7.59 |
| Diluted EPS, 2013 | $0.23 | $0.79 |
| Adjusted EBITDA (non-GAAP), 2013 | $6.93 | $21.57 |
For comparison, operating margins were 16.9% and 18.0%, attributable net income was $1.82 million and $6.12 million, diluted EPS was $0.19 and $0.63, and adjusted EBITDA was $5.38 million and $16.41 million for the respective 2012 periods. Adjusted EBITDA is a company-defined non-GAAP measure.
- Cash flow: Nine-month operating cash flow was $14.17 million, versus $14.13 million a year earlier. Investing used $8.64 million, mainly for property, equipment and acquisitions; financing used $2.00 million. Cash increased $3.53 million to $9.05 million.
- Liquidity: Current assets were $20.22 million and current liabilities $29.39 million at June 30. Excluding the $12.34 million Texas patron-tax accrual, management reported working capital of $3.2 million, versus $1.7 million at September 30, 2012.
- Debt: Current and long-term debt totaled $76.54 million, up from $63.53 million at September 30, 2012. Nine-month interest expense rose to $5.27 million from $3.18 million.
Changes versus prior periods
- Revenue growth largely reflected acquired or newly opened clubs, including approximately $3.6 million of quarterly revenue from the Jaguars chain and $1.1 million from Bombshells and Vee Lounge. Same-location revenue declined 2.1% in the quarter and 1.0% year to date.
- Operating margin improved, with management citing lower cost of goods sold, lower rent as a share of revenue, and reduced legal and professional expense. Higher interest expense and stock-based compensation partly offset operating improvement.
- Same-location club operating income, excluding corporate overhead, was $5.9 million versus $5.8 million for the quarter. The company reported $230,000 of losses from locations not yet open in the quarter and $350,000 year to date.
- The company acquired the remaining 50% of an unopened Los Angeles club for 100,000 shares valued at $863,000, acquired a licensed Beaumont location for $300,000, and completed other club and real estate transactions. In June, it sold its remaining interest in the Austin entity and recognized a gain of approximately $2.3 million; discontinued operations nevertheless showed a $124,000 quarterly loss.
Outlook, risks and unusual items
- Management described the near-term outlook as strong and expected substantial operating cash flow in 2013, but provided no numerical earnings or revenue guidance. It planned six additional locations by calendar year-end, subject to construction, licensing, permits and other conditions.
- A planned $23 million purchase of the New York City building leased by the company was scheduled to close by August 8, 2013. Subsequent to quarter-end, the company also reported new or refinanced borrowing transactions in July and August.
- The $12.34 million Texas patron-tax liability remains accrued while litigation proceeds. The company had not paid the tax since the first quarter of 2009 and said a favorable final outcome could result in a one-time gain; an adverse outcome could require payment.
- Nevada authorities asserted approximately $2.1 million of live-entertainment taxes, penalties and interest relating to the former Las Vegas operation. The company disputed the assessment and had not accrued it; the filing said the potential material effect was unknown.
- Other legal exposure includes a New York wage-and-hour case, with summary-judgment motions pending. Two lawsuits were settled during the quarter, with the company reporting $160,000 of settlement expense in the income statement.
- Management cited competition, laws governing adult-entertainment businesses, financing availability, execution of expansion plans and dependence on key personnel as risks. The company also noted seasonal softness historically from April through September.
Important facts for investors to verify
- Progress and final outcomes in the Texas patron-tax litigation, and the status and potential exposure of the unaccrued Nevada tax assessment.
- Whether the planned openings and building acquisition were completed on schedule, and the capital and operating costs required.
- Debt maturities, interest costs and availability of financing as acquisition and real estate activity continues.
- Underlying performance at established clubs, given same-location revenue declines despite reported consolidated growth.
- The assumptions and exclusions used in management’s non-GAAP measures, and the impact of stock compensation, litigation settlements and pre-opening losses on reported results.