RCI Hospitality Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 7 speakers on the call.

Operator

Of Rick's non GAAP financial measures. Finally, I'd like to invite everyone listening in New York City to join Eric and me tonight at 7 o'clock to meet management at Rick's Cabaret New York, one of RCI's top revenue generating clubs. Rick's is located at 50 West 33rd Street between 5th Ave and Broadway, a little in from Herald Square. If you haven't RSVP'd, ask for us at the door. And I'm pleased to introduce Eric Langan, President and CEO of RCI Hospitality.

Operator

Eric, take it away.

Speaker 1

Thank you, Mark, and thanks, everyone, for joining us today. Please turn to Slide 6. Despite the uncertain economy, the core strength of our business enabled us to generate $72,300,000 in revenue in the 2nd quarter compared to $71,500,000 last year. While GAAP EPS of $0.08 primarily reflected non cash impairment, Non GAAP EPS totaled $0.90 near the high end of analyst expectations. The Nightclubs segment generated 59 $400,000 in revenue in 2Q 2024 compared with $57,000,000 last year.

Speaker 1

Separately, the effort begun in mid February to improve Bombshell segment resulted in steady sales and better margins on a sequential quarter basis. Please turn to Slide 7. We also continued to make progress with our new project developments. These efforts are focused on developing new locations and upgrading existing ones to further grow the company. In doing this, we are committed to following our capital allocation strategy, concentrating on our core nightclub business, evaluating potential acquisitions and buying back stock.

Speaker 1

To that end, subsequent to the end of the quarter, we increased our cash position $20,000,000 by closing our planned bank loan. Now here's Bradley to go into more details on our results.

Speaker 2

Thanks, Eric. Please turn to Slide 8 to review our Nightclub segment. 2nd quarter revenues increased $2,400,000 year over year. This was primarily due to a $7,400,000 increase from acquisitions, which partially offset declines of $2,900,000 in same store sales and $2,100,000 from clubs in transition. By revenue type, alcoholic beverages increased 16.9% food 10.8% and other by 4.3%.

Speaker 2

However, service declined 8.3%. The sales mix reflected higher alcohol and food sales from newly acquired clubs and same store sales declined due to lower service revenues. As we mentioned in the Q2 sales call, PT's Centerfolds in Lubbock, a new club, did not open till late in the quarter. Baby Dolls Abilene, a reformatted liquor club, didn't open until early April. A BYOB club in El Paso temporarily closed during the quarter to start reformatting into a Chico's Locust Liquor Club.

Speaker 2

Although we didn't talk about it on the sales call, severe cold and rainy weather in Texas did have an impact in January as it had for other hospitality companies. We had to partially close partially or fully closed clubs and Bombshells for a number of days during that period. Impairment resulted in operating income of $11,000,000 or $18,600,000 of revenues compared to $18,000,000 or 31.6 percent. On a non GAAP basis, operating income was $19,800,000 or 33.4 percent of revenues compared to $22,400,000 or 39.3 percent. The non GAAP margin decline primarily reflected lower served reps revenues, higher insurance and increase in Texas patron tax and wage inflation.

Speaker 2

One of the reasons why insurance is higher is because we received a refund in the year ago quarter. Now please turn to Slide 9. The Dunkin' Burch acquisition has continued to perform well. We closed on the acquisition in mid March in 2023 with 4 clubs open. We finished remodeling and opened the 5th club in mid June 2023.

Speaker 2

As of fiscal 2024 Second Quarter, revenues have grown 23.9 percent from a year ago 3rd quarter, which was the 1st full quarter post acquisition, and operating margin has expanded 3 94 basis points. Locations have benefited from increased credit card transactions, reduced management costs and more effective RCI marketing management purchasing methods, partially offset by the increase in patron tax, which started in September of 2023. Please turn to Slide 10 to review our Bombshell segment. Revenues declined $1,500,000 year over year. This primarily reflected a $2,700,000 decline in same store sales and a $1,200,000 increase from acquired or new locations.

Speaker 2

Operating income was $700,000 or 5.5 percent of revenues compared to $1,800,000 or 12.4 percent. On a non GAAP basis, operating income was $800,000 or 5.9 percent of revenues compared to $2,200,000 or 15.4%. The year over year decline in profitability primarily reflected lower same store sales. On a sequential basis, however, revenues were approximately level and GAAP and operating margin expanded 480 basis points and 470 basis points on a non GAAP basis. As Eric mentioned earlier, this reflected the effort by upper management to return the brand to its core focus on being a sports bar.

