RCI Hospitality Holdings, Inc. (NASDAQ:RICK), a leading operator of adult nightclubs and Bombshells Restaurants and Bars, reported its fiscal second quarter 2024 results, showcasing the resilience of its business model despite the challenging macroeconomic environment.
For the second quarter ended March 31, 2024, the company generated total revenues of $72.3 million, a 1.1% increase compared to the prior-year quarter. This performance was driven by a 4.1% increase in Nightclubs segment revenues to $59.4 million, partially offset by a 10.8% decline in Bombshells segment revenues to $12.8 million. The company's net income attributable to RCIHH common stockholders was $774,000, or $0.08 per diluted share, compared to $7.7 million, or $0.83 per diluted share, in the same period last year.
On a non-GAAP basis, the company reported adjusted EBITDA of $17.2 million, or 24% of revenues, and non-GAAP diluted earnings per share of $0.90, near the high end of analyst expectations. The company's free cash flow for the quarter was $8.8 million, or 12% of revenues.
Business Overview
RCI Hospitality is a diversified hospitality company that operates two principal reportable segments: Nightclubs and Bombshells. The Nightclubs segment includes the company's adult nightclub operations, while the Bombshells segment encompasses its Bombshells Restaurants and Bars.The company's Nightclubs segment generated $59.4 million in revenues during the second quarter, a 4.1% increase compared to the prior-year period. This growth was primarily driven by a $7.4 million contribution from newly acquired clubs, partially offset by a $2.9 million decline in same-store sales and a $2.1 million impact from closed clubs. By revenue type, alcoholic beverage sales increased 16.9%, food and merchandise sales increased 10.8%, and other revenues increased 4.3%, while service revenues declined 8.3%.
The Bombshells segment reported revenues of $12.8 million, a 10.8% decrease compared to the prior-year quarter. This decline was mainly due to a $2.7 million drop in same-store sales, partially offset by a $1.2 million increase from acquired or new locations. By revenue type, food and merchandise sales decreased 7.4%, while alcoholic beverage sales decreased 12.4%.
Liquidity
As of March 31, 2024, the company had cash and cash equivalents of $20.0 million, compared to $21.0 million as of September 30, 2023. The company's working capital position was negative $14.4 million, compared to negative $10.5 million as of the prior fiscal year-end.RCI Hospitality remains committed to its disciplined capital allocation strategy, which includes a focus on mergers and acquisitions, organic growth, and share repurchases when the yield on free cash flow per share exceeds 10%. During the second quarter, the company used $1.5 million to repurchase shares.
Subsequent to the quarter-end, the company closed a $20 million bank loan, further strengthening its liquidity position. Management is evaluating strategic options for the Bombshells segment, including potential partnerships or divestitures, as it works to return the brand to its targeted $60 million in revenue with 15% margins.
Operational Highlights and Outlook
The company continued to make progress on its new project developments during the quarter, including the opening of the PT's Centerfold club in Lubbock, Texas, and the rebranding of the XTC Dallas club to the Dallas Show Club. Additionally, the company received liquor licenses for the planned conversion of a BYOB club in Harlingen, Texas, into a Chicas Locas Liquor club, which is expected to open in the current quarter.Looking ahead, the company is focused on optimizing its existing asset base, including the rebranding of underperforming BYOB clubs to liquor-serving concepts. Management believes this strategy will help the company avoid issues similar to those experienced with the XTC Dallas club, where a city ordinance forced the club to close at 2 AM, significantly impacting its service revenues.
The company is also evaluating its plans for the Central City, Colorado location, where it had previously pursued a gaming license. Given the lengthy timeline and significant costs associated with the gaming license process, the company is now weighing strategic options, including potentially opening the Rick's Cabaret Steakhouse without gaming operations.
Financials
For the fiscal year ended September 30, 2023, RCI Hospitality reported annual revenues of $293.8 million, net income of $29.2 million, and operating cash flow of $59.1 million. The company's free cash flow for the year was $18.7 million.During the second quarter of fiscal 2024, the company's Nightclubs segment generated operating income of $11.0 million, or 18.6% of revenues, while the Bombshells segment reported operating income of $0.7 million, or 5.5% of revenues. On a non-GAAP basis, the Nightclubs segment's operating margin was 33.4%, and the Bombshells segment's operating margin was 5.9%.
The company's consolidated operating margin for the second quarter was 6.4%, compared to 18.8% in the prior-year period. This decline was primarily due to the impact of impairment charges, higher insurance costs, and increased Texas patron tax.
Risks and Challenges
RCI Hospitality operates in a highly regulated industry, with various federal, state, and local laws governing the operation of adult entertainment businesses. Changes in these laws or increased enforcement could have a material impact on the company's operations and financial performance.The company also faces competition from other adult entertainment and dining establishments, which could impact its ability to attract and retain customers. Additionally, macroeconomic factors, such as inflation, rising interest rates, and changes in consumer spending patterns, could adversely affect the company's financial results.