RCI Hospitality Q3 2024 Earnings Call Transcript

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August 8, 2024

There are 6 speakers on the call.

Operator

Greetings and welcome to RCI Hospitality Holdings Q3 2024 Earnings Conference Call. You can find the company's presentation on RCI's website. Go to the Investor Relations section.

Operator

All the necessary links are at the top of the page. Please turn with me to slide 2 of our presentation. I'm Mark Moran, CEO of Equity Animal. I'll be the host of our call. I'm coming to you from the Commonwealth of Virginia, Eric Langan, President and CEO of RCI Hospitality and CFO Bradley Hsieh are in Houston.

Operator

Please turn with me to Slide 3. RCI is making this call exclusively on X Spaces. To ask a question, you will need to join the space with a mobile device. To listen only, you can join the space on a personal computer. At this time, all participants are in a listen only mode.

Operator

A question and answer session will follow. This conference call is being recorded. Please turn with me to slide 4. I want to remind everybody of our safe harbor statement. You may hear or see forward looking statements that involve risks and uncertainties.

Operator

Actual results may differ materially from those currently anticipated. 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. I also direct you to the explanation of Rick's non GAAP financial measures. Now I'm pleased to introduce Eric Langan, President and CEO of RCI Hospitality.

Operator

Eric, take it away.

Speaker 1

Thank you. If everyone will turn to Slide 6, like to thank you for joining us today. And we made a lot of progress during the Q3. It reflects the 1st full quarter of our back to basics approach to our business and our capital allocation strategy. Specifically, we are taking aggressive actions to increase revenues, reduce costs, expand margins.

Speaker 1

We're concentrating our core club business, improving the bombshells and buying back shares, all with the goal of increasing free cash flow per share. Yes, we had a lot of impairment that affected our GAAP results in the Q3, but that was non cash. The key takeaways are that Nightclubs achieved record revenues with year over year increase in total sales and the Q1 of year over year increase in same store sales since the Q2 of fiscal 'twenty three. Sales also increased from the last quarter. Bombshell sales increased sequentially and margins grew from 5.9% last quarter to 10.8% this quarter, reflecting our back to the basics approach starting in February of 2024.

Speaker 1

Looking at our list of new projects, we have opened, converted or enhanced 7 locations to date this fiscal year and we are working on opening, reopening or reformatting 7 more as fast and efficiently as possible. As per this effort, we formally withdrew our application for the Colorado Casino license to better focus on projects that will provide more immediate results. Looking at our capital allocation strategy, we added $20,000,000 to our war chest through a bank real estate loan. The Board of Directors authorized increasing the amount available under our share repurchase program by $25,000,000 and we took advantage of our low stock price during the 3rd and 4th quarters. To that end, I'm pleased to announce we have reached our short term objective of reducing shares outstanding to less than CAD9 1,000,000.

Speaker 1

Please turn to Slide 7. I'm also pleased to announce that part of our as part of our share buyback program, we bought back 700,000 shares in the open market reducing our share count by the same number we used in our big October 21 March of 2023 acquisitions. As you will see on this slide, we bought back those 700,000 shares at a 22% discount to the average share price used in those transactions. Please turn to Slide 8. Over the last few years, we have achieved some major accomplishments.

Speaker 1

We more than survived COVID. We then managed through the post COVID bounce. Then we made our 2 biggest acquisitions ever, successfully integrated them and improved their results. Now that things have settled down and given the uncertain economic environment, we want to take a good hard look at what we should do next to best increase free cash flow per share and return value to our investors. We are now working on a 5 year strategic plan.

Speaker 1

We plan to implement it starting in the fiscal quarter 2025 fiscal year 2025 and tell you more about it on our next earnings call. Here's a general outline. Right now, we see 2 pillars to the plan. The first is to continue our back of the basics approach to our business. We want to make sure our locations are running as efficiently and profitably as possible.

Speaker 1

Our priorities would be to grow same store sales, improve margins and rebrand and reformat underperforming locations or sell them. The second pillar is capital allocation. Assuming no growth, we should have approximately $250,000,000 of free cash flow to deploy. Our priorities would be to target less than 10% of discretionary free cash flow to ensure a stable and modestly growing dividend, target about 50% of discretionary free cash flow for selective M and A focusing on base hits and the occasional home run, making sure we capture synergies at the acquired clubs and to target any excess cash not used in M and A and dividends for regular share buybacks. Now here's Bradley.