Speaker 2

This began in mid February to improve results. Some key changes included replacing management, cost cutting and going back to the basics, touching tables, make sure wait staff is attentive among others. Please turn to Slide 11. Corporate expenses totaled $6,800,000 an increase of $600,000 on a GAAP basis. On a non GAAP basis, expenses totaled $6,300,000 an increase of $800,000 Both GAAP and non GAAP results primarily reflected more corporate level management from the Dunkin' Burch acquisition, casino pre opening operations and accounting and professional services due to the recently acquired clubs and new projects along with the timing of billing.

Speaker 2

Now on a sequential quarter basis, expenses declined $300,000 Please turn to Slide 12. This puts together consolidated operating income on a segment basis. Please turn to Slide 13. We have a couple of slides coming up that discuss free cash flow and adjusted EBITDA, which are on a non GAAP basis. In advance of that, we wanted to present the closest GAAP equivalent on this slide, which are operating and net income.

Speaker 2

Please turn to Slide 14 to look at some of our other key metrics. We ended the quarter with cash and cash equivalents of $20,000,000 During the Q2, we used $1,500,000 to buy back shares. 2nd quarter free cash flow was $8,800,000 or 12 percent of revenues. Adjusted EBITDA was $17,200,000 or 24 percent of revenues. Recent free cash flow and adjusted EBITDA conversion rates reflect the combination of lower percentage of service revenue and higher costs.

Speaker 2

Please turn to Slide 15 to review our debt metrics. Debt as of March 31 declined $2,200,000 from December 31 due to scheduled pay downs. The weighted average interest rate remained at 6.61%. Total occupancy cost at 8% declined on a sequential quarter basis. At 2.99x, debt to trailing 12 month adjusted EBITDA inched up just a bit, but continues to be in our comfort level of less than 3.

Speaker 2

Occupancy costs and debt to adjusted EBITDA reflect the fact that we were developing a number of projects. As they open and we began generating revenue and EBITDA, both metrics should improve. Debt maturities continue to remain reasonable and manageable. Please turn to Slide 16 for our debt pie chart. We continue to pay down all slices of our debt.

Speaker 2

The percentage share of the different slices remained largely the same as the Q1. As Eric mentioned, subsequent to the quarter, we completed our $20,000,000 cash out bank loan. Now let me turn the presentation back to Eric.

Speaker 1

Thank you, Bradley. I want to reiterate I'm sorry, please turn to Slide 17. I want to reiterate that everything we do is centered around our capital allocation strategy. We employ 3 different approaches subject to whether there is compelling rationale to do otherwise, mainly mergers and acquisitions, organic growth and buying back shares when the yield on free cash flow per share is more than 10%. Since refocusing myself on Bombshells in mid February, I'm starting to have our teams question everything like we did in 2016.

Speaker 1

This has caused us to rebrand some club locations and we are currently evaluating several of our non income and underperforming assets. We are doing performance reviews throughout our operations to ensure we are getting ROI from our team members and making sure we are awarding those members appropriately for great performance and fixing or removing others. We got a little complacent during the post COVID times when times are easy, and I believe we must return our focus on the basics of our capital allocation strategy. Please turn to Slide 18. We continue to make progress with new projects since our April 9 call.

Speaker 1

We've received our liquor license for XTC Dallas, which is being renamed and repositioned as Dallas Show Club. We received our liquor license for the planned conversion of BYOB Club in Harlingen, Texas into a Chico Locust Liquor Club. This should open this quarter. We also firmed up our plans to open Rick's Cabaretne Steakhouse in Central City without gaming in our 4th quarter. Please turn to Slide 19.

Speaker 1

By sticking to our capital allocation since the end of fiscal 2015, we have generated compound annual growth rates of 10.2% for total revenues, 12.1% for adjusted EBITDA and 17.2% for free cash flow. We also reduced our fully diluted share count even after shares issued for acquisitions. I'd like to say thanks to our local and dedicated teams for all their hard work and efforts and all our shareholders who believe in us and make our success possible. Now here's Mark to start the Q and A session.

Operator

Thank you, Eric and Bradley. The audience to free up space. To start things off, we'd like to take questions from Rick's analysts and then some of its larger shareholders. First up, we have Scott Buck of H. C.

Operator

Wainwright. Scott, please take it away.

Speaker 3

Hi, good afternoon, guys. Thanks for taking my questions. Bradley, apologies if I missed it. But could you give a little color on what the increase in other charges was

Speaker 4

in the income statement this quarter?

Speaker 2

You're talking about the impairment. We had $8,000,000 worth of impairment charge.

Speaker 3

Okay. All right. Thanks. Appreciate that. And then just

Speaker 4

I was hoping we could

Speaker 3

get a bit of an update on M and A. The call a quarter ago, it sounded like you guys were close to announcing something. I don't remember seeing it. Kind of curious what if there's a hold up or if the situation has changed there?

