RCI Hospitality Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 8, 2024

There are 9 speakers on the call.

Operator

Welcome to RCI Hospitality Holdings First Quarter 2024 Earnings Conference Call. You can find the company's presentation on the RCI website. Go to the Investor Relations section and you'll find all the necessary links at the top of the page. Website. Please turn with me to Slide 2 of our presentation.

Operator

I'm Mark Moran, CEO of Equity Animal. I'll be the host of our call today. I'm coming to you from New York. Eric Langan, President and CEO of RCI Hospitality and CFO, Bradley Shea are in Houston. Website.

Operator

Please turn with me to Slide 3. If you aren't already doing so, it is easy to participate in the call on X Spaces. Website. Log in to X, formerly known as Twitter, go to rickce0 and select the space titled $rickk, RCI Hospitality Holdings, Inc. 1Q 2024 Earnings Call.

Operator

To ask a question, you will need to join the X Space with a mobile device. To listen only, you can join the XSpace on a personal computer. RCI is also making this call available for listen only through a traditional landline and webcast. Webcast. This conference call is being recorded.

Operator

Website. Please turn with me to Slide 4. I want to remind everyone of our Safe Harbor statement. You may hear or see forward looking statements that involve risks and uncertainties. Actual results may differ materially from those currently anticipated.

Operator

We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards. Please turn with me to Slide 5. Website. I also direct you to the explanation of Rick's non GAAP financial measures. Now I am pleased to introduce Eric Langan, President CEO of RCI Hospitality.

Operator

Eric, take it away.

Speaker 1

Thank you, Mark, and thanks everyone for joining us today. If you'll please turn to Slide 6. Our first quarter revenues were in line with what most people were expecting. They totaled 70 Web. Same store sales reflect the macroeconomic uncertainty everybody is talking about.

Speaker 1

Margins were lower than what we had been expecting mainly on Bombshell's side of the business. Bradley will go into that in more detail later. EPS was $0.77 per share with non GAAP at $0.87 Net cash from operating activities and free cash flow held up very well. They declined only 8% and 3%, respectively. Website.

Speaker 1

Please turn to Slide 7 for other key takeaways. We are pleased to report that during the quarter website. And after the quarter, we continue to make progress toward our key initiatives. We have a solid plan to lower costs, increase revenue and return our margins to their target goals. The newest development is an agreement to relaunch Admire Me with a strategic partner website already in the online and mobile adult entertainment business.

Speaker 1

During the Q1, we also continued to buy back shares and we remain confident we have access website. Please turn to Slide 8 to review Nightclub development plans. Website. We continue to add value to our Baby Dolls Chicas acquisition. Sales in the Q1 were up 10% from the 4th quarter and have improved every quarter since we've owned them.

Speaker 1

In addition, our margin improvement program resulted in 130 basis point improvement on a sequential quarter basis and 2 60 percent basis point improvement versus the acquisition performance in fiscal 2023. Website. Looking at new clubs, the replacement location in Lubbock, Texas is nearing completion. Due to the success of the Baby Dolls brand, we are converting the location to that format, which is awaiting installation of its audio and video systems and furniture delivery. The planned Baby Dolls in West Fort Worth is simply awaiting a building permit to begin construction.

Speaker 1

A Chica's Locust brand has also been successful for us and as a result, We have decided to remodel and convert a BYOB locations in Harlingen, Texas into a Chico Locust and we are currently awaiting the issuance of the liquor license. Regarding acquisitions, we are evaluating a sizable number of targets. The hardest part we face is coming up with fair value because owners want to be awarded for post COVID highs during 2021 2022, and we are typically by on a 2 year historical performance. Website. Please turn to Slide 9.

Speaker 1

We continue to be excited about our Central City Colorado casinos, Rick's Cabaret Steakhouse Casino and our Bombshell Sports Casino. In the few weeks since Christmas and New Year's, there have been no new developments with our gaming license. Meanwhile, interior construction on The Rick Casino has been progressing on schedule and we anticipate completion in June of 2024. We will then await issuance of our gaming license so that we can install, test and configure the devices and systems in order to open the casino. For the Bombshells Casino, we are waiting for building permit.

Speaker 1

We continue to anticipate both casinos plan to open in fiscal 2024 and that they represent and they will represent a significant free cash flow opportunity. In Colorado's most recent fiscal year, Central City Slots averaged 131 adjusted gross proceeds per day and Nearby Blackhawk does 307, mainly because they run 20 fourseven as we plan to do. Please turn to Slide 10. Admire Me is a service we've been developing to help club entertainers monetize their content and develop stronger relationships with their customers. Based on the agreement we've recently signed, we worked out, we will retain 75% ownership, our new partner will own 25% and the service will be relaunched later in the June quarter under a new name.

Speaker 1

Website. This partner has an existing Internet platform with domestic and international traffic, safety controls, credit card processing, The result is that overnight we obtained access to a strong technology infrastructure with significant distribution and proven revenue collection dispute and disbursement capabilities. This will provide club entertainers with even greater potential to make money and RCI will become the largest publicly traded entity owning a worldwide interactive social media adult platform with streaming video both live and prerecorded. Website. Our vision is to create a digital extension of our physical brands, connecting tens of thousands of contractors and workers on the front lines, entertainers and waitresses, etcetera, and the customer who come through our door so they can continue to interact or receive content.

Speaker 1

We want it to be an easy and seamless way for entertainers and waitresses to monetize their relationships 24 hours a day, 7 days a week, 3 65 days a year. Website. You walk into the club, the entertainers are on the platform promoting themselves, getting customers to sign up and subscribe to them and then come back and visit them in the club. Please turn to Slide 11 to review our Bombshells development program. Our newest location, Stafford, a suburb of Houston opened in mid November.

Speaker 1

Construction is continuing in our Rollag location, which we plan to open in late June or July of this year and the Lubbock location construction is well underway and we plan to open that in the Q4 of 2024 as well. We are getting ready to begin the remodeling of downtown Denver location as soon as we receive our building permits. Website. Since this is a simple remodel of an existing restaurant location, it should be a quick turnaround to get this site open. As for future developments, We have decided to list our Aurora, Colorado type for sale or lease and to put our 2nd Austin location on hold.

