RCI Hospitality (RICK) - 2024 Q2 - Quarterly Results

Executive Summary & Highlights 2Q24 Financial Summary Total revenues slightly increased to $72.3 million in 2Q24, though GAAP EPS fell sharply to $0.08 due to a significant non-cash impairment charge 2Q24 Financial Highlights | Metric (in millions except EPS) | 2Q24 | 2Q23 | 6M24 | 6M23 | | :------------------------------ | :--- | :--- | :--- | :--- | | Total revenues | $72.3 | $71.5 | $146.2 | $141.5 | | EPS | $0.08 | $0.83 | $0.85 | $1.94 | | Non-GAAP EPS | $0.90 | $1.30 | $1.76 | $2.50 | | Net income attributable to RCIHH common stockholders | $0.8 | $7.7 | $8.0 | $18.0 | | Adjusted EBITDA | $17.2 | $21.7 | $34.7 | $42.1 | | Net cash from operating activities | $10.8 | $16.8 | $24.5 | $31.7 | | Free cash flow | $8.8 | $14.8 | $21.5 | $27.8 | - GAAP EPS of $0.08 primarily reflected $8.0 million in non-cash impairment charges[3] Management Commentary Management highlighted core business strength, revenue growth despite economic uncertainty, and a continued focus on its capital allocation strategy - Total revenues for 2Q24 were $72.3 million, an increase from $71.5 million in the prior year[3] - The Nightclubs segment generated $59.4 million in revenue in 2Q24, up from $57.0 million last year[3] - Efforts to improve the Bombshells segment resulted in steady sales and better margins on a sequential quarter basis[3] - The company is committed to its capital allocation strategy, focusing on core nightclubs, evaluating potential acquisitions, and buying back stock[3] - Subsequent to the quarter end, RCI increased its cash position by $20 million through a planned bank loan[3] Company Overview About RCI Hospitality Holdings, Inc. RCI Hospitality Holdings, Inc. is a leading operator of adult nightclubs and sports bars-restaurants with over 60 locations across the United States - RCI Hospitality Holdings, Inc. operates more than 60 locations, making it the country's leading company in adult nightclubs and sports bars-restaurants[10] Forward-Looking Statements The company's forward-looking statements are subject to numerous risks and uncertainties inherent in its business and operating environment - Forward-looking statements are subject to risks including operating adult entertainment/restaurant businesses, business climates, launch success, cybersecurity, real estate, and COVID-19 impact[11] Investor Information The company provided details for its investor conference call and management meeting held on May 9, 2024 - A conference call and X Spaces event were scheduled for May 9, 2024, at 4:30 PM ET, with a management meeting at 7:00 PM ET[4] - Investors were invited to meet management at Rick's Cabaret New York[4] - Media and investor contacts are Gary Fishman and Steven Anreder[12] Detailed 2Q24 Financial Results Consolidated Performance Consolidated revenue saw a slight increase, but operating and net income declined significantly due to a large impairment charge and higher interest expense Consolidated Performance Summary | Metric (in thousands) | 2Q24 Amount | 2Q24 % of Revenue | 2Q23 Amount | 2Q23 % of Revenue | | :-------------------- | :---------- | :---------------- | :---------- | :---------------- | | Total revenues | $72,283 | 100.0% | $71,517 | 100.0% | | Income from operations | $4,657 | 6.4% | $13,427 | 18.8% | | Net income | $749 | 1.0% | $7,693 | 10.8% | | Other charges, net | $8,195 | 11.3% | $3,758 | 5.3% | | Interest expense | $(3,999) | (5.5)% | $(3,677) | (5.1)% | | Effective tax rate | 0.7% | —% | 21.8% | 3.0% | - The effective tax rate decreased significantly to 0.7% in 2Q24 from 21.8% in 2Q23[7] Segment Performance The Nightclubs segment grew revenue through acquisitions while Bombshells' revenue declined, and corporate expenses rose to support growth initiatives Nightclubs Segment Nightclubs segment revenue increased due to acquisitions, but operating income fell sharply because of an $8.0 million impairment charge Nightclubs Segment Financials | Metric (in millions) | 2Q24 | 2Q23 | | :------------------- | :--- | :--- | | Revenues | $59.4 | $57.0 | | GAAP Operating Income | $11.0 | $18.0 | | GAAP Operating Margin | 18.6% | 31.6% | | Non-GAAP Operating Income | $19.8 | $22.4 | | Non-GAAP Operating Margin | 33.4% | 39.3% | | Impairment | $8.0 | $0.7 | - Revenue increase reflected the benefit of acquisitions, which more than offset declines from same-store sales[7] - Non-GAAP margin decline was primarily due to lower service revenues, wage inflation, and a doubled Texas patron tax ($10 per customer)[7] Bombshells Segment The Bombshells segment experienced declines in revenue and profitability, primarily driven by lower same-store sales Bombshells Segment Financials | Metric (in millions) | 2Q24 | 2Q23 | | :------------------- | :--- | :--- | | Revenues | $12.8 | $14.3 | | GAAP Operating Income | $0.7 | $1.8 | | GAAP Operating Margin | 5.5% | 12.4% | | Non-GAAP Operating Income | $0.8 | $2.2 | | Non-GAAP Operating Margin | 5.9% | 15.4% | - Revenue decline reflected lower same-store sales, partially offset by increases from FY23 acquisitions and a new location[7] - The decline in profitability primarily reflected lower same-store sales[7] Corporate Segment Corporate expenses increased to support recently acquired clubs and new projects, rising as a percentage of total revenues Corporate Segment Expenses | Metric (in millions) | 2Q24 | 2Q23 | | :------------------- | :--- | :--- | | GAAP Expenses | $6.8 | $6.2 | | GAAP % of Total Revenues | 9.4% | 8.6% | | Non-GAAP Expenses | $6.3 | $5.5 | | Non-GAAP % of Total Revenues | 8.8% | 7.7% | - The expense increase primarily reflected more corporate level management, accounting, and professional services due to recently acquired clubs and new projects[7] Other Financial Metrics Weighted average shares outstanding increased slightly, while the company continued its share repurchase program and reduced total debt - Weighted average shares outstanding increased 0.9% year over year, influenced by shares used in an acquisition, partially offset by subsequent share buybacks[7] Share Repurchase Activity | Metric | 2Q24 | 6M24 | | :-------------------- | :--- | :--- | | Shares Repurchased | 27,265 | 65,219 | | Value of Repurchases | $1.5M | $3.6M | | Average Price per Share | $56.12 | $55.23 | | Remaining Authorization | $13.0M (as of March 31, 2024) | | Debt Position | Metric | March 31, 2024 | December 31, 2023 | | :----- | :------------- | :---------------- | | Debt | $231.9M | $234.1M | Non-GAAP Financial Measures Explanation of Non-GAAP Measures The company utilizes Non-GAAP measures like Adjusted EBITDA and Free Cash Flow to offer a clearer view of its core operational performance - Non-GAAP financial measures are used to clarify and enhance understanding of past performance and future prospects by excluding or including amounts not representative of ongoing business operations[6] - Non-GAAP Operating Income and Margin exclude amortization of intangibles, impairment of assets, settlement of lawsuits, gains/losses on sale of businesses/assets, gains/losses on insurance, and stock-based compensation[8] - Adjusted EBITDA excludes depreciation and amortization, impairment of assets, income tax expense (benefit), net interest expense, settlement of lawsuits, gains/losses on sale of businesses/assets, gains/losses on insurance, and stock-based compensation[12] - Free cash flow is derived from net cash provided by operating activities less maintenance capital expenditures and serves as the baseline for capital allocation strategy[12] Non-GAAP Reconciliations This section provides detailed reconciliations from GAAP to Non-GAAP metrics, quantifying adjustments for items like asset impairments and amortization Adjusted EBITDA Reconciliation Adjusted EBITDA decreased to $17.2 million in 2Q24 from $21.7 million in 2Q23, with a major adjustment for an $8.0 million asset impairment Reconciliation of Net Income to Adjusted EBITDA | Metric (in thousands) | 2Q24 | 2Q23 | 6M24 | 6M23 | | :-------------------- | :--- | :--- | :--- | :--- | | Net income attributable to RCIHH common stockholders | $774 | $7,732 | $8,000 | $17,970 | | Impairment of assets | $8,033 | $662 | $8,033 | $662 | | Interest expense, net | $3,903 | $3,587 | $8,025 | $7,183 | | Adjusted EBITDA | $17,232 | $21,690 | $34,699 | $42,149 | Non-GAAP Net Income & EPS Reconciliation Non-GAAP diluted EPS was $0.90 in 2Q24, down from $1.30 in the prior year, primarily reflecting adjustments for impairment charges Reconciliation of GAAP to Non-GAAP Net Income & EPS | Metric (in thousands except EPS) | 2Q24 | 2Q23 | 6M24 | 6M23 | | :------------------------------- | :--- | :--- | :--- | :--- | | GAAP diluted earnings per share | $0.08 | $0.83 | $0.85 | $1.94 | | Impairment of assets (per share) | $0.86 | $0.07 | $0.86 | $0.07 | | Non-GAAP diluted earnings per share | $0.90 | $1.30 | $1.76 | $2.50 | | Non-GAAP net income | $8,379 | $12,059 | $16,511 | $23,079 | Non-GAAP Operating Income & Margin Reconciliation Non-GAAP operating income fell to $14.0 million in 2Q24, with the operating margin contracting to 19.3% from 26.6% in 2Q23 Reconciliation of GAAP to Non-GAAP Operating Income | Metric | 2Q24 | 2Q23 | 6M24 | 6M23 | | :-------------------------------- | :--- | :--- | :--- | :--- | | Income from operations (GAAP) | $4,657 | $13,427 | $17,822 | $30,325 | | Impairment of assets | $8,033 | $662 | $8,033 | $662 | | Non-GAAP operating income | $13,963 | $19,000 | $28,254 | $36,880 | | GAAP operating margin | 6.4% | 18.8% | 12.2% | 21.4% | | Non-GAAP operating margin | 19.3% | 26.6% | 19.3% | 26.1% | Free Cash Flow Reconciliation Free cash flow decreased to $8.8 million in 2Q24 from $14.8 million in the prior-year quarter, driven by lower operating cash flow Reconciliation of Net Cash from Operations to Free Cash Flow | Metric (in thousands) | 2Q24 | 2Q23 | 6M24 | 6M23 | | :-------------------- | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $10,836 | $16,789 | $24,469 | $31,684 | | Less: Maintenance capital expenditures | $2,011 | $2,021 | $2,994 | $3,885 | | Free cash flow | $8,825 | $14,768 | $21,475 | $27,799 | Non-GAAP Segment Information Non-GAAP operating margins declined for both the Nightclubs and Bombshells segments compared to the prior-year quarter 2Q24 Non-GAAP Segment Performance | Segment (2Q24, in thousands) | Non-GAAP Operating Income | Non-GAAP Operating Margin | | :--------------------------- | :------------------------ | :------------------------ | | Nightclubs | $19,817 | 33.4% | | Bombshells | $750 | 5.9% | | Corporate | $(6,327) | (8.8)% | 2Q23 Non-GAAP Segment Performance | Segment (2Q23, in thousands) | Non-GAAP Operating Income | Non-GAAP Operating Margin | | :--------------------------- | :------------------------ | :------------------------ | | Nightclubs | $22,390 | 39.3% | | Bombshells | $2,211 | 15.4% | | Corporate | $(5,493) | (7.7)% | Consolidated Financial Statements Consolidated Statements of Income The income statement reflects a slight revenue increase but a substantial drop in net income for 2Q24 compared to 2Q23 Income Statement Highlights | Metric (in thousands) | 3 Months Ended Mar 31, 2024 | 3 Months Ended Mar 31, 2023 | 6 Months Ended Mar 31, 2024 | 6 Months Ended Mar 31, 2023 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total revenues | $72,283 | $71,517 | $146,190 | $141,485 | | Income from operations | $4,657 | $13,427 | $17,822 | $30,325 | | Net income | $749 | $7,693 | $7,993 | $17,964 | | Basic and diluted EPS | $0.08 | $0.83 | $0.85 | $1.94 | Consolidated Balance Sheets The balance sheet shows a stable asset base and a slight reduction in total liabilities as of March 31, 2024, compared to fiscal year-end 2023 Balance Sheet Highlights | Metric (in thousands) | March 31, 2024 | September 30, 2023 | March 31, 2023 | | :-------------------- | :------------- | :----------------- | :------------- | | Total assets | $609,893 | $610,884 | $621,131 | | Total liabilities | $324,394 | $329,560 | $345,167 | | Total RCIHH stockholders' equity | $285,763 | $281,581 | $276,081 | | Cash and cash equivalents | $19,973 | $21,023 | $22,784 | Consolidated Statements of Cash Flows Cash flow from operations decreased year-over-year, contributing to a net decrease in cash for the first six months of FY24 Cash Flow Highlights | Metric (in thousands) | 3 Months Ended Mar 31, 2024 | 3 Months Ended Mar 31, 2023 | 6 Months Ended Mar 31, 2024 | 6 Months Ended Mar 31, 2023 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $10,836 | $16,789 | $24,469 | $31,684 | | Net cash used in investing activities | $(7,606) | $(34,426) | $(12,686) | $(48,076) | | Net cash provided by (used in) financing activities | $(4,412) | $6,313 | $(12,833) | $3,196 | | Net decrease in cash and cash equivalents | $(1,182) | $(11,324) | $(1,050) | $(13,196) |