Speaker 1

Yes, I'll take that, Bradley. Basically, we had 2 LOIs. We have pulled 1 and the other one is in kind of a negotiation lock at the moment due to the potential of unknown liabilities and the indemnification clauses that the company would require of the seller. I don't know if that's going to move forward or not at this time. I wouldn't say it's very promising.

Speaker 1

We are looking at several other acquisitions right now as well though. And I think eventually these people will figure it out and come back to us because no one's going to buy unknown liabilities from anyone. So they're going to have to figure that out. And unfortunately, the way the licensing works in that particular market, their existing corporation has to be bought in order to keep the license valid. So we'll see if that one goes on.

Speaker 1

I'm looking at other locations around the country. And I figure at some point here, I'd say sellers are getting more reasonable now. We just got to get some of the terms worked out with cash and carry of notes and whatnot. So we'll figure that out shortly.

Speaker 3

Great. That's helpful, Eric. And second, I was wondering, we're about halfway through the Q2 now, I mean, 2nd calendar quarter anyway. Curious if you could give us a little update on the trends you're seeing. I'm guessing it probably looks fairly similar to the Q1 or the Q1 calendar quarter.

Speaker 1

Yes. Well, April beat January, which was very important to me. We now need May to beat March and then our June numbers to beat February so that we can be up sequentially on the quarter. The 1st week of May was very well. I don't know if you follow sports, but for those that do, you should know that we have 4 NHL teams and 4 NBA teams that are all in playoffs modes right now.

Speaker 1

We've had some great games out there, seeing a lot of traveling customers from our markets to our markets. For example, in Colorado right now, we have the Dallas Stars playing the Avalanche. So we're getting Colorado fans in Dallas and Dallas fans in Colorado, which is great for us. We have clubs in both markets, as well as the Denver Nuggets and the Timberwolves playing in Colorado and Minnesota. So our Colorado locations are basically doing very well from both the NHL and the NBA and so is Dallas because you have the Mavericks in there as well.

Speaker 1

So the Knicks and the Rangers are both in. So you get hockey and basketball in New York, which has been great for New York as well. And then of course, we have the Panthers down in Florida. So all in all, very solid sports lineup. Last year, Mother's Day weekend was very weak weekend, one of the weakest of the quarter.

Speaker 1

This year, I think we should have much better Mother's Day weekend because you basically have 4 games that will affect between hockey and basketball basically starting tonight all the way through Monday, I believe. So very excited about that.

Speaker 3

Great. That's helpful. And then last, if there's any update you can give us on timing in Central City, that'd be helpful.

Speaker 1

Well, timing is just unknown. Other than we're going to do everything we can do to get the club open in this quarter. So we'll have the club and the steakhouse will be open in this quarter. I've gotten some news from gaming where they've requested a very large amount of money to continue our investigation through a third party and gave us a very long timeline from where we are today. And I'm currently basically evaluating that timeline with our new refocus on capital allocation, doing a lot of math right now and calculating whether or not we want to even continue to focus on that at all or take our money and energy and focus instead of casino operations get back to us back on our core business.

Speaker 1

If so, we would probably divest a property or 2 of the properties. Obviously, we'll keep the Rick's location and the steakhouse up there, but we may end up with actually withdrawing the gaming license at some point instead of paying all this money for the investigation and waiting the timeline they want. I just don't know yet. When I know, I will get that information out once what decision has been made. But there's just a lot of new information that's come in, in the last week or so.

Speaker 1

And we're evaluating all of that at this time, and we'll have a better understanding where we're going with that as we move forward.

Speaker 3

I appreciate the transparency there. Thanks again.

Speaker 2

Always.

Operator

Thanks so much, Scott. Next up, we have Anthony of Sidoti. Anthony, please take it away.

Speaker 5

Good afternoon and thank you for taking the questions. So first, as far as the quarter, your service is revenue were down a little over 8%. Can you share more details in regards to this decline? And what is your strategy to improve services as a proportion of your revenue mix?

Speaker 1

I can nail it right on the head for you. About $1,300,000 of XTC in Dallas, as some people are aware and some aren't. Dallas passed a new city ordinance. It's in current litigation, forcing us to close the club at 2 o'clock. That was a major after hours club, did most of its revenue between the hours of 2 and 5 am.

Speaker 1

We have rebranded that to the Dallas Show Club now or in the process of our liquor license then. We have continued operations. I think we were closed 1 night as we converted from BYOB into liquor. The rest of the conversion will happen as we're open. That's a big part of it.

