RCI Hospitality Q3 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 11, 2025

Key Takeaways

  • Positive Sentiment: Nightclub segment revenues were nearly flat year over year and margins improved sequentially, reflecting resilience amid economic uncertainty.
  • Negative Sentiment: The Bombshells segment saw revenue decline due to divestiture of five underperforming locations and a 13.5% drop in same-store sales.
  • Positive Sentiment: GAAP net income was $4.1 million with $0.46 EPS compared to a loss last year, although non-GAAP EPS fell to $0.77 from $1.35 due to insurance reserves and taxes.
  • Positive Sentiment: Executed on the capital allocation plan by acquiring two upscale nightclubs, opening a new Rick’s Cabaret and Steakhouse, and repurchasing $3 million of shares.
  • Neutral Sentiment: The company set aside $9.4 million in self-insurance reserves year-to-date and plans to establish a captive insurance vehicle to stabilize future costs.
AI Generated. May Contain Errors.
Earnings Conference Call
RCI Hospitality Q3 2025
00:00 / 00:00

There are 6 speakers on the call.

Operator

Good afternoon, everyone. We're gonna wait a few minutes for others to join, and then we will get this going. We'll give this another thirty seconds or so and then kick off the third quarter twenty twenty five earnings call. I've received words from Eric Langan. We're gonna wait one more minute so Bradley Shay can finish using the bathroom, and then we will begin.

Operator

Good afternoon. Greetings, and welcome to RCI Hospitality Holdings Third Quarter twenty twenty five Earnings Conference Call. You can find the company's presentation on RCI's website. Go to the Investor Relations section, and all the links are at the top of the page. Please turn with me to slide two of our presentation.

Operator

I'm Mark Moran of Equity Animal, and I'll be the host of our call today. I'm coming to you from Washington, D. C. Eric Langan, president and CEO of RCI Hospitality and CFO Bradley Shea are in Houston. Please turn with me to slide three.

Operator

RCI is making this call exclusively on xSpaces. To ask a question, you'll 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. A question and answer session will follow the presentation.

Operator

This conference call is being recorded. Please turn with me to Slide four. I want to remind everybody 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 may occur afterwards. Please turn with me to Slide five. 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. Eric, take it away.

Speaker 1

Thank you, Mark. Please turn to slide six. Thanks for joining us today. Let me run through some key takeaways. All comparisons are year over year unless otherwise noted.

Speaker 1

Nightclub revenues were nearly level despite economic uncertainty related to tariffs and the tax bill, which affected our customer base. Bombshell's revenue reflected the previously announced sale and divestiture of five underperformers, but both revenues and margins increased sequentially from the second quarter. Consolidated profitability benefited from the absence of impairment charges, partially offset by other factors. We continue to make solid progress on our back to the basics cap allocation plan. We acquired two upscale nightclubs, Platinum West in South Carolina and Platinum Plus in Allentown, Pennsylvania.

Speaker 1

Price multiples were in line with our cap allocation strategy. We opened Rick's Cabaret steakhouse. I'm sorry, Rick's Cabaret and Steakhouse in Central City, Colorado. We also purchased more than 75,000 shares of common stock for $3,000,000 and ended the quarter with approximately 8,760,000.00 shares outstanding. Subsequent to the quarter, we opened a bombshells location in Lubbock, Texas, which has been doing very well right out of the gate.

Speaker 1

Now here's Bradley to review our performance in more detail.

Speaker 2

Thank you, Eric. Turning to slide seven, I'll start with a review of our third quarter results. All comparisons are year over year for a quarter for the quarter unless otherwise noted. Total revenues were $71,100,000 compared to $76,200,000, a difference of $5,000,000. This primarily reflected the sale and divestiture of underperforming bombshells relocations late in fiscal twenty four and early fiscal twenty five.