Speaker 2

Thanks, Eric. Please turn to Slide 9. The core strength of our business enabled us to generate $76,200,000 in revenue in the 3rd quarter. GAAP EPS was a loss of $0.56 per share. This primarily reflected non cash impairment of $17,900,000 in the current quarter.

Speaker 2

A good portion of that is related to the impairment of right of use and leasehold improvements on several operating leases. Now on a non GAAP basis, EPS totaled $1.35 In addition, free cash flow reached a year high of $13,800,000 as did adjusted EBITDA at $20,100,000 Please turn to Slide 10. Nightclub revenues of $62,800,000 increased $374,000 year over year. This primarily reflected same store sales growth of 1.7 percent, 2 new and reformatted clubs and a strong pro sports playoff lineup in May. In turn, this was partially offset by some temporary closings of clubs being reformatted to liquor from BYOB and severe weather in Texas and South Florida.

Speaker 2

By revenue type, alcoholic beverages increased 4.9% food, merchandise and other increased by 5.1 percent and service revenue decreased by 5.3%. The different growth rate primarily reflected a higher alcohol and lower service revenue mix from clubs acquired in the past 1.5 years. Non cash impairment of $7,600,000 in goodwill, SOB and leasehold improvement impairments related to 6 clubs GAAP operating income was $13,600,000 compared to $20,400,000 with a margin of 21.7 percent of revenues compared to 32.7 percent. Non GAAP operating income was $21,900,000 compared to $23,600,000 with a margin of 34.9 percent compared to 37.7 percent. Comparing to the last quarter, revenues increased 5.8%.

Speaker 2

Non GAAP operating income increased 10.5% and margin increased to 34.9% from 33.4%. All of these improvements reflected higher sales, including service and reduced costs. Please turn to Slide 11. Bombshell's revenues of $13,100,000 declined by 8.7%. This primarily reflected reduced same store sales and temporary closings due to severe weather in Texas.

Speaker 2

In turn, this was partially offset by 3 locations not in same store sales: Bombshell San Antonio and Stafford in Texas and Cherry Creek Food Hall and Brewery in Colorado with its Bombshells Kitchen. The StrongPro Sports playoff lineup in May also helped. Non cash impairment of $10,300,000 reflected operating lease right of use asset impairment and leasehold improvement impairment related to 5 Bombshells. GAAP operating results were a loss of $8,900,000 compared to an income of $1,700,000 with a margin of negative 67.8 percent of revenues compared to 11.8%. Non GAAP operating income was $1,400,000 compared to $1,800,000 with a margin of 10.8% compared to 12.8%.

Speaker 2

Now looking comparing it to last quarter, however, revenues increased 2.9%, non GAAP operating income increased 89.3% and margin increased to 10.8% from 5.9%. These improvements reflect the first full quarter of changes initiated in mid February 2024. Please turn to Slide 12. We've made some progress on reducing corporate expenses. Year over year, they were 9.4% of total revenues compared to 8.1 percent, but compared to last quarter, they were level at 9.4% on a GAAP basis, and on a non GAAP basis, they were 8.4% compared to 8.8%.

Speaker 2

Please turn to Slide 13. This slide puts our operating performance into perspective looking at the Q3 compared to the Q2, so you can see how results improved on a non GAAP basis. We also added some data on the number of location day closures for club and Bombshells during the Q3 due to severe weather. During the Q3, we had one day closure for clubs and 10 for Bombshells. To date, in the Q4, we've had 10 day closures for Clubs and 26 for Bombshells, all in Houston due to Hurricane Beryl.

Speaker 2

Please turn to Slide 14. We have a couple of slides coming up that discuss free cash flow and adjusted EBITDA, which are non GAAP. In advance of that, we wanted to present the closest GAAP equivalent on this slide, which are operating and net income. Please turn to Slide 15. We ended the Q3 with cash and cash equivalents of $34,900,000 This included proceeds from our $20,000,000 bank real estate loan.

Speaker 2

During the quarter, we used $9,200,000 to buy back shares. As a percentage of revenues, free cash flow was 18% and adjusted EBITDA was 26%, both highs year to date. Please turn to Slide 16. Debt at June 30 increased by CAD13.5 million from March 31. This reflected a combination of the new bank loan and scheduled pay down.

Speaker 2

The weighted average interest rate was 6.74 percent, only 22 basis points higher than a year ago. Total occupancy costs at 7.9% declined from 8% year over year on a sequential quarter basis year over year and on a sequential quarter basis. Debt to trailing 12 month adjusted EBITDA increased to 3.27, primarily due to the new bank loan. This should decline over the coming year as sales grow from locations that have come online recently and from those anticipated to open. Debt maturities continue to remain reasonable and manageable.