Speaker 1

And then the rest is, of course, Miami's service revenues last year were much, much higher than they have been this year. And that's majority of it. Obviously, there's little bits here and there. There's success stories in some markets like New York and Minnesota, and there's other clubs that are declining a little bit. Most of those offset, the major part of it was the XCC Dallas and the Miami clubs.

Speaker 5

Thank you, Eric. And then, what were the main factors that drove the sequential margin gains at the Bombshells? And do you think that's sustainable?

Speaker 1

Well, my goal with Bombshells is to return us to $60,000,000 of revenue with 15% margins, which would put us about $9,000,000 in operating income on an annualized basis. At this point, we will probably work very hard at strategic options with that asset, whether it's a partnership, whether it's selling the assets outright, whether it's selling part of the assets or bringing in partners to expand the process at that time once we prove we can return it to those numbers. I think that's a 6 month process from now, at least I hope so. I think the 15% margins are maybe doable earlier, The revenue is being a little more difficult because while part of it has been management issues, the other part of it is the economy and people just not spending as much and not drinking as much. Yes, I believe that we will have that corrected.

Speaker 1

I think we've made some major changes. We've definitely lowered our cost. We've changed out a lot of the management teams in certain club or certain stores, certain markets. And we've been doing some hiring. We still have about 3 spots that we need to find the right people for, but the people that we're bringing in are motivated and excited to be part of our team.

Speaker 1

And I think that the concept is definitely heading in the right direction

Speaker 2

so far.

Speaker 5

Got you. Okay. And then you also have quite a number of projects in the pipeline. So as you're looking to open the Rick's Cabaret and stay

Operator

Hey, Anthony, you're on mute.

Speaker 5

Can you hear me now? Hello? Yes.

Speaker 2

Can you hear me?

Speaker 1

Hey, Eric, you're on mute. Yes. I'm sorry. They muted me too. Oh, okay.

Speaker 1

Now we're both back. We had a speaker who wasn't muted, and I think they muted all instead of just that speaker. Okay.

Speaker 5

All right. Sorry about that. I didn't touch my phone.

Speaker 1

Yes. I thought you needed.

Speaker 5

Okay. So as I started saying, so you guys have a quite number of projects in the pipeline, but just wanted to focus more on the plans for the Central City location. So you are planning to open the Rick's Cabaret Steakhouse in 4Q even if there is no gaming. So how should we think about the revenue contribution? What's that that's up and running?

Speaker 5

And then if you do get gaming there, what could that contribute to revenue if you go ahead? I know there is uncertainty with that, but just hypothetically speaking, how should we think about that?

Speaker 1

I have not thought about the gaming at all anymore. My focus is on the club itself. I would like to I think the club can open up in the $100,000 per week range, which puts about $5,000,000 annual. We run our 40% margins. We'll make about $2,000,000 a year out of it.

Speaker 1

I'm only opening 4 days a week to start. As we build up our clientele base and our entertainer base in that market and we open 7 days a week, I think we can grow that to somewhere between $8,000,000 $10,000,000 annually at 40% margins. So that's my focus right now. Like I said, with the gaming, I'm weighing a lot of things right now to see what makes sense or doesn't make sense for us as a company. I can tell you that from what we're being told, we're 18 months to 2 years away at a minimum.

Speaker 1

There are 2 other licenses that have been applied for in Central City. They're now crossing the 3 year mark without denial or approval. And so I just like I said, we've got a lot of information that's coming in the last week or so. We're going to weigh that out and probably within the next 2 weeks, maybe 3 weeks, we will have a plan of action and we will let everyone know what our plan is there. To me, it's not really relevant or material to earnings this year or next year, obviously, if it's 18 to 2 years away, 18 months to 2 years away.

Speaker 1

So we're going to focus on what we do know. What we do know is we can open that club and the steakhouse. And I think we'll do very well in that market with it. And we're going to continue to rebrand some of the cheapest or some of the BYOB locations in the cheapest, so that we don't face anything like we did in Dallas in the last 6 months. We're just getting ahead of everything just in case the laws don't change.

Speaker 1

And we think these underperforming assets and some of the BYOB are underperforming and they will do much better under the new branded concept. So that's kind of where our focus is. I think we've got to one thing I'll say about being having to focus on Bombshells for the last two and a half months is that it's really brought the team, especially upper management focus back to what are we really doing, what is our capital allocation. I don't know. I guess really putting microscope to the existing assets.

Speaker 1

And that's why you've seen us change. I mean, we've had 4 clubs now that we're going to close and rebrand. I think that's going to be a big increase as we move forward to the end of this year. We've got the 3 Bombshells coming online by the end of this year as well, I believe, as well as sometime in the Q1 of fiscal 'twenty five, I think we can get the Baby Dolls West location open. And then we have no more drag.