Speaker 1

Both moves are intended to help us better focus on other opportunities. The Huntsville franchisee is still awaiting his building permits. The bigger issue is Bombshell's performance. After we've seen the results from the quarter, We have made a major structural management changes in Bombshell's team and we are also considering any and all options to improve performance that potentially includes seeking an operational partner or selling the business. Now here's Bradley to go into more details on our results.

Speaker 2

Thanks, Eric. Please turn to Slide 12 to review our Nightclub segment. 4th quarter revenues Can you guys hear me? It says you can't hear me. Okay.

Speaker 2

Please turn to Slide 12 to review our Nightclub segment. 4th quarter revenues increased $4,700,000 year over year. This was primarily due to an $8,900,000 increase from acquisitions and a $4,000,000 decline in same store sales. By revenue type, alcoholic beverages increased 18.7%, website. Food 14.1 percent and other by 8.2%.

Speaker 2

Meanwhile, service declined 1.6%. Page. The different growth rates reflected higher alcohol and food in the sales mix from the newly acquired Heartbreakers, Baby Dolls and Chica's Locals Club. Website. GAAP operating income was $20,400,000 or 33.4 percent of revenues.

Speaker 2

Non GAAP operating income was $21,000,000 or 34.3 percent of revenues. Margins were affected by different sales mix from the newly acquired clubs, lower service revenues and wage inflation. Website. Please turn to Slide 13 to review our Bombshell segment. 4th quarter revenues declined $700,000 year over year.

Speaker 2

Website. This primarily reflected a $2,700,000 decline in same store sales and a $2,100,000 increase from the newly acquired and new locations. The acquired locations are Bombshell San Antonio and Cherry Creek Food Hall with its Bombshell's Kitchen. The new location is Bombshell's Stafford, which opened in mid November. Website.

Speaker 2

GAAP operating income was a profit of $86,000 or 0.7 percent of revenues and non GAAP was a profit of $149,000 of 1.2%. Please turn to Slide 14. The combined operating loss from our other end corporate segments was $400,000 less than that of last year. On a non GAAP basis, they were about $100,000 less. Website.

Speaker 2

I also wanted to note the effective tax rate for the year was 19.9% compared to 22.8%. The rate is affected by state taxes, permanent differences, tax credits, including the FICA tip credit. Now please turn to Slide 15. We have a couple of slides coming up that will discuss free cash flow and adjusted EBITDA, which are non GAAP. In advance of that, we wanted to present you with the closest GAAP equivalent on this slide, which are operating and net income.

Speaker 2

Now please turn to Slide 16 to look at some of our other key metrics. We ended the quarter with cash and cash equivalents of $21,200,000 During the Q1, we used $2,100,000 to buy back shares. First quarter free cash flow was $12,700,000 or 17 percent of revenues. Adjusted EBITDA was $17,500,000 or 24 percent of revenues. Website.

Speaker 2

Our more recent free cash flow and adjusted EBITDA conversion rates reflect a lower percentage of service revenues in our ICLP business. Website. Now please turn to Slide 17 to review our debt metrics. Debt as of December 31 declined $5,800,000 from September 30 due to scheduled pay downs. The weighted average interest rate was 6.61%, in line with what we have been paying.

Speaker 2

Total occupancy cost was at 8.2%, inched up a little bit from a sequential quarter on a sequential quarter basis, but we are still in our comfort range of 69%. At 2.9 times, debt to trailing 12 month adjusted EBITDA also inched up just a little bit, but continues to be in our comfort zone of less than 3. Please note that both occupancy costs and debt to adjusted EBITDA reflect the fact that we are developing a number of projects. Website. As they open, we begin generating revenues and EBITDA, occupancy costs and debt to adjusted EBITDA should decline.

Speaker 2

Website. Debt maturities continue to remain reasonable and manageable. We are also in the process of completing a $20,000,000 cash out bank loan using $30,000,000 of our unencumbered real estate. Please turn to Slide 18 for our debt pie chart. We continue to pay down all our slices of our debt.

Speaker 2

The percentage share of our different pieces of debt remained largely the same as the 4th quarter. Website. Now let me turn the presentation back to Eric.

Speaker 1

Thanks, Bradley. Thanks Bradley. Please turn to Slide 19. Before we go into Q and A for our new investors, I want you to know that everything we do is centered around our capital allocation strategy. We employ 3 different approaches subject to whether There is a compelling rationale to do otherwise.

Speaker 1

Mergers and acquisitions, organic growth and buying back shares when the yield on our free cash flow Per share is more than 10%. All this is being done with the ultimate goal of driving shareholder value by increasing free cash flow per share by at least 10% to 15% on a compound annual basis. To see more about this strategy, please visit our new website at rcihh.com. Website. Please turn to Slide 20.

Speaker 1

By sticking to our capital allocation strategy since the end of fiscal 2015, we have generated compound annual growth rates of 10.2% for revenues, 12.1% for adjusted EBITDA, 17.2% for free cash flow. We also reduced our fully diluted share count, including shares used for acquisitions, but nothing goes up in a straight line. The key point is we have the plans, tools, resources and expertise to get the job done. We'll make more acquisitions. While taking a little longer to get projects up and running, the drag will be behind us, website.

Speaker 1

The doors will open and our numbers will improve. We will get our free cash flow and adjusted EBIT margins back to the 20% 30% website as we have in the past. Unfortunately, in the current environment, it has taken us a little longer to open new locations and we have dealt with economic downturns before.

Speaker 3

Website.

Speaker 1

I know that these numbers are a little disappointing to some and they are disappointing to us, but I ask you to have faith in our team's ability as I do that we will reach our future targets. Website. Thank you to our loyal and dedicated team members for all their hard work and effort and all of our shareholders who believe and make our success possible. Now here's Mark.

Operator

Thank you very much, Eric and Bradley. Webcast. When you finish, please mute your microphone to eliminate any background noise. We only have a limited number of speaker spaces. So after you ask for question and we may ask you to move to the back of the audience to free up space.

Operator

To start things off, we'd like to take questions from Rick's analysts and some of its larger shareholders before moving into general Q and A. First up, we have Anthony of Sidoti and Company. Anthony, please take it away. Website. Hey, Anthony, I'm not sure if you're on mute.

