RCI Hospitality (NASDAQ:RICK) reported higher third-quarter revenue, earnings and adjusted EBITDA, while management emphasized debt reduction, a turnaround effort at its Bombshells sports-bar business and plans to resume more meaningful stock repurchases after lowering leverage.
Interim CFO Albert Molina said total revenue increased 4% from a year earlier to $73.9 million. Net income attributable to RCI shareholders rose 57% to $6.4 million from $4.1 million, while GAAP earnings per share increased 80%. Non-GAAP earnings per share were $0.90, up 17% year over year.
Nightclubs Set Revenue Record; Bombshells Profitability Improves
The company’s Nightclubs segment generated record revenue of $63 million, up 1% from the prior-year quarter. Four newly acquired, opened or reformatted clubs contributed $4 million in revenue, while 52 same-store clubs generated $58.5 million. Those gains more than offset $1.2 million in revenue from four clubs that were closed after the prior-year period.
Within the Nightclubs segment, service revenue increased 7.6%, while food, merchandise and other revenue declined 1.4% and alcoholic beverage revenue fell 4.2%.
Nightclubs operating income increased to $19.6 million from $17.9 million, with operating margin rising to 31.2% from 28.6%. On a non-GAAP basis, segment operating income was $20.2 million, compared with $20.8 million a year earlier, and the non-GAAP operating margin was 32.1%.
Bombshells revenue rose 25.4% to $10.8 million. Three new locations contributed $2.6 million, while nine same-store locations generated $8.2 million. Alcoholic beverage revenue increased 33.6%, and food and other revenue increased 16.6%.
Bombshells operating income rose to $759,000 from $67,000, producing a 7% operating margin compared with 0.8% a year earlier. Non-GAAP operating income was $801,000, compared with $80,000 in the prior-year quarter.
Founder and Head of Mergers and Acquisitions Eric Langan attributed the improvement to returning Bombshells to its original bar-focused concept. He said the company hired a new Bombshells director of operations with nightclub experience, while retaining food-focused personnel to maintain food quality.
“We’ve brought in a new director of operations for Bombshells, who is a club guy,” Langan said. “He understands fun. He understands creating the party, not joining the party.”
Langan said some locations shifted from approximately a 50-50 food-and-beverage sales mix to roughly 62% to 64% beverage sales while also growing food revenue. He said the company began testing operational changes at a store in February, expanded them to three stores in March and rolled them out across all 11 locations by mid-April.
Debt Paydowns and Capital Allocation
RCI ended the quarter with $26.4 million in cash and cash equivalents, down by less than $500,000 from March 31. During the quarter, the company paid down $8.6 million of debt and repurchased $1 million of shares, Molina said.
Net cash provided by operating activities and free cash flow each declined year over year, primarily because the company paid more outstanding payables than in the prior-year quarter. However, operating cash flow increased 14% sequentially and free cash flow increased 26% sequentially.
The company’s weighted average interest rate was 7.05%, and total occupancy cost declined sequentially to 8.3%. Debt to trailing 12-month adjusted EBITDA was 4.3 times, or 3.7 times excluding a fourth-quarter legal accrual, according to Molina.
Langan said management became uncomfortable with leverage around 4.17 times debt to EBITDA and temporarily slowed repurchases to focus on debt reduction and prepare for potential acquisitions. He said the company paid down $16 million of debt over the prior six months and expects another approximately $8 million of debt reduction during the current quarter.
He said management hopes to return to the stock-buyback market around the beginning of October, while continuing to evaluate larger-market acquisitions that it believes could be accretive.
- RCI expects its line of credit to be reduced to approximately $100,000 after August, according to Langan.
- The company is working to sell or lease non-income-producing properties and expects potential property-sale proceeds to be used for debt repayment.
- Langan said RCI may sell a small number of clubs in smaller markets, while remaining focused on larger markets and larger potential acquisitions.
Development and Legal Matters
Langan said construction began March 4 on the Baby Dolls West Fort Worth location, which he expects could open around May 1. Separately, redevelopment of a former Dallas club that burned down remains delayed by replating and sewer-related issues, and Langan said construction there could take nine months once it begins.
During the call, the company said it could not discuss its legal situation in New York beyond reiterating that RCI, the individuals involved and three clubs have pleaded not guilty to all charges and are taking actions to defend themselves.
About RCI Hospitality (NASDAQ:RICK)
RCI Hospitality Holdings, Inc operates as a diversified hospitality and entertainment company focused on the ownership and operation of adult nightclubs and themed sports bars throughout the United States and select international markets. The company’s U.S. Nightclub segment includes venues branded as Rick’s Cabaret, Club Onyx and various other upscale adult entertainment clubs, offering private dance experiences, VIP services and live performances. Its Restaurant & Bar segment operates Bombshells, a brunch-themed sports bar chain featuring chef-driven menus, craft cocktails and game-day viewing in a military-inspired setting.
In addition to its brick-and-mortar venues, RCI Hospitality deploys proprietary digital platforms for talent recruitment, training and scheduling, helping to streamline operations and drive customer engagement.