Speaker 1

I mean, to put it simply, we've had so much drag. We've got to get rid of this drag. We've got to get focused on much quicker ROI that we get from acquisitions versus trying to build these new locations. I mean, yes, it was I think it's a great theory and I think it was working, but the system is broke right now because governments just take forever. Building permits taking forever.

Speaker 1

Inspections take forever. And it's adding 6 months' time. Well, when interest rates were 4% 5%, that extra 6 months didn't cost us very much. Well, now the interest rates are 8.5%, 9.5% for corporate money, It's just the carrying costs become too much. And so we have to reevaluate that.

Speaker 1

We have to run all these we have to go back and do all the 5th grade math over again. And that's what we're in the process of doing. And you'll see us through the rest of this quarter. And I plan to have everything lined out in the next 6 months, which gets us everything on track running into fiscal 2025.

Speaker 5

Got it. Okay. And then so as you rebrand some of the clubs, I mean, what's your expectation as to the lift in sales that you will get after you do such a rebranding?

Speaker 1

Liquor clubs tend to run some liquor clubs tend to run obviously more sales than the BYOB clubs. I'm assuming we can get those high enough that we will also have better total margins. The margin rate may be about the same, but because the revenues are higher, obviously, the bottom line should be higher. We've ran some models, but we've really only converted 1 club so far. And of course, the new club that opened in Lubbock.

Speaker 1

As we do El Paso and Harlingen and the FCC Dallas that's now been converted as of last week, I'll probably be able to give you more color on that as we get into the next call.

Speaker 5

All right. Well, sounds good. Thank you and best of luck.

Operator

Fantastic. Thank you so much. Next up, we're going to have Rob Maguire of Granite Research. Rob, take it away.

Speaker 4

Mark, thank you. So Eric, you discussed what's happening or avoiding what happened in Dallas again. But if you move from a BYOB to a liquor club, do you work with a different sort of new regulators?

Speaker 1

Well, you have alcohol, the TIBC in Texas becomes a new regulator for you, yes.

Speaker 4

In general, do you find that that creates an easier environment or I'm wondering if you could elaborate a little further about the strategy helping you avoid what happening with XTC?

Speaker 1

It's just irrelevant. They've come in with time, place, manner and decided that all the clubs in Dallas needed to close at 2 o'clock if they have an adult entertainment license. I believe it's unconstitutional. If you close me, you need to close every business. So far, the judges disagreed with us.

Speaker 1

Well, they agreed with us, then they disagreed with us. And so now we're going back and forth with this. The litigation will take too long for us to sit there with that club not making any money. And so we just converted it. And to avoid that in other markets, not every market, because some of our BYB clubs are still very successful, and we'll just take the chance on those.

Speaker 1

But and what I consider the underperforming markets when we ran analysis like Harlingen, El Paso and Abilene, as we believe that we will do much better. These clubs have been around since early 2000s and some of the areas have changed, the market has changed and the club stayed the same. And so we've gone and said, look, we believe these particular locations will do much better under this new concept that we acquired. Before we acquired the Dunkin' Burch acquisition, we didn't have this concept. But now that we have this concept, we're able to take it and run its numbers and its demographics and against some of our BYOB clubs and those 3 particular clubs, especially Harlingen and El Paso and even the SCC in Dallas, I think we do very, very well with this new console.

Speaker 4

Thank you. And then with regards to the economic uncertainty, you talked about in the last call how you're starting to discount on Monday Wednesday night. Are you seeing an uplift in terms of traffic on that? Or in general, could you just comment about what you're seeing that's working in the clubs as you adjust in this environment?

Speaker 1

Yes, I mean running specials are helping for sure. Sports is helping tremendously right now. So that's been a big plus for us in this quarter and last quarter I mean, this month and last month. We will see how that runs out through June, depending on who makes finals. Obviously, weekends parties, VIP parties, just getting our teams much more involved and much less complacent, I think is really helping.

Speaker 1

As you're chugging along, you don't realize sometimes that you get complacent. We've hired some new managements in the clubs as well as the bombshells, and we're seeing results from that. So it's a lot of just getting everybody back on track, returning back to the basics. And that's what got me thinking As we returned to the basics in the restaurants, returned to the basics in the clubs, I thought to myself, well, are we returning to the basics at a corporate level? And what are the basics at the corporate level?

Speaker 1

And I said, well, let's go back to 2015 2016 when we adopted this capital allocation strategy and must reevaluate our assets like it's 2015 again. It was highly successful for us. It worked very, very well. And well, I think we've stayed true to the capital allocation strategy. I think we got a little complacent on existing assets, existing team members, and it was easy.