Speaker 2

Subsequent to the quarter, we paid down $1,500,000 on the Playmate notes and extended the balance 16 months out. The balloon payment at the extended maturity date was adjusted accordingly. The monthly installment payment and principal and interest has remained unchanged. Please turn to Slide 17. We continue to pay down all slices of our debt with the exception of real estate because of the new bank loan.

Speaker 2

As a result, that slice is larger at 61.4 percent. And all the other slices are proportionately lower adjusted for their net debt paydowns. Now let me turn the presentation over back to Eric.

Speaker 1

Thanks, Bradley. Please turn to Slide 18. I want to make clear 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. Mergers and acquisitions, organic growth are buying back shares when our free cash flow per share is more than 10%, the yield on our free cash flow.

Speaker 1

Sorry about that. Please turn to Slide 19. With that in mind, we are laser focused on opening the 7 reformatted and new clubs and Bombshells currently under development. Rebuilding the Babydoll's Fort Worth location that burnt down in July as fast and efficiently as possible reviewing all operating units to ensure they meet our financial objectives selling non income producing real estate to free up more cash and reduce debt and using free cash flow to facilitate buyback of more shares and acquisitions of clubs. 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 total revenues, 12.1% for adjusted EBITDA, 17.2% for free cash flow. We have also reduced our fully diluted share count. I'd like to special thanks to our loyal and dedicated teams for all their hard work and effort in this past quarter and for all our shareholders who believe and make our success possible. Now here's Mark.

Operator

Thank you, Eric and Bradley. When you finish, please mute your microphone to eliminate any background noise. We have a limited number of speaker spaces. After your question, we may move you back to 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.

Operator

First off, we have Scott Buck of H. C. Wainwright. Scott, take it away.

Speaker 3

Good afternoon, guys. Thanks for taking my questions. Nice progress on the Bombshells margins. I'm curious if we use the baseball analogy of what inning you're in, how far along are we in the restructuring process there and can we get those margins back to 20%?

Speaker 1

I mean, right now my goal is 15% for sure. I'd like to see us getting back to the deals. I'd probably, on a baseball analogy, I'd probably say we're in the 5th inning, probably the bottom of the 5th. We're headed into that 7th inning stretch, which I think will be in September and then heading towards the finals in October, November, December where I believe that we'll certainly hit the 15% and maybe better as we open new stores and move into calendar 2025 Q2 of our fiscal year, and then we might get back to those 20 margins. We just have to see how these new club or these new stores do.

Speaker 1

They're all handpicked flagship locations, and I'm very excited about those locations. So we will see. We may also consider as we move forward through the end of September of maybe even taking some underperforming locations and either selling those locations off or closing some of those locations as well. And I know a lot of restaurant chains have been doing that. I've been looking at the numbers on a couple of locations, underperforming locations, and it may just make more sense at this point to eliminate those locations versus continuing to put the efforts into fixing them and taking those efforts and put them on others.

Speaker 1

We'll come up with those decisions over the next probably 45 to 60 days.

Speaker 3

Great. I appreciate that color. And Eric, I think you were in the upper Midwest a few weeks back checking out some clubs. Can you give us an update on what the environment is for M and A and maybe a reminder of what it is you guys are looking for in a club property?

Speaker 1

Sure. We've been getting lots of calls. We went to the Detroit market, it's a market we're not in. There's some very successful clubs in that market. We've been told some of those are for sale.

Speaker 1

We're actually talking and meeting with some of those owners this weekend and probably through next week. And hopefully by expo, we will meet some of them coming to the expo as well as other club owners we've been talking with. The pipeline is really heated up. People are starting to get more reasonable. They're starting to realize that 2022 was a one time event for the industry and realizing that going into 'twenty three, 'twenty four, 'twenty five that the more reasonable number to sell their clubs at versus those high earnings from 2022.

Speaker 1

And so I'm very optimistic that going forward over the next 12 to 24 months, we're going to see some nice acquisitions coming forward at a closer to 5x multiple with real estate included.

Speaker 3

Great. That's helpful. And then I want to ask about the Colorado properties. I think you're still full go on the steakhouse, but the other properties you have there, what's the timeline to liquidate or do you have something else in mind?