Operator

Website. While Anthony works that out. We can Can you

Speaker 3

hear me now?

Operator

Yes, we can hear you. We can hear you. So we'll stay on Anthony. Anthony, take away.

Speaker 3

Sorry about that. I have a new phone over here. So Apologies for that. So anyway, thanks for taking the questions. I do want to get into a little bit more about the same store sales numbers as far as traffic versus average ticket that you've seen.

Speaker 3

And also in your January sales release, Eric, you talked about hopefully that I think the quote was basically saying that hopefully we've seen the worst of the same store sales declines given the uncertain macro conditions. So just wondering if you think that's still True. And I have a couple of other questions as well.

Speaker 1

Yes, sure. I mean the same store sales declines, obviously, Much has changed from the last call. We got the December numbers. December was decent. January was Starting off okay, then we have the weather issues for a couple of the middle weeks, but finished very strongly.

Speaker 1

The 1st week of February has been a good week for us overall. I don't have breakdowns on same store sales for January, February because it's just too early for me to have all those numbers yet. But hopefully we'll get an idea of those soon. I think the worst of it is behind us. I mean, bombshells are still an issue.

Speaker 1

We've had to make some cost changes there and some structural changes in management and how we're operating those locations. And hopefully we'll start seeing those results as we move into March Madness. I think March Madness, we're doing a big push for March for March Madness, Some other changes, we started today with our launch rate Thursday. So we're going to do a few more things, take the Bombshells concept, make it A little more risque, I think kind of the team kind of started focused on restaurant operations too much and what we're doing and we've got to get back to our basics and which is keeping our alcohol sales at the 60% range of sales. Those have declined a little bit.

Speaker 1

And And I want to get that back to normal and making the place fun again, especially in the evening hours. So that's kind of what we're focused on right now.

Speaker 3

Got you. Okay. Thanks for that. And then I know you recently hired a new assistant of Director of Operations for Bombshells. Website.

Speaker 3

What has he done so far and kind of what are your plans? Can you share any specifics as to what you're doing as

Speaker 1

one. We've done some cost cutting at the management level, taken our regional managers, put them back in individual stores, having them focus on individual stores, which allowed us to get rid of some underperforming general managers and not replace other managers through that have left Naturally left the attrition by moving people around. The new guy has been in training in Houston. He's now in Dallas. He'll be working at the Dallas and the Arlington location to get those locations, which are our biggest decliners back in shape, just making sure people are promoting, doing the things they do and really focusing on customer service, like I said, and then Making the place fun again to hang out in.

Speaker 1

I think I said earlier that they've been focused on restaurant operations More than what I would consider the alcohol sales operations and I think that's kind of the key. We've made some major changes in music formats, DJs, Some of the things have just kind of as we went and visited the stores and our secret shoppers in, just found things that we weren't happy with on Some of the direction that the current management team had been taking it and so we're on that. And then also by moving these Our regionals into direct stores, we'll have a lot more accountability as we move into the March, April, May months and we'll see significant changes or we'll continue to make changes in management there as well.

Speaker 3

Got you. Okay. And then switching gears, you talked about the Admire Me relaunch with a new strategic partner. How should we think about this as far as From a financial perspective as far as what this could mean to you guys, if you could add any additional color,

Speaker 2

Hey, Eric, are you speaking? I'm sorry.

Speaker 1

Yes, I'm sorry. My for some reason, my mute turned itself back on. Sorry about that. Thanks, Mark. So for the new site, basically, Our new partner already has the software up and running on another for their site.

Speaker 1

So we're going to basically white label that software. So we're waiting for the skins to be done right now, which hopefully will be done sometime in April. We'll begin early testing and basically full launch this in that next quarter. It lowers our cost tremendously because we're spending about $40,000 a month on programmers trying to get Admire Me up and running. So basically, it will cut about $500,000 a year from our expenses, which is a part of our overall cut to cut over $2,000,000 a quarter in expenses from our budget right now.

Speaker 1

And so that'll be a big part of that. And we'll continue to move forward Launching this new site with video streaming, which we weren't we didn't have on Admire. Me and weren't going to have on Admire. Me for some time and who knows at what cost to get to that. So basically, I think it just moves the software light years ahead.

Speaker 1

The concept is still the same to get all of our entertainers and waitstaff and employees that are interested in creating content to create content and have a means to do so.

Speaker 3

Website. All right. Well, thank you very much. I'll pass it on to others, and best of luck.

Operator

Fantastic. Thank you so much. And next up, we'll bring of Scott Buck of H. C. Wainwright.

Operator

Scott, take it away.

Speaker 4

Good afternoon, guys. Thanks for taking my questions.

Speaker 5

Eric, I'm curious on the licensing. I know

Speaker 4

you don't have an update for us, but I'm curious at what point do you start to get a little nervous And your ability to get the properties open by year end fiscal 2024?

Speaker 1

May. We need to have We need to be on the agenda for approval by May. If we're not on by May, it will be very difficult. It's going to take somewhere between Probably 3 4 months, so somewhere between 90 120 days to do all the install testing and get all the certifications we need from gaming to get the final go live approval. So we really if we want to open in September, we need to have that approval for the license itself no later than the end of May.

Speaker 1

We have quarterly updates with them. The next update is in about a week from now. So once we have that update, hopefully, we'll have better information on where they're at in the process. As far as me getting worried, I don't really worry about overall unless of course they start issuing a bunch of licenses to the other Now if all the other licenses start getting issued to other operators that have applied, I think there are 6 licenses applied for in Central City right now. If all those were to start getting approved and ours was not getting on the agenda, I would be concerned.

Speaker 1

But as of right now, there There's no concern. I think it's just the normal flow of operations and the way the Colorado Department of Gaming does their investigations.

Speaker 4

No, understood. I appreciate that. And I'm curious, what's the remaining CapEx on those the two properties to get them open. Really depends

Speaker 1

on how we do certain things. So far, we're about $2,500,000 in. I believe on my last update that I've gotten, we just signed about a $3,000,000 contract for All of construction on the RICs, which includes some pretty major changes to the overall deal and the HVAC systems are in Denver right now. So they will be installed as soon as weather permits and they can get all their decks in a row because we're replacing the roof at the same time they put the unit. So basically, they're going to pull the existing units off the roof.