Speaker 1

We were making lots of money in 2021 and 2022. 2023 was kind of a wake up call for us. And as we moved into the last quarter, especially with Bombshells, that kind of became a wake up call. And then we've seen some decline in same store sales at the club levels. And I said, we got to cut this off immediately at the club level.

Speaker 1

We can't let it go on as long as we did at Bombshells. And so that's where we're at today.

Speaker 4

That's all really helpful. Thank you. That's it for me, Mark.

Operator

Thank you very much, Rob. I'd like to encourage anyone in the audience with a question to please raise your hand and we'll bring you up. Next up, we'll have Steve Martin. Steve, please take it away.

Speaker 1

Well, most of my questions have been addressed. What are you seeing from the competition? And do

Speaker 4

you think you're outperforming the competition

Speaker 1

on the club side? On the club side, in most of our markets where we're number 1 or number 2, we are definitely outperforming our competition. I talk to other club owners. I think overall, they're seeing 15% to 30% declines, probably an average of 20% declines from their peaks in 2021, 2022 and off again down in 2023 and now they're down again in 2024 so far. It's a struggle for the mid level consumer.

Speaker 1

The majority of clubs cater to that mid level consumer. So I think it's just one of those things we're going to work through over the next few months. And it's not that we're I think a lot of the misunderstanding because I hear people like it starts reminding me in 2,009 when everybody talk about us going out of business when we were still making $6,000,000 We're still making $60,000,000 $50,000,000 right? It's not like we're not making a ton of money still. We're not going out of business.

Speaker 1

It's just we're not making the same type of easy revenue and easy money that we made in 2021 2022 when there was just tons of free money and we were the and in 2021 we were some of the only clubs open our only businesses open. In 'twenty two, there was just so much free money left out there. Things tightened up, interest rates went up, the consumers being squeezed in multiple places with inflation. We're seeing wage inflation ourselves. And so it's changed and we've had to adapt to that and change with it.

Speaker 1

Okay. And you've put in a lot of cost containment measures. How long do you think that's going to take for those

Speaker 2

to show through into the earnings?

Speaker 1

Well, I mean, I think you're seeing some of it right now because our revenues were down, but our EBITDA adjusted EBITDA wasn't down as much, I think, on a same store sales basis. And I think so, I think we're seeing some of that. We made a decision about a week and a half ago as we got through the end of April and said, we're cutting off all future project costs that are controllable costs. We can't get rid of carrying costs and just from that, but we're not going to hire any new employees. We're not going to continue the management training or any kind of training for these new concepts until the day they're complete.

Speaker 1

So when we have a direct opening date, then we'll start all that, then we'll carry those costs. But we're not going to have any pre opening costs that we carry for we think we're going to open in 3 months, but it takes 9. So we end up carrying those costs for 9 months. I said, we're just going to wait from now on. If it takes us an extra month or 2 to get open, cost me nothing it cost me very little to have a store sitting there ready to open and not open because they don't have the staff, then it cost me to carry that staff for 9 or 10 months.

Speaker 1

And so we've cut all of that type of stuff. I mean, this is all going back to the cap illustration strategy where we're not making any investment till we know exactly what the ROI is on it.

Speaker 2

All

Speaker 1

right. Thank you. Thanks, Steve.

Operator

Thank you very much. Next up, we'll have Orchid Wealth. Please take it away. Hey, Orchid Wealth, I think you're on mute still.

Speaker 6

Hey, guys. Hey,

Speaker 2

guys. Hey, guys.

Speaker 5

Hey, Jason.

Speaker 1

How are you?

Speaker 6

Good, man. Obviously, the main thing that I'm focusing on right now is just with the environment that you're in, have you noticed any significant impact from people calling you and are they still holding on to their prices or these people open to negotiation?

Speaker 1

We've been negotiating price pretty well. A lot of it right now has been terms and uncertainty. And people have been trying to hold on to their 2021, 2022 deals, but now they've got through 2023, we're into 2024. And I think people are starting to wake up to that 2021 and 2022 was kind of a fluke. There was, like I said, just a lot of free money out there and people are coming out of COVID and a lot of businesses are closed.

Speaker 1

Things are normalizing. I mean, who would think we'd be thinking normalization 5 years later, but that's really where we're at. I mean, it was unprecedented to close so many businesses or close down the country at one time like that. And then for such a long period of time when it was supposed to be 2 weeks. And so I just think there's been a lot of adjustment going on.