Speaker 1

We're talking with several people. We may lease those properties. We may sell those properties. We've got several groups. On one particular property, I expect an LOI on that property probably in the next few weeks, if not sooner.

Speaker 1

The other property we're talking with several, it's got a tenant in it right now, but there's additional space in there. So we may add additional tenants to that or we may sell that property if we find the right casino operator to sell that property to. The Rick's Cabaret Steakhouse property we will open that property. I'm hoping to make October. If we don't make October, it's very difficult to open in full winter up there, so we may push that to a spring opening and set up for a while or we may do maybe some temporary, you know, like weekend only opening or something like that.

Speaker 1

Haven't really got a full plan because right now I'm planning to get be finished by October, but unfortunately construction is out of my hands. It's going to be whether they can get it done in time for us to do that. But that's currently the plan on that one.

Speaker 3

Great. That's helpful. And then last question. Bradley, should we see a meaningful decline in interest rates? Are there any opportunities for potential refinancings that could help with cash flow?

Speaker 2

As of current right now, you're seeing what I'm seeing as far as the news media. I've spoken to the bank yesterday and there's nothing immediately in the future for us to refinance or anything like that. But we're closely watching that because we've got quite a bit of debt that works on the lower our interest rate and debt service loan.

Speaker 3

Great. That's helpful guys. I appreciate the time. Thank you.

Speaker 1

Thank you.

Operator

Thanks so much, Scott. Next up, we have Orchard Well. Please take it

Speaker 2

away.

Speaker 1

I think you're muted, Jason.

Speaker 2

How about now?

Speaker 1

All right.

Speaker 2

Hey, you go.

Speaker 4

Let's talk about, you guys saved $10,000,000 on the share buybacks from the clubs that you purchased. And I'm assuming, I forgot what the old things were, but you paid about 5 times earnings for both Colorado and for

Speaker 1

plus the real estate on Colorado. And I believe we were 4 times plus the real estate on the on the Dow I call it Dallas, the Birch acquisition, Babydas.

Speaker 4

Right. And then since you guys have taken over those properties, you've seen improvements from what their sales numbers were before, correct?

Speaker 1

Yes,

Speaker 3

Scott. Last name is Buck, b u c k.

Speaker 4

So so the idea being is you guys have been able to up the earnings on the clubs for what you paid and then what you paid you guys have been able to get for 22% lower or if it was a 5, it was like a 4.2 in terms of what you paid for now that you've adjusted the new prices, right?

Speaker 1

Well, it was 22% less stock, not the total purchase price. But, you know, I mean, it depends on how you want to look at it. If you look at, you know, you split the 10,000,000, split the baby, but take say you take 5,000,000 less for, you know, so we only paid 83,000,000 for the Colorado acquisition, we only paid 61,000,000 for the Babydoll's acquisition. I mean, you can go and figure out those multiples that way. That's that's how I would do it.

Speaker 1

But, yeah, but it's still a considerable savings on the overall deal. And the nice thing is is on a free cash flow per share basis, you know, there's all those shares are no longer outstanding, yet we have all that new revenue coming in. So Right.

Speaker 4

It seems like the majority of the shares you basically took down when the stock broke below like 45. Because there was like a huge amount of shorts that came into the market in the last, let's say, 5 to 6 weeks max, where it looks like they put on 500,000 shares, bringing the total to 925,000 shares that are outstanding that are going to have to buy it back. So you were the guys

Speaker 1

buying those shorts. I believe we bought, if you look at the last 2 months, we probably bought over 50% of the shares. We like, what, 400,000, 1 quarter, 133 so far this quarter. Right. So we probably bought a quarter of a 1000000 or more of those shares in basically June July.

Speaker 1

Okay. And a lot of it under, We made some very large purchases when the stock went under 40%. Right. It wasn't for very long. It was only a few days, but we were we were buying about the maximum amount of shares.

Speaker 1

I think we could buy a day for a couple of those days when it was under 40 down to 38 and change, I think. And then under 42, I think I'd say under 42, we bought pretty heavily. And then we just bought average between, you know, 40 and $42 $50 We just bought basically a pretty much steady number of shares every day, occasionally bumping it up because we set a target, an internal target of being under 9,000,000 shares by August 5th. So we were buying the shares we needed to buy, basically taking the total number we needed dividing it by the number of trading days left and so we were buying 3,000 shares a day, 5,000 shares a day or if we couldn't get stock, some days we didn't get stacked. And I think for a brief period, we were buying probably 8,000 shares a day and then got it back to a normalized number and dropped it down again.