Speaker 1

We're going to put all the new curves and stuff in for the roofing, they'll set the units and then they'll re roof the building. So that'll be considerable. It should be done, I would think, no later than the end of March at

Speaker 2

this time.

Speaker 1

So 6 or 7 more weeks, we'll have all new AC in that building and have everything up and running. We think final construction other than the actual gaming machine should be completed sometime in June.

Speaker 4

Yes, sorry about that. I went back on mute. Yes, so on Bombshells and the strategic review, You talk about a potential sale or at least exploration. You guys hired some outside help to kind of speed that process along? Or At this point, are you still kind of looking at opportunities internally to do something?

Speaker 1

We are working with the outside group right now, as well as, none of the few things on our own as well. So, when we say we're exploring everything, I mean, We're looking everywhere. We're talking with lots of people. But as far as getting rates as far as listing and whatnot, we haven't gone as far as listing For sale at this point because right now we are really kind of hoping we can find either the right partner like we did with Admire Me for giving our making the changes we've done internally and seeing if that is going to make a difference It's been a quick enough time period for my liking. All right, great.

Speaker 1

So those are that's where we're at.

Speaker 4

That's helpful, Eric. And then just last thing quickly, what's the timing look like on the cash out loan? And are you kind of in conversations with folks already about potential acquisitions?

Speaker 1

We're pushing the loan because we have been in talk with several outside operators and would need significant cash down payments. So we're going to just try to get that cash sitting on our books. We've been working on this for about 5 weeks. We had to get appraisals In environmental studies on a couple of the properties because they weren't current. That's all updated and we should be going to loan committee in the next week or so.

Speaker 1

Website. So I would look for our hope is to close sometime in either the last week of February or 1st week of March. That's to close the loan. So hopefully we can stay on that timeline as long as nothing comes up or nothing comes out of committee ran casinos in Blackhawk, ran casinos in Central City both for the past 20 some years. He's very knowledgeable.

Speaker 1

He's very well known by the Department of Gaming as well as Many of the other operators, employees and whatnot in that Central City Black Cocks area.

Speaker 5

Great. And I'm sorry, you broke up a little earlier, but can you talk about where do you see your budget For the casinos, but to the point where what do you believe the budget will be when you complete the casinos?

Speaker 1

I'm sorry, can you repeat that? I'm sorry.

Speaker 5

Yes. Can you give us an idea of what the budget will look like To complete the casinos, I believe you mentioned that earlier, but it was you kind of broke up.

Speaker 1

Okay, sure. The budget for the casinos is probably overall about $20,000,000 for both properties, Including the real estate purchases, we spent about $2,500,000 on the deal, the real estate purchaser, about another $8,000,000 So we've got about $10,000,000 more to spend. It depends on how we're going to And how we're going to do the machines? If we pay all cash for the machines, that would be a very significant amount of money, but it looks like we're going to do there's some terms we can get that are like 12 months same as cash. We don't have to start making payments still after the Machines are installed with some operators.

Speaker 1

We can also do rev share that will also create some cash outlays savings for us. We'll still have to pay, but we'd have time to do that.

Speaker 5

Great. Thanks, Eric. And then lastly, with regards to the macroeconomic uncertainty that you've been discussing, I take it that can you just confirm if it's still on the blue collar, how your white collar customers are holding up? And then kind of in general, what do

Speaker 2

you think We have to see

Speaker 5

to move beyond this area or time period of macroeconomic uncertainty.

Speaker 1

I mean, we have to get rid of the uncertainty in the marketplace. It's funny because you read Stuff in the media and you hear how great things are in jobs and this and that, but that when you go out into on Main Street and you start talking with people, They're uncertain. Even the people that are doing very well in their jobs right now are uncertain, is my job still going to be here 3 months from Am I still going to be doing as well? What are interest rates going to be? And we're seeing that in the customer.

Speaker 1

You're seeing the customer trade down, So which is typically recessionary behavior. So we're definitely seeing the customer trade down. We're seeing the customer Maybe not come as often. So our Mondays and Wednesdays are becoming slower and you're going to start seeing us do some basically what I call recessionary discounting on other days, which is kind of like dynamic pricing, only we do it on certain days rather than all the time. So we're going to see that happen.

Speaker 1

As we're moving forward, we've already got a lot of these things going into place right now. Bring that customer in and get that customer to continue to spend money.

Speaker 5

Thank you. That's it for me.

Operator

Thanks so much, Rob. We appreciate the questions. Next up, we're going to have Orchid Wealth. And I'd like to encourage everyone who has a question to raise their hand and we'll bring you up to the speaker spot. Orchid Wealth, take it away.

Speaker 2

Hey, guys.

Speaker 6

Let's go into the Admire Me 2.0 that you guys are going to be doing. How long have you been dealing or engaging with this partner that you're bringing on?

Speaker 1

Website. Sorry, I better unmute myself. We started talking with them at Expo In Vegas in August, and we've kind of developed the relationship. We had to get comfortable with each other. We've laid out the foundation of expectations from both sides and on that we've probably signed the agreement about 3 weeks ago, I believe.

Speaker 1

And they've been working on some skinning ideas and how they're going to what it's going to look like, what the site is going to look like, I've registered the domains and or purchased the domains, so we have those all ready to go for the new launch. And they're very excited. Like I said, we're shooting for basically some testing, which we don't need to do a lot of testing the software. It's really just making sure That everything flows properly with the design so that we don't end up with like you click on a link website and actually end up seeing content or something from their previous website. So it's basically just going to make sure everything is working properly.

Speaker 1

And then we'll be ready to launch. We'll start at a couple of specific clubs Putting on entertainers from those clubs first, getting everything rolling and then basically do A full company wide launch hopefully by May June.

Speaker 6

And then how long has this partner been in business of doing this in terms of like they're going to handle the credit card processing or all that aspect of the business. You're basically supplying the performers or the entertainers?