Speaker 1

We're getting back to that normalization. And like I said, I think a lot of I don't think it's just us. I think a lot of companies, a lot of people got complacent. I was talking with Mark today when I came into the office, his office here in New York City. And I think last time we were here, there were 15 people in this office at most.

Speaker 1

And most of the time we come over here, there'll be 8 or 9. And I said, you guys got 35, 45 people in here. What's going on? He goes, everybody's back to work. And we're seeing that in our numbers in New York City as well to clubs.

Speaker 1

So I think, like I said, I think it's just going to return back to normal. And I don't know what that means just yet, but I do know that we'll be staying on top of it and staying ahead of it instead of playing catch up like we've done in 2023.

Speaker 6

And my assumption is when I roll take out the numbers for all of the years previous years before the let's call it the COVID bump, I kind of feel like you guys are still on trend line from what you were for the previous 5 years of what you had been doing. And just in terms of overall, just you're growing and you have this like kind of having like a heat wave, you sell a lot of ice cream and you get back to normal temperatures, you're going to sell about a certain historical number of ice cream. I mean, I'm assuming things are along those lines or are you noticing anything different?

Speaker 1

Yes. When we compare to 2018 2019, we're in pretty good shape. I mean, you have certain markets. Minnesota was dragging for a while, but I mean, they not only had COVID, you had the George Floyd issue up there, you have major changes in that market that had affected it for a while. But the Tea Wolves are breathing life in the downtown again.

Speaker 1

I'm seeing numbers that we hadn't seen in Rick's Minneapolis in a long time. The Seville Club is doing much better. So I'm optimistic that that market is going to finally turn. New York is turning as people have returned back to the offices. So I'm very optimistic there.

Speaker 1

The biggest problem we have is Florida was just incredible, right? When you took to us, these who never their highest year ever was 26 $800,000 or $26,600,000 in 2018 or 2019. And then in 2022, they did $39,600,000 gross. So and then I think last year, dollars 35 and change or $34 and change. So that's a $5,000,000 change of 50s is a big swing on a quarterly basis for same store sales.

Speaker 6

When it comes to buybacks right now, obviously you guys have your chart for when you should be aggressive or not. But obviously with the influx of the cash that you're going to have on the balance sheet and stuff, it's I mean because it sounds like you're not in any negotiations or anything close by where you're going to be doing any big deals at least at the present moment. Are you prepared to be aggressive and get back those 130 1,000 shares that you put out at $80 close to 2 years ago?

Speaker 1

I'm thinking a little more aggressive terms on that. I would like to get us back under 9,000,000 shares total outstanding. So I'd like to buy back a little over 300,000 shares at some price here depending on what the market opportunity is for us. I don't know when I got aggressive. We just closed the loan.

Speaker 1

We closed the loan on Bradley, can you remind me what to us today. Today is Thursday. We closed loan Tuesday rather or when the 8 ks went out, whenever the 8 ks went out. We closed loan within the last week, I can tell you that. I thought about getting pretty aggressive.

Speaker 1

I decided that after talking with our attorneys that I should wait till after this call, make sure all the relevant data is out there. Now with the casinos kind of in limbo, we'll probably stick to a for at least the next 2 weeks, we'll probably stick to a more moderate buyback if we start buying back stock. We may not. I don't know. We may buy maximum under Safe Harbor.

Speaker 1

I can tell you we probably will never buy over a Safe Harbor amount in a single day. We will stick to the SEC safe harbor provision for our buybacks.

Speaker 6

And what's that number approximately?

Speaker 1

25% of the average daily volume. Man, it's been so long since I had to worry about it because we actually hire real we used to use a little local stock broker. Now we actually use an investment bank to do our buybacks. 25% of the average daily volume over a 25 day period, something like that, 30 day period or something, 10 days, I don't know.

Speaker 6

Looks like 8,000 to 10000 shares is what you could take down?

Speaker 1

I think it's a little higher than that, but I'd have to get the I mean, I can ask them. Yes, it goes up to 14,000 shares, I think, last time I looked.

Speaker 2

Right.

Speaker 6

But yes, more than enough cash to take back 130,000 shares? I mean, we're setting

Speaker 1

up $45,000,000 in cash now that we closed the loan. So I mean, I could use the whole $20,000,000 to buy back stock if I well, I could use $13,000,000 of it. So the Board would have

Speaker 6

to approve

Speaker 1

for me to go over that amount. But yes, I mean, we could do that. We'll see what the stock does. I just obviously, when it's super cheap, I get very aggressive. You've seen that before.