Speaker 2

Impairments and other charges were $2,300,000 compared to $18,300,000, a difference of approximately $60,000,000. Net income attributable to RCIHH common shareholders was $4,100,000 compared to the loss of $5,200,000 a difference of 9,300,000 and GAAP EPS was $0.46 per share compared to a loss of $0.56 per share. Net cash provided by operating activities was $13,800,000 compared to $15,800,000 a difference of $2,000,000 and free cash flow was about level at $13,300,000 compared to $13,800,000 Adjusted EBITDA was $15,300,000 compared to $20,100,000 and non GAAP EPS was $0.77 compared to 1.35 Most of the year over year difference in non GAAP EPS was due to slightly lower margins in nightclubs, lower margins in bombshells, higher noncash expenses related to our self insurance program with higher taxes. Now moving on to Slide eight. I will now cover our third quarter results by segment, beginning with nightclubs.

Speaker 2

Revenues totaled $62,300,000 down less than 1% year over year. Key factors included a 3.7% decline in same store sales and the absence of Baby Dolls Fort Worth due to a fire. This was mostly offset by $2,600,000 from newly acquired or rebranded nightclubs. By revenue type, food, merchandise, and other increased 5.1%, service increased 0.3%, and alcoholic beverages declined 3.9%. Other net charges totaled $2,300,000 compared to $7,700,000 In the '5, this included a mostly noncash lawsuit settlement, partially offset by a gain on insurance.

Speaker 2

In the year ago quarter, this primarily included impairments. There were none in this quarter. Operating income was $17,800,000 compared to $13,600,000 with a margin at 28.5% of revenues versus 21.7%. Results reflected the decline in other net charges and same store sales, acquisitions not yet fully optimized, and the central city preopening costs. Non GAAP operating income, which excludes other net charges, was $20,700,000 compared to $21,900,000 with a margin at 33.2% of segment revenues versus 34.9%.

Speaker 2

I'd like to point out that while GAAP and non GAAP operating margin were down year over year, they have increased two quarters in a row sequentially. Turning to Slide nine. Here are the results of the Bombshell segment. Revenues totaled $8,600,000 a difference of $4,500,000 The key factors here included the sale and divestiture of five underperforming locations in the '24 and the '25, which impacted revenues by $3,800,000 and a 13.5% decline in same store sales. This was partially offset by two new locations not in same store sales.

Speaker 2

Other net charges were minimal in the '25 versus $10,300,000 in impairments last year. There was an operating income of $87,000 compared to a loss of $8,900,000 with the margin at 1% of segment revenues versus a negative 68%. Results primarily reflected the decline in impairments, sales from open locations, and Lubbock's preopening costs. Now on a non GAAP basis, which excludes impairments, there was an operating income of a $100,000 compared to $1,400,000 profit, with the margin at 1.2% of segment revenues versus 10.8%. Moving to slide 10, you will see a summary of our corporate expenses.

Speaker 2

GAAP expenses totaled $8,700,000, an increase of $1,500,000. Non GAAP was $8,300,000, an increase of $1,900,000. As we've explained on previous calls, starting this year, corporate expenses are being affected by an estimated noncash self insurance actuarial reserve for the quarter. That's why expenses were higher year over year in the first quarter, lower in the second, and higher in the third. Please turn to slide 11.

Speaker 2

We have 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 equivalents, which are operating income, net cash from operations, net cash by operations, and net income. So please turn to Slide 12. We ended the third quarter with cash and cash equivalents of $29,300,000 During the quarter, we used $5,250,000 as part of our two platinum acquisitions and $3,000,000 to buy back shares. While they were down year over year, I'd like to note that both free cash flow and adjusted EBITDA increased sequentially.

Speaker 2

As a percentage of revenues, free cash flow margin increased from 11% in the second quarter to 19% in the third and back to where we were were two years ago in the '23, while adjusted EBITDA remained approximately level at 22% for each of the first three quarters this fiscal year. Please turn to slide 13. Debt at June 30 declined slightly 201,000 from March. This reflect the scheduled pay downs, new acquisition related debt, and construction financing for Bombshells Rowlett and Bombshells Lubbock. We continue to control the rate paid on our debt with an average weighted interest rate of 6.68% compared to 6.74% in a year ago quarter.

