RCI Hospitality Holdings, Inc. (then Rick’s Cabaret International, Inc.) — Q2 FY2012 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2012; fiscal year ends September 30. Unaudited consolidated results. Unless noted, financial amounts below are in millions of dollars.
Business context and financial performance
The company operated adult nightclubs, Internet businesses and a media division. Nightclubs generated the vast majority of revenue. During the period, the company acquired Silver City Cabaret and related real estate, purchased other club properties, and reported 24 clubs operated or owned, plus a 40% interest in an Austin club.
| Metric | Three months ended Mar. 31, 2012 | Prior-year quarter | Six months ended Mar. 31, 2012 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $25.4 (+17.8%) | $21.6 | $47.4 (+15.0%) | $41.2 |
| Operating income | $4.5 | $5.6 | $8.8 | $10.0 |
| Operating margin | 17.5% | 25.9% | 18.6% | 24.3% |
| Income from continuing operations | $2.3 | $3.3 | $4.5 | $5.6 |
| Net income attributable to Rick’s shareholders | $2.1 | $2.9 | $4.3 | $5.0 |
| Diluted EPS | $0.22 | $0.29 | $0.44 | $0.50 |
| Adjusted EBITDA (non-GAAP) | $5.6 | $6.9 | $11.2 | $12.3 |
Same-location club revenue increased 7.6% for the quarter to $22.6 million and increased 7.2% for the six months to $43.2 million. Management attributed growth to pricing, marketing and increased customer counts, as well as acquisitions. Alcoholic-beverage sales rose as a share of revenue, partly reflecting Silver City and conversion of the DFW Airport club to a liquor establishment. Higher bottle sales carried lower gross margins; club cost of goods sold rose to 13.3% of revenue in the quarter from 12.3%.
Cash flow, liquidity and debt
- Six-month operating cash flow was $12.0 million, versus $8.5 million a year earlier. Management said the increase was primarily due to higher accrued liabilities.
- Investing activities used $6.2 million; financing activities used $3.8 million. Cash increased by $2.0 million to $11.7 million from September 30, 2011.
- At March 31, cash was $11.7 million, current assets were $20.5 million and current liabilities were $22.4 million, resulting in a working-capital deficit of approximately $1.9 million (versus a $2.0 million surplus at September 30, 2011).
- Total debt, including current maturities, was approximately $47.0 million, up from $35.6 million at September 30, 2011. The increase included seller-financed acquisition and property debt. The filing reports no established lines of credit and cautions that further financing may not be available on reasonable terms.
- Cash additions to property and equipment were $4.7 million. The company also disclosed $8.0 million of seller-financed debt used in a business acquisition and $6.2 million used for real estate and an aircraft purchase.
Material changes, outlook and management commentary
- Profit and margins declined despite revenue growth. The principal unusual item was a $1.831 million lawsuit-settlement expense in the quarter. The company agreed to pay $2.65 million to settle a shareholder lawsuit, with approximately $850,000 expected from insurance and approximately $1.8 million paid by the company; it made no admission of liability. The dismissal order was entered April 19, 2012.
- Management said operating margin would have been 24.7% for the quarter and 22.5% for the six-month period without the settlement expense. Adjusted EBITDA is a non-GAAP measure; management cautioned that it excludes costs such as interest, taxes and depreciation that remain necessary business expenses.
- Management continued to pursue club acquisitions, real-estate ownership and Internet growth, but provided no specific numerical earnings or revenue guidance. It said nightclub results are typically strongest October through March and weaker April through September; the media division typically earns a large share of revenue and profit during its annual Expo in the final fiscal quarter.
- The company accrued approximately $8.4 million for Texas’s $5-per-visitor sexually oriented business fee and had stopped paying the fee after the first quarter of 2009 while litigation continued. The Texas Supreme Court rejected the federal First Amendment challenge; remaining state-law issues were pending. A favorable outcome could result in a one-time gain, according to the company.
- Nevada authorities asserted approximately $2.1 million of unpaid live-entertainment taxes, penalties and interest; the company disputed liability and recorded no accrual. Other disclosed litigation included text-message advertising class actions without insurance coverage and a New York wage-and-hour case. The company said it was defending both.
- Management identified regulatory and local sexually oriented business ordinances, competition, financing availability, Internet operations and reliance on key personnel as risks. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress and ultimate financial exposure in the Texas visitor-fee litigation, including the $8.4 million accrued liability and any potential recovery of amounts paid.
- Resolution of the disputed Nevada tax assessment and the unaccrued potential $2.1 million liability.
- Cash available, working-capital deficit, debt maturities and capacity to finance planned acquisitions and property investment.
- Whether same-location sales and club-level profitability can offset higher costs, weaker reported margins and seasonal softness after March.
- Final purchase accounting and contribution to earnings from Silver City and other recent acquisitions; acquisition allocations were preliminary.
- Exposure and outcomes in the TCPA and wage-and-hour litigation, alongside the recorded shareholder settlement and insurance proceeds.