Speaker 1

Kind of. I mean, yes, it will still be through our company. So we are processing our But we're going to be working with different banks than we've worked with, with Admire Me, who they have a much longer and stronger relationships with, as well as other vendors that they've been doing. They've been in the business since the early 2000s back when they it's funny because We started talking about different people throughout in the industry from back when Rick's had Dancerdorm back in 'ninety nine, early 2000s. And we We all kind of knew the same people and it was kind of funny that we were both in the business at the same time back then and didn't really meet up back then.

Speaker 1

I'm very optimistic and excited to see where the concept will go when it has the right software. So I think we have the right idea. We just didn't have the right medium to basically put the entertainers and the customer base together. And with their software, we're going to be able to do that. And like I said, with full video streaming, that seems to be the big thing these days.

Speaker 1

So I'm very excited about where that's going to go.

Speaker 6

So how many entertainers do you think you're going to be able to at least offer this as an option by being an independent contractor within the firm? How many? Well, I mean,

Speaker 1

we had in 2023, we had over 25,000 contracted entertainers nationwide. So I mean if we can get 5% of them that would be 12.50. If we can get 10%, we'd have 500 and so on. So I don't really know and that doesn't count waitresses or any other front of house staff, whether there's some bartenders or door girls whatnot that might be interested in being on this site. And then of course other clubs and outside people as well.

Speaker 1

So I think it will grow relatively quickly. We were doing pretty decent and growing it when we were pushing it. The few times we tried to push AdmireMe. But as soon as we start putting any people on the site, it would we've run into bugs and problems that we'd have to stop and hold back and then try to fix the software. The beauty of their software is it's up and running and is already ready to handle 100 and 100 of people at a time.

Speaker 1

So That's going to be a big plus for us.

Speaker 6

Are any other clubs in the marketplace doing something like this or are you guys going to be at the forefront of this? Where other clubs that are maybe competitors or not competitors in other markets would want to join on board and this becomes like This is the entertainers only fans, one stop shop, because it seems like a lot of this stuff is really about just being first to market.

Speaker 1

Look, with us trying to do it before, I know how much it costs and I don't think any other I don't know of any other operators that are trying website. Right now, I haven't heard anything. And when they start looking at what it costs to try to get there, it's going to be too much. So I don't think they'll do it. That's kind of where I got to the term.

Speaker 1

It's like, look, we're not going to keep at the rate we're going, we're going to spend another $3,000,000 trying to get this thing working. And here we got a guy that a partner who's got everything. We give up 25% of the deal and be light years ahead of where we're at. And it is about being first to the market. So I didn't want someone So going to start trying to wrap these up.

Speaker 1

I know there are some other sites out there that have tried to tap the entertainer market, but I don't think they have the direct website. We will be able to offer them incentives for them to put their entertainers on our site and they'll earn residual income as well. So through referral programs. So the new operator and the new software is going to be incredible. All we have to do As do what we do is get our entertainers on there.

Speaker 1

Basically, we get them to show up and they provide everything else,

Speaker 4

Which is

Speaker 6

And then just one last question is I know OnlyFans typically does an eightytwenty revenue share with percent to the entertainers and 20% to the OnlyFans platform. Is yours going

Speaker 2

to be similar to that?

Speaker 1

Website. It's exactly the same as you've seen from Admire. Me and we have it set up the same way. And we may end up using part of our 20% AS referral piece for a time period and we may also Bring some big influencers over from other sites that are also in the entertainment, whether in our clubs or other clubs, and we may offer them a little more of the percentage. So there may be we may make little less than the 20% in the beginning, but at some point, those promotions will end.

Speaker 1

It will just be a marketing dollars basically, and then We'll refer to the standard. Okay.

Speaker 6

Well, fantastic. I mean, I think this venture obviously has been something I've been hoping for years. So good luck with that and look forward to the next call.

Operator

Website. Thank you so much for the questions. Next up, we will have Evan Tindell. Evan, please take it away.

Speaker 7

Hey guys, thanks for taking my call. Is the way you talked about kind of the Same store sales performance in the Nightclub segment makes me think that you guys are kind of of the opinion that it's

Speaker 2

a similar thing. I'm sorry, this is Bradley. Repeat the question, we missed the first part of it.

Speaker 7

Sorry. I think the first part was just me thanking you for taking the call. But so obviously you guys have talked about the kind of the macro environment at the clubs. And And it makes me think that you guys are of the opinion that the results at other clubs are kind of similarly negative in terms of same store sales. So I was just wondering if that's kind of the full results at other clubs are kind of increasing the inbound Offers you guys have in terms of acquisitions or might make the multiples that you guys can pay a little lower given the recent performance?

Speaker 1

Yes, I've talked with several other club operators. In fact, I'm going to be this weekend with the club operator that basically between him and some of his partners, about 65 clubs around the country. They're all very similar in client declines. A lot of their declines are even higher than ours. I'm hearing from some people as much as 20% 30% at certain locations in declines from their highs.

Speaker 1

And so that's definitely going to be an issue. But as far as more offers, yes, we're talking with several acquisition targets. The biggest problem we have is everybody wants to sell based on their 2022 numbers. And don't we all? The reality of it is, is there was a lot of free cash out there and there was a lot of pent up demand that doesn't exist today and higher interest rates and more economic uncertainty.

Speaker 1

And so I can't be buying at a 5 times multiple of 2022 when we're in 2024 and I know that those numbers aren't repeatable.

Speaker 7

Okay, thanks. And then one more question. So there was A couple of threads on Twitter about the kind of some of the warnings in the 10 Qs and 10 ks over the years about internal controls. And I was just wondering, there's one warning about like goodwill impairments and there was one about like user access to the IT systems. I was just wondering, if you could kind of address some of those concerns or maybe help explain kind of what those are about for people That don't know or that are just might be reading the financials for the first time.

Speaker 1

Yes, sure. If you notice, they continuously change, right? It's like our auditors are continually trying to find some new material weakness every single year. And typically, we When they're found whether by us, whether by our internal third party independent auditors or by the auditing company by auditors ourselves. We immediately make changes and adjust and correct them.