Speaker 1

And when it's at these prices, dollars 100,000 a day or $200,000 a day is I don't consider that too aggressive. I consider that just a nice casual buyback with cost average in and out, and we buy some stock at $48,000,000 we buy some stock at $56,000,000 It all works out in the wash for us and over the long run over a 5 year period it won't matter. What we bought it for today it will be a much higher price and it will be 5 years from now.

Speaker 6

Well, I mean, you got 2 deals. You got shares at 80 and you got shares at 60. So anything right now is just Yes, those next 3 100,000

Speaker 1

shares and under 60,000,000 we're benefiting, right? I mean we bought real assets. Those we bought real estate, we bought cash flow. Both of those acquisitions are performing much better than they were based on the price that we bought them up. So, you mean, you see the Duncan Burch changes of 23% increased revenues, margins up to 32%.

Speaker 1

I mean, that's a big change from where we bought it at a year and a half ago or a year ago, right? Yes, a year ago.

Speaker 6

And then with like obviously over the last number of years here, you guys obviously have a huge amount of real estate portfolio right now. I'm assuming like on a lot of these things when you did with the Bombshells, you had ancillary property and stuff. Do you still have parcels and stuff that you could sell off and like what possibly could you sell off in terms of just land or places next to the clubs that could that doesn't do you any good, it'd be worth selling.

Speaker 1

On a cost base? On a cost base, it's about $4,000,000 on a cost basis. On a market basis, we have one property that we just turned down $9,000,000 for. I believe it's worth.

Speaker 6

And what did you pay for that? $2,150,000

Speaker 1

about 4 years ago maybe. We've got basically got 3 parcels of land left. The Aurora property that we recently bought for Bombshells that we're not going to develop as Bombshells, that property is up for sale. I expect to have a contract on that hopefully in the next 2 weeks according to the broker that I put on that. I guess I turned down $9,000,000 for a property in the Houston, Texas area, it's about 19 acres.

Speaker 1

I believe the property is worth about $30 a foot if we got prime price for it. But in this market today, probably closer to $14 a foot, which will be around $12,000,000 $14,000,000 I know I think the price we got offered for it was closer to $10 a foot. If somebody came in at $12 a foot today, I'd probably take it and walk. Friday was a fast closing. I talked about broker pretty regularly.

Speaker 1

There's a lot of it's the largest contingent piece of land within about 5 mile radius on 2 we're on an intersection of 2 major highways. There's a big giant Bass Pro shop on the opposite corner. It is a prime piece of real estate today. It wasn't when we bought it because it was zoned or in a special use zone. I petitioned the city about a year and a year and a half ago to rezone that property into basically C1 commercial, which is basically any viable commercial use.

Speaker 1

So that property and that's where the value was created is when we changed the zoning, that property became very valuable. And as all the other large pieces around us got bought up, because we had originally a plan to develop that property into basically a mini industrial park, light industrial park. And then, of course, I got, yes, look, RCI is not really in the development business, let's just sell this property. And so I started shopping it out there to sell it. So we'll get it sold, I think, at some point in the next I'd like to I mean, in the next 6 months really.

Speaker 1

I'd like to get everything I'd like to really or actually 4 months now because I'd like to get everything lined up by October 1, 2024 for our fiscal 2025 and get everything back in line for our capital allocation strategy like we did in 2016 2017.

Speaker 6

Okay. And I'm assuming anything that you're buying at these current levels is meeting your capital allocation strategy?

Speaker 1

I think everything we bought period has met our capital allocation strategy. I don't think we have anything invested. I think the mistake, if we made any mistake, was estimation of time to open. And so therefore, the carrying costs are increasing. And I think we'll still be I still think we'll be within our capital allocation strategy with additional carrying costs on everything except for maybe these casino properties because this timeline is getting crazy.

Speaker 1

So we've got to weigh that math still. But on everything else, the Bombshells properties, even if we open 6 months late, maybe the return on investment is 25% instead of 45%, but I still think the return on investment will be very fine. Cash on cash wise, we'll just be still well within the ranges of our capital allocation strategy.

Speaker 2

Well, if you

Speaker 6

can't buy clubs, buy stock.

Speaker 2

So all right, thanks so much guys. Yes, thank you.

Operator

Thank you very much, Eric and Bradley, as well as to all those who asked questions. For those who joined us late, you can meet management tonight at 7 at Rick's Cabaret New York, one of RCI's top revenue generating clubs. Rick's is at 50 West 33rd Street between 5th Ave. And Broadway, a little in from Herald Square. If you haven't RSVP ed, ask for Eric or me at the door.

Operator

On behalf of Eric, Bradley, the company and our subsidiaries, thank you and have a good night. As always, please visit 1 of our clubs or restaurants and have a great time.

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Earnings Conference Call
RCI Hospitality Q2 2024
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