Speaker 4

Okay. And then my last question would be, obviously, this Bearcade dude put out like this tweet and it was a picture of some people standing in front of the clubs or whatever. Can you comment on any of this BS stuff that they were trying to make it seem like you guys were like up to no good you know, with whatever that police thing was about.

Speaker 1

I I would refer you to the 10 Q and the disclosures in the 10 Q and state that I cannot make any comments on ongoing and any type of ongoing investigations at this time. But there are disclosures in the 10 q if you want to see what that is and you'll see that he was a little off base on on on a lot of the accusations that we make.

Speaker 4

Yeah. Yeah. A little bit or a lot of bit. Alright. Great.

Speaker 4

I'm just blown away by the gap. The fact that you guys were able to save $10,000,000 on the purchase price, that's, like, massive.

Speaker 1

Thank you. I mean, that was very important to me too.

Operator

Fantastic. And with that, this will conclude our earnings call on behalf of Eric You

Speaker 1

have a hand you have a hand raised, I think. Check again. If anybody wants to ask questions, you can yeah. I show a request. Yes.

Operator

Eric, he has 0 followers. So if this goes south, it's on you. Liam, take it away.

Speaker 1

Alright. Try the try the next one. We've got a few more now.

Operator

There we go. Perfect. So next up, we're gonna bid bring

Speaker 5

Thanks for the opportunity. So curious, just cumulatively, how much cash has been invested in the Bombshells business and the casinos?

Speaker 1

Well, casino properties and remodel of the Rick's Cabaret. So we'd have to kind of divide it up. There's about $6,000,000 in non income producing properties up there and we'll have about $8,000,000 invested in the Rick's Cabaret and that will and steakhouse that will actually open. We have one of the properties for sale right now for $5,000,000 and I think we'll get an LOI on it. I don't know if we'll get a full asking price, but I think we'll be very close.

Speaker 1

So we'll have recouped almost 100% of the non income producing properties. We'll be almost recouped other than the one property, but we have a tenant. So it's actually income producing. I shouldn't really say it's non income producing. It is income producing, just not a significant amount.

Speaker 1

And then when the RICS opens, I think we'll recoup that investment pretty quickly. And but a lot of that is debt now because we did when we did the $20,000,000 loan, those three properties are a big portion of the collateral on the $20,000,000 loan. So we actually got our cash back. So to do a true cash on cash, I'll have to have Bradley do a calculation on it. I haven't been that concerned with it because it wasn't really material in the overall investment from the company right now.

Speaker 1

As far as Bombshells goes, I mean, I know in June of 2023, we were 140% cash on cash returned for Bombshells. Where we're at today, I haven't run that again recently, but I know we haven't invested 40% of the first 13 stores into these next three stores. So we're still probably 100% cash on cash or more has been returned to us. We've only invested profits that Bombshells has made in the past into the concept and we've nowhere near the amount of full profits. So on that basis, you're probably talking from an ROI standpoint, we have really no money invested in the concept.

Speaker 1

And we made 1,400,000 dollars off Bombshells this past quarter. If we get back to where I think we need to be, which is about $15,000,000 of revenue and 15% margins, we'll still be making a significant amount of money on Bombshells. Then we can look to take those assets and monetize them in another way and then reinvest that money back into our adult club business.

Speaker 5

Okay, thank you. I have no more questions.

Speaker 1

Thank you.

Operator

Hey, Eric. An anonymous question submitted, if you'd like to discuss the fire that happened.

Speaker 1

Okay, sure. We don't know what happened. It was inconclusive results on the fire investigation. That building was completely remodeled in 2023. We believe it was some type of electrical fire based on where the fire burned through the roof and which walls collapsed first and basically where the hottest part of the fire was at.

Speaker 1

It was in that electrical room area. There was no real kitchen there. There's no natural gas there. So we couldn't have been a gas leak or anything. So when you eliminate all those things, the last person that left the building was a cleaning crew at 5 or 4:40 am in the morning according to the alarm system.

Speaker 1

It's just one of those freak things. It's a rough loss for us because it was up to about 80,000 a week in sales. Club was doing very well. It was newly remodeled. So it's a tough deal, but we've already started the cleanup.

Speaker 1

We've hired the architect within 3 days of the fire and started redesigning the property to be rebuilt and an image of the new Baby Dolls West location that we're building. So we'll be moving on pretty quickly there and get that back open for us.

Operator

Fantastic. And with that, 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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RCI Hospitality Q3 2024
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