Speaker 1

But the problem is in order to get a clean bill of health, you have to be It has to be fixed for the entire year. So even if it was one day that something was off, you get a material weakness. So we have to deal with that. I'm hoping all we can do is keep pushing and keep working and keep fixing things as they say. I will say that none of the weaknesses they've ever found have ever caused restatement of financials.

Speaker 1

They've never found any fraud or anything like that. It's just It's the old saying is what if, what if, what if, what if. And I always use the I always like to use the example of if you have a bank vault in your home and

Speaker 3

And you have a security system

Speaker 1

in your home and you have all these things to stop somebody from being able to steal a necklace out of your home and they come up with a way to break into your house, circumvent all of your stuff and still steal the necklace. Even though the necklace was never stolen, they turn and say, well, that's a material weakness. And so now you've got to fix this New what if. And so those are things we face. And as a growing company, In the beginning, it was software, it's all software.

Speaker 1

Our software didn't that we put an ERP system in. We corrected website. The majority of those what ifs with our ops stuff, I mean, at the end of the day, you have to have somebody in IT that's responsible for monitoring the system, keeping the system up and alive, running the backups. And these are that's a very high paid employee who has to have that access. And just like the company has to have a CEO that has The ability to make certain decisions and whatnot.

Speaker 1

And so basically what they said with our IT stuff, I think is basically is basically one guy had powers to change and do things and where was the check system on him. And I think we've resolved all of that now through notifications to certain people if things are changed and whatnot. But you don't know what you don't know until they come in and say, oh, this is a this could happen or this Even though it's never happened, obviously once it happens, we've always taken or anything's ever happened, we've always been able to fix and adjust the system. But we can't think of every little detail and every little thing constantly that could happen when it does never happen or has never happened or hasn't even happened to somebody else. So those are the things we deal with and we just keep working on that.

Speaker 7

Okay. Thanks, guys.

Operator

Fantastic. Thank you so much, Evan. Next up we have

Speaker 1

In stereo and Mark talks.

Operator

Next up, we have Adam Wyden of ADW Capital. Okay. Yes, I'm

Speaker 8

here. Couple of things. It was encouraging that you wrote in press release that you thought you've seen the bottom in the same store sales and I think consistent with other people's commentary and sort of live entertainment, Dave and Buster's, all this stuff. It seems like that you're doing more promoting and stuff like that, but People are still willing to spend, maybe spend differently, but people are still willing to spend. So that's good.

Speaker 8

And I guess this is your seasonally weakest quarter anyway. That's like about 20% of EBITDA at least historically. So, it sort of gives you a nice baseline of sort of where you are. But Couple sort of procedural questions. You mentioned $2,000,000 of costs annualized per quarter.

Speaker 8

That's roughly $8,000,000 of EBITDA. Is that in Bombshells, nightclubs, corporate? Can you talk a little bit about where you think that cost is going to come from?

Speaker 1

Well, I mean, we're doing the COVID sweep as I call it. When we got closed down for COVID, we had to sit down and go through every single pool expense and what we could waive, what we could get rid of, how we could make changes, where we could make cuts, What non income producing properties or non income producing assets we needed to get rid of, we're going to sit down there. We've been doing it, but we're going to continue. And I mean, there's a lot of 70 some operating subsidiaries, so there's a lot of subsidiaries still to go through. But we've been working on this basically since We internally had results from the past quarter.

Speaker 1

So it's going to be a lot of places. A part of it was with Admire Me making the major change. With Admire Me bringing on Our partner there is going to be a significant cost reduction for us going forward. We're looking at all SG and A expenses. We're looking at all Club by club, whether it's employees, whether it's security, whether it's Basically every little cost and figuring out where we can make the cuts just like we had to do back in 2020 when COVID hit.

Speaker 8

Yes. Well, you guys did an excellent job cutting costs during COVID. So obviously, You guys have shown that you guys can make margin with lower revenues. So, look, Another $8,000,000 to $10,000,000 of cost, if you can do it, would be well welcomed from a cash perspective as it relates to being able to allocate capital into share repurchase or more clubs. Secondly, Obviously, you expect to get the casinos open, but you talked a lot about non income producing properties.

Speaker 8

You've got, I don't know, 3 or so clubs, I can't keep it all straight that are sort of being remodeled to being reopened. Those are obviously not You're not sort of waiting on same store sales to come back. Do you mind like trying to sort of enumerate sort of what you think that is in revenue and potential EBITDA contribution. I mean, I'm just sort of trying to sort of give people an understanding of, look, if the company does nothing from here, same store sales don't improve, You get the $8 plus 1,000,000 of EBITDA from cost and you get another $X,000,000 of revenue and EBITDA from the clubs reopening and that sort of gives you a baseline assuming Things don't get worse, which you don't think they are, what sort of not in the numbers today. So you can sort of take the 18, multiply it by 5, gets you to 90.

Speaker 8

If it's 20% and then you add the $8,000,000 of cost reduction plus club sort of gives you a sense of what normalized EBITDA is ex casinos.

Speaker 3

Erez, do

Speaker 8

you want to share where I'm going?

Speaker 4

Yes, I got you.

Speaker 1

So only one is actually a remodel, that's the Abilene. And we'd closed that down and remodel because we were going to get a liquor license, Then we couldn't get the late hours. And so we basically went back to the BYOB for a very short period of time. And then Once we did that, the city worked with us up there to get us the late hour. So now we have we're going to be able to sell alcoholic beverages till 2 am.

Speaker 1

So we've rebranded it. Now we have Baby Dolls doing so well, we rebranded it to Baby Dolls. It will open hopefully in March. Website. And then as well as Lubbock Club is near completion and should open as March as well.

Speaker 1

So we should get 6 months of both of those locations. Both of those locations have gone from BYOB clubs to alcohol sales clubs. Should I'm guessing should be somewhere around $60,000 to $80,000 a week sales clubs, so somewhere between $3,000,000 to $4,000,000 annualized revenue And then they use a 40% margin rate or 30%, 35% margin rate where we're at here. I I think both clubs will be able to have VIP areas, so we should have plenty of service revenue at both those locations. The 3rd location We'll not open probably until the Q1 of 2025.