Speaker 2

Total occupancy cost was 7.9% of revenues, level with last year, and debt to trailing twelve month adjusted EBITDA was 3.82 times compared to 3.56 times in the preceding quarter. While debt stayed approximately level because of the recent acquisitions and adjusted EBITDA increased sequentially, adjusted EBITDA for the trailing twelve months declined. As new locations generate revenue and EBITDA, occupancy costs and debt metrics should improve. Debt maturities continue to remain reasonable and manageable. Now here's Eric.

Speaker 1

Thank you, Bradley. Please turn to slide 14 to review our capital allocation strategy. Our plan calls for allocating 40% of free cash to club acquisitions and 60% to share buybacks, debt reduction and dividends in order to grow free cash flow per share annually at a 10% to 15 rate. Please turn to Slide 15. Operationally, we are focused on our core nightclub business, reviewing every club to increase same store sales on a regular basis, and we will rebrand, reformat or divest underperformers.

Speaker 1

Our nightclub plan also involves acquisition. Our goal is to acquire an average of about $6,000,000 of adjusted EBITDA per year, focusing on the best clubs, buying base hits with an occasional home run. Our target metrics remain the same, three to five times adjusted EBITDA for the club and fair market value for the real estate, targeting 100% cash on cash returns in three to five years. Purchases would be made with cash on hand, bank financing or seller notes. We would also consider using stock when our valuation improves.

Speaker 1

For bombshells, we are working to improve performance at existing location, targeting 15% operating margins, and return to same store sales growth. We also plan to complete the one remaining location currently under development. The final part of our plan is to regularly buy back our stock, so that's enough if we consider the price to be particularly undervalued. We also anticipate modest annual dividend increases. Over the five years, we aim to generate more than $250,000,000 in free cash flow and repurchase a significant amount of shares.

Speaker 1

By fiscal twenty nineteen, our targets are $400,000,000 in revenue, dollars 75,000,000 in free cash flow and 7,500,000 shares outstanding. The end result would be doubling our free cash flow per share to approximately $10 per share compared to what we did in fiscal twenty twenty four. Please turn to Slide 16. To give you an idea of the progress we've made on the share buyback, ten years ago, we had about 10,300,000.0 shares outstanding. As of last Friday, we had about 8,700,000.0, which represents a reduction of 15.5%.

Speaker 1

Turning to Slide 17. We have only three remaining projects. We are targeting Bombshells Rowlette for opening late this summer, early fall. We are also still awaiting construction permits for Baby Dolls West Fort Worth, and we are awaiting engineering view and zoning plans for the Baby Dolls Fort Worth that burnt down last year. I would like to thank all of our loyal and dedicated team members for all their hard work and efforts, and all of our shareholders believe and make our success possible.

Speaker 1

Now here's Mark to open up the question and answer section.

Operator

Thank you very much, Eric and Bradley. If you would like to ask a question, please raise your hand in the x space. When you finish, please mute your microphone to eliminate any background noise. We have a limited number of speaker spaces today. After your question, we may move you to the back of the audience to free up space.

Operator

First off, we have Orchid Wealth. Please take it away.

Speaker 3

Hey, guys. Can you hear me?

Speaker 1

Yes. I can hear you.

Speaker 3

Hey. I just got a question. How much in real estate do you guys have that you think you could be selling off that's, you know, nonperforming or just, you know, holding in general?

Speaker 1

So as we've said in in the previous calls, about $28,000,000 is our estimated value of it. We have some contracts on a couple of pieces. We're in negotiation on a couple more. So I think, as I've said by the end of this year, I think we'll start which will actually be fiscal first quarter fiscal twenty six, I think we'll start seeing some of those, closings happen, and I think we'll see, more offers if if the Fed cuts rates or as as if the economy picks back up again for commercial real estate.

