Reports Second Quarter Earnings; Lowering Price Target

3Q23 Club and Restaurant Sales

Continuing the Momentum

2Q23 Revenue Inline

Joe Gomes

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Consumer Cyclical

Restaurants

RCI Hospitality Holdings Inc.

Second Quarter Operating Results
RCI reported consolidated revenues of $71.5 million in the second quarter compared to $63.7 million in the prior-year quarter, an increase of $7.8 million or 12.3%. We estimated revenue of $71 million. Consolidated same-store sales increased by 0.2%. The increase is primarily due to an 11.6% increase in sales from&nbsp;acquired clubs and new Bombshells openings.&nbsp;
For RCI&#8217;s revenue segments, Nightclubs revenues increased to $57 million from $48.2 million in the previous year, or an increase of $8.9 million or 18.4% due to the contribution of&nbsp;acquired clubs and the impact of a 3.7% increase in same-store sales. Newly acquired and remodeled clubs contributed a sales increase of $6.9 million to the total Nightclubs revenue increase of $8.9 million. By type of revenue in the segment,&nbsp;service revenue increased by 19.5%, alcoholic beverage sales increased by 18.8%, and food, merchandise and other revenue increased by 14.4%.&nbsp;Operating income was $18.0 million or 31.6% of revenues compared to $19.1 million or 39.7%. Second quarter 2023 operating income included a $3.1 million legal settlement accrual and a $0.7 million non-cash impairment. On an adjusted basis, segment operating income was $22.4 million or a margin of 39.3%, down from 39.5% from the second quarter 2022 adjusted basis.&nbsp;Compared to the first quarter of fiscal 2023, revenues increased 0.3% driven primarily by acquisitions, while non-GAAP operating margin declined one percentage point, reflecting the fact that RCI had two weeks of the Baby Dolls-Chicas Locas acquisition, which now did not allow enough time for optimization. 
The Bombshells segment revenue decreased to $14.3 million from the prior year&#8217;s $15.3 million, or a decrease of $1.0 million or 6.6%. The second quarter of 2022 was the last major peak stimulus/post COVID quarter. About 12.1% of the decrease was from a same-store sales decline, with the offsetting increase caused by one new location and revenue from franchising operations.&nbsp;By type of revenue in the segment, food and merchandise sales decreased by 7.2%, while alcoholic beverage sales decreased by 8.3%. Operating profit was $1.8 million or 12.4% of revenues compared to $3.5 million or 22.6%. The second quarter of 2023 operating profit included $0.4 million of accelerated non-cash amortization of Grange Food Hall leases. Notably, on a sequential basis, revenues increased 6.6%, driven mainly by the acquisition of Bombshell San Antonio and the Grange Food Hall with its new Bombshells Kitchen, non-GAAP operating margin expanded 1.6 percentage points, and the segment was profitable, generating $1.8 million GAAP and $2.2 million non-GAAP.&nbsp;All of this reflects initial progress from management&#8217;s turnaround program. 
Cost of goods sold for RCI as a percentage of revenue was&nbsp;12.7% compared to 13.8% in the prior year, with the decline due to a sales mix increase in service revenue, which carries higher margins. Salaries and wages increased to 27.2% from 26.0% due to wage inflation. SG&amp;A increased to 30.8% from 28.9% last year due to acquisitions that have yet to be fully optimized. Depreciation and amortization was at 5.3% compared to 4.5% in the previous year, with the second quarter in 2023 reflecting a&nbsp;$0.4 million in accelerated one-time, non-cash amortization of Grange food stall leases. RCI also had one time expenses of $3.1 million from legal settlement accrual and a $0.7 million non-cash impairment charge. Overall, total operating expenses increased to 81.2% of revenue from 73.2% from last year&#8217;s second quarter, with the increase due to increases in wages, SG&amp;A expenses, legal settlement, and goodwill impairment.
For the three months ended March 31, 2023, operating margin for the Company was at 18.8% versus 26.8% in the prior year. Non-GAAP operating margin was of 26.6% compared to 26.9%. Interest expense increased by 28.4% year-over-year and as a percentage of revenue was 5.1% compared to 4.5% last year, in which the recently finished quarter included&nbsp;$35.5 million in new debt associated with the mid-March Baby Dolls-Chicas Locas acquisition.
 RCI reported net income of $7.7 million, or EPS of $0.83, compared to $11 million, or EPS of $1.15, in the previous year. On an adjusted basis, EPS was $1.30 for the just completed quarter, compared to $1.19 in the same period last year. Adjusted EBITDA for the quarter was $21.7 million compared to $19.9 million a year ago.
Capital Overview and Cash Flows
RCI ended the March quarter with $22.8 million of cash on the balance sheet, down from $34.1 million at the end of December 2022, with the decline driven by acquisition payments. Total debt outstanding at quarter&#8217;s end totaled $245.7 million, up from $211.2 million at the end of December, with the drive again acquisitions made during the quarter. The following table provides an overview of the Company&#8217;s total debt, net of loan costs, and weighted average interest rate over time. At the bottom of the table, the Company provides a breakout of the debt maturities over time, which we believe current cash flow will be able to satisfy, at least over the next two years.
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/RICK2Q23debt.png" style="width: 588px;height: 359px" /> 
 
RCI can handle its debt load given the strong cash flows generated by the underlying business, as seen in the table below. During the second fiscal quarter, RCI generated $21.7 million of adjusted EBITDA, up 8.8%, year-over-year. Net cash from operating activities totaled $16.8 million, up 44.8% from the prior year period. Free cash flow was up 33.3% year-over-year to $14.8 million. With free cash flow for 2023 expected to be in a range of $68-$78 million and about $22 million of required debt repayments, RCI should generate some $46-$56 million of excess cash that can be used for growth investments. We would point out, RCI has increased cash flow by 22% on a compound annual basis since 2015.
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/RICK2Q23.png" style="width: 584px;height: 363px" /> 
 
As a percentage of revenue, adjusted EBITDA was 30% and free cash flow as 21%, within the Company&#8217;s 30% and 20% targets.
Updated Guidance
The state of the economy remains an unknown. Management noted there doesn&#8217;t seem to be any discernable pattern, positively or negatively to the business. Business at a club may underperform for a week or two for no apparent reason, management makes some adjustments, and then business will outperform at the same location. We believe optimization of recently acquired and/or re-opened clubs will help drive nightclub revenue and segment margins. Bombshells will see easier comps going forward and we believe management&#8217;s turnaround plan for the business is gaining traction, as evidenced by the sequential improvement in the business.&nbsp;
For the third quarter, we are projecting revenue of $77.8 million, adjusted EBITDA of $24.4 million, and net income of $12.8 million, or $1.34 per share. In the same period last year, RCI reported revenue of $70.7 million, adjusted EBITDA of $24.6 million, and net income of $13.9 million, or $1.48 per share. For the full year, we are at revenue of $303 million, adjusted EBITDA of $95.1 million, and net income of $45.9 million, or $4.83/sh. Our adjusted EPS is $5.35.

RCI Hospitality Holdings Inc. (RICK)

Continuing the Momentum

Fundamental Analysis:

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Reports Second Quarter Earnings; Lowering Price Target (RICK)

3Q23 Club and Restaurant Sales (RICK)

Continuing the Momentum (RICK)

2Q23 Revenue Inline (RICK)

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