Speaker 1

So it won't really contribute in 2024, but it is a very large location. This location we bought in Fort Worth, Texas. We bought the property and we're going to revamp and reopen the club there. We're building the 2nd floor. We're doing a lot of construction.

Speaker 1

It's about a $3,000,000 rebuild of the building. So part of the building will still be there, but basically we're tearing down a big portion of the building, in the building, tearing off the roof and going up, all new parking and whatnot. So it will be a very Much bigger deal, but I also I think it will contribute in a much larger ratio and that location is probably Around $140,000 to $180,000 a week location when it reopened. So somewhere between $7,000,000 $9,000,000 And I think the margins will be at that larger location much closer to our 40% typical margins for a club of that size.

Speaker 8

So just humor me for a minute.

Speaker 1

And maybe even not.

Speaker 8

Humor me for a minute. If you say you do 7 for the 2 little clubs and 8 for the big club, but maybe even more, that's like $15,000,000 at a 35%, 40% margin, that's another $6,000,000 of EBITDA. And then add another For cost reductions, that's like 14, again, on a you're not going to get it this year, but I'm just saying sort of on a normalized basis. And if I take your sort of 17, now 18 and multiply it by 5, I'm getting to a number that looks like around 105,000,000 Without the casinos, without M and A, without sort of improving bombshells, just to sort of give people a baseline of like assuming You talked about do nothing on a capital allocation perspective. I'm sort of saying do nothing on an operating basis, I.

Speaker 8

E. The same store sales don't improve and all you do is Do your COVID sweep, get your clubs open, right? Then you're looking at something like $105,000,000 of EBITDA, not including casinos, not including M and A. I mean, are you sort of following my math?

Speaker 1

I'll follow your math, but I think you're we do have to have same store sales bottom out and we have to have same store sales

Operator

Hey, Eric, you're cutting out.

Speaker 8

Yes. You said we have to have same store sales and then we lost you.

Speaker 1

Okay. I think we have to have same store sales bottom and return back to that 3% to 5% growth In order to deal, we're going to have to obviously fix the bombshells get bombshells back to where their margins are Head in the right direction is not 1%, but back to their 15% to 18%, 22% margins where they need to be at. Then I think your 100 and some million is probably a very good number. Right now, I mean, if you got to figure we're probably $80,000,000 without anything new opening. You open up these 2 new stores provided that this was our worst quarter.

Speaker 1

So it's definitely doable, but there are some things that have to happen and some things have to go right. I suspect that, like I said, I think March Madness, I think we returned to basically 2017, 2019 type seasonality in the business, which means March should be a huge turnaround month. March Madness should be really big for us this year. And we should start seeing the typical spring fever that we see in March. And we do have 5 weekends in March this year.

Speaker 1

So while January may seem a little weaker. We had 5 weekends in January last year, which that weakness was and we had some pretty tough weather this year in January where we had it in February, I think the previous year. So we'll have to see how that weighs out as we get to the end of February. But I'm very optimistic this quarter Will be much better than the

Speaker 8

last quarter. What I was trying to do, Eric, what I was trying to do and I got one last question is just try to bridge for the audience that like This quarter did not this last quarter is your seasonally weakest. So if you were to say, hey, it's 20% of EBITDA. And then by the way, These are all the things we are doing today, right, whether you get a full credit for them for the full year. I know you like to think about things in years.

Speaker 8

I think a lot of people in the audience like to think about things sort of on a normalized basis, run rate basis. And so when you think about $8,000,000 of annualized cost and then you think about Having those clubs open, what does the business look like normalized exiting the year type thing. That's all I'm saying that like I think everybody understands you're not even going to have the big club open until the end of the quarter, end of the year. I'm just saying like all things being equal, If you get the cost cuts and the same store sales do bottom and you get these clubs open, sort of what does the business look like, right? Obviously, you can get casinos open too and then That's not in the numbers either, right?

Speaker 8

I'm just trying to sort of

Speaker 1

Yes, I mean from the club standpoint, I mean the clubs have been very strong. We've had a couple of quarters here where same store sales have declined a little bit. But the big part of our same store sales decline has been the Bombshells. Even though it's a smaller part of sales, it's been a much Those are significant when you start looking at 15%, 20% sales to in store sales declines. That has to stop.

Speaker 1

We have We've made some major changes. I think we've definitely bottomed at bombshells. In fact, I had a Big meeting with people, they ask us, it's hard to fall when you're lying down. So take chances, take risks. Let's make the changes.

Speaker 1

We've started the lingerie Thursdays, we've got some other promotions that we're getting ready to kick off on Monday, Tuesdays and Wednesdays. The clubs are getting ready to do some big promotions for Tuesdays Wednesday nights, which have gotten weaker at the clubs on the clubs for the clubs for us to really build those numbers up like we did back in 20 10 when we in our 2,009, 2010 era. So we're going to be beginning some of that stuff for Tuesdays and Wednesdays here in the next 2 weeks. And hopefully that will bring our Tuesdays and Wednesday numbers back up. So all in all, yes, and to get to where we're at, yes, can we do $100,000,000 of $25,000,000 of EBITDA?

Speaker 1

I don't see why not. Everything is lined up. Nothing's really changed. This quarter was a little off, but as far as the all the projects that we have that are coming online that are basically as drain on EBITDA And are draining our costs right now as they open in March, as they open in June, July and start contributing, it's a double bang for the buck. Instead of costing us money now, they're all going to be generating money.

Speaker 1

So we not only get on a run rate basis, not only the new income and the new revenue. We also lose the drag that they've been causing.

Speaker 8

Right. Well, you also don't have the casinos in this number either. I If you have the casinos open in 2025, we should do probably well in excess of $100,000,000 I mean those are potentially Those are 40%, 50% margin businesses. So if you have both of those open, I mean that's going to be a significant contributor as well.

Speaker 1

Yes. I remain very optimistic that we can get those casinos open by September provided that gaming issues our licenses. I mean, we're sitting here Basically, you're at the will of the state until the state issues our licenses, there's not a whole lot we can do. We will have the Rick's Casino ready to go in June. And I think that construction will probably be completed provided the building permits come in, in the next few weeks.