Speaker 3

And if you were to liquidate all, let's say, 28,000,000, how much of that would have to go to just pay back debt, and what do you think you guys would be left over with?

Speaker 1

I'm not sure. The the main piece is a piece that we bought for about $2,150,000 in cash and then rechanged zoning on it. It's it's worth somewhere between 8 and 14,000,000, and we don't really owe anything on it. So that would be a big chunk of cash. The rest of it would be, about, you know, less than 60%, would go to debt, because all of our original loans were 60% or 65%, loan to value.

Speaker 1

And those those, were based on appraisals from from a few years back. So, you know, I would say somewhere around, 40 to 45%, would go to cash, and the rest would go to service debt, other than a few pieces that, are worth considerably more than what we paid for them. And and that probably be the opposite. 60 to 65% would go to cash and 3035% of debt.

Speaker 3

Okay. And then the thing about the insurance, you know, you guys are now not buying insurance. You're self insuring. How much should we basically be modeling that you guys are gonna be setting aside for this particular self insurance going forward?

Speaker 1

There's no way for us to really know that number at this point. I can tell you year to date, we're at $9,400,000. It's based on actual aerials, and it's based on, you know, when we settle claims from the past, when new claims are made. So it's a constantly changing number for us. So at this point, we can't, we can't really say what they're going to reserve.

Speaker 1

And then, to me, the real key is when will those reserves come back to us if they're not used, because we have to wait through certain statute of limitations and certain other things. So this reserve number can become a very large number over time. We're we're in the process of of initiating a captive that we would have set prices so we know exactly what we'd be paying for the insurance. And I'm hopeful we can get that operational soon.

Speaker 3

Okay. So

Speaker 1

then we'll have a they'll then we'll then we'll be able to answer those questions because we'll Yeah. We'll have a we'll have a policy through a captive that we'll own, but at least we'll know what the what the what the fees are.

Speaker 3

Okay.

Speaker 1

Is this one of

Operator

these things

Speaker 3

yeah. Is this one of these things that, like, it's got a lot of startup costs in the beginning and then you kinda taper down and then reach a run rate for every quarter?

Speaker 1

Well, we thought that because we had 4.1 in one quarter, then the next quarter was 1.4, then we just hit 3.9 in this last quarter. We cannot figure out the math of it. The the problem is the math is ever changing based on, claims, based on, you know, loss runs with with our other insurance companies because they have to take those claims and and put them out. And since we're not using the insurance companies anymore, they're all setting you know, they may change. We may get a claim, and they may put some high reserve on it, which that reserve then affects our, reserves going forward.

Speaker 1

Until that case is actually settled and we know exactly what we pay on it, then they'll revamp. And the next quarter, we might not pay anything. Right? I mean, it it's, like I said, it's a it's a lot of math, and it's it's all guesswork. So

Speaker 3

Okay. Alright. Thanks. Yep.

Operator

Fantastic. Thank you so much for those questions. Next, we have D and D Realty. Please take it away.

Speaker 4

Hey, Eric. Thanks for taking my question. I really wanna commend you guys on your pace of acquisitions. I think that that's a really a real a nice tailwind for the for the company, and, and you guys are sticking to plan. So I think that's great.

Speaker 4

My question I I kinda I I have two. One pertaining to the acquisitions, which is when you guys go out and, you know, bid on these assets, who are you competing with? Are are there other groups out there that that are bidding against you? Are you bidding against yourself? Are you the only real exit capital that exists for a lot of people?

Speaker 4

I'm just kinda curious around that dynamic. And then my second question pertains to I think in a in a prior call, you mentioned a potential tailwind from some of the tax policy that would get reworked that has now since gotten reworked under the Trump administration. I'm just curious is, you know, do you are you early days, hopefully. Are you seeing an uptick in, in activity potentially due to that? Or, you know, is is it is the do you still feel that the economy and kind of some of your service charge, which you which you called out last quarter, is still muted?

Speaker 4

Thanks.

Speaker 1