Speaker 1

Like we think For the Bombshells, we're very close going back and forth with the city's 3rd party company that does all the plan reviews. We're very close on that as well. I think we will get that hopefully and that casino should be built and ready to go maybe in June, but probably closer to August. So if we can get the licenses issued in the next 3 months, We'll be good to go. I just don't know where they're at, because they just don't tell you anything, right?

Speaker 1

They tell you if they need something, and they tell you when they're going to come visit you and those types of things, but they really don't give you any real feedback on Where they're at in the process or when they think the process will be completed.

Speaker 8

You talked about senior management changes at Bombshells. I mean, have you Has senior leadership the head of Bombshells, are they still there? And I guess your strip club or sorry, on the night club side, You sort of have a unique management program in that, the Nightclubs are managed by RCI Management Company and They've been with you for a long time and many of the managers sort of participate in the tip pool. It's sort of a more of an entrepreneurial culture. I mean, Have you considered bringing in someone from like a Twin Peaks or a Nohos Locos or another business and perhaps structuring a program where Someone who knows what good looks like sort of has a revenue share or profit share or some sort of thing.

Speaker 8

So they go up and down with the business. I mean, I don't know, but it seems like it's worked really well on the nightclub side, sort of the entrepreneurial culture and sort of the way you sort of manage those. I mean, have you thought about sort of doing something similar on Bombshells where you sort of get an Ed or get someone that sort of has real sort of financial interest in the success of the business and sort of bringing someone over from a business that has sort of executed. I mean, I don't think it's that hard. I mean, I think if you look at like some of the other businesses on the restaurant side, I mean, obviously, they've seen some weakness, but They're still sort of holding margin and whatnot, which means that means it's great opportunity.

Speaker 8

It doesn't mean unlike on the nightclub side where your peers are sort of down 30%, you're sort of Eons beyond them, it feels like your peers aren't that down on the restaurant side. So it feels like there's opportunity with the proper management. I mean, have you Sort of sorted through that and is there anything you can sort of discuss on that front? I mean, because that might make it easier to sell it or maybe you decide you don't want to sell You get someone that really can sort of do a 20% margin day in, day out.

Speaker 1

I mean, we are currently Testing all of our options and working through this process. I mean, we basically started process. In December, we made a few changes. We were not happy with those changes at the end of that quarter. We have made additional changes when the results came in, in January as we started seeing the Bombshells results, we started More changes.

Speaker 1

It was we were affected in Texas by weather, freeze days and then 2 weeks of rain and flooding. So there is some issues on are the changes we made in early January working or not. We will know that over the next Couple of weeks as we go through Super Bowl Sunday, I will tell you that Ed is helping out With Bombshells right now, as I am myself, being involved in monitoring stores, dailies, hourlies, sales and making phone calls and visiting sites and doing the things that we need to do to make sure the changes that we are that we have made are working and that we're seeing immediate results. I think that part of the problem was The current management team that we had in place in October through December just did not understand the sense of urgency. I think they have definitely got the sense of urgency well under it at this time.

Speaker 1

And they understand that this is not a we're going to wait till March to see results or we're We're going to wait until May to get results. No, we are going to see results this week and see results next week and we're going to see the results the week after that. And if the results aren't Going in the direction that we want, we were going to make more changes or until we get the formula correct. I think the concept is a great concept. The food is great.

Speaker 1

I think we've lacked in a couple of places. We've lacked in service and customer service. And I think we've lacked in that the focus of the current team has been strictly on the restaurant and not on The bar sales and of course, the bar sales are the highest profit margins. And it really showed in this last quarter, where I think I was taken off the ball on a few things. We've asked and told them to make Certain changes to the music formats, to the DJs, some of those changes were not made that we asked for.

Speaker 1

Website. Those are now being monitored on a daily basis. And I'd say the easiest way is I'm not being nice about it anymore. I'm not giving there is no time. Sense of urgency is today, not tomorrow, not next week, but today.

Speaker 1

And if they can't get the sense of urgency figured out relatively quickly like today, then tomorrow they'll be I will be making additional changes until So I get the formula right. I've done this many times. I used to be the turnaround and that's why I got my start in this business was buying clubs that were that needed to be turned around or businesses that need to be turned around and going in and fixing them and putting the right people in place. And that's exactly what I'm doing with Bombshells now.

Operator

Fantastic. Thank you so much for the questions, Adam. We are going to call up one last questioner. Ref, please take it away.

Speaker 8

Hello. Can you all hear me?

Operator

We can hear you.

Speaker 2

Yes, I can.

Speaker 8

Cool. Well, thanks for having me on, Eric. Mark Bradley, big time supporter, long time fan of Rick's and RCI. But I have a question for you, Eric. In 2 years, what does that ideal quarter look like for you?

Speaker 1

In the next 2 years? I mean, I want to continue to We can grow our free cash flow at a 10% rate. I want to see the casinos open. I think we need to within the next 2 years, I'd like to see us take another major acquisition in of 10, 15, 20 clubs in a single stroke, so that we're buying out another, what I call, major player in the industry like we did with the Birch Management acquisition like we did with the acquisition of BCGH. And of course, we did our first large one in 2012, when we bought out the Jaguars chain.

Speaker 1

So I'd like to see us take down another major chain in the next 2 years. I would like to see the casinos. We'll have results of operations from the casinos. So we'll know if we can take The entertainmentcasino model to other markets, whether that's Iowa, Indiana, Mississippi, what other small states, what I call regional casino states and even maybe even small regional casinos outside of Las Vegas in the state of Nevada, but not in Vegas itself. So we'll have that.

Speaker 1

And then obviously, I'd like to see Whether the Bombshells change is going to be able to grow into a great large franchisable chain or whether we're going to look at Having private equity take that out from us and take our efforts and energies and put them someplace else. That's kind of where I see us at in 2 years.

Speaker 2

Yes.

Speaker 8

Thank you. I really love that.

Operator

Fantastic. Thank you so much for that question and thank you, Eric and Bradley. On behalf of Eric, Bradley, the company and our subsidiaries, thank you and good night. As always, please visit one of our clubs or restaurants, website. Say hi to Bridget at the door and have a great evening.

Operator

Until next time.

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Earnings Conference Call
RCI Hospitality Q1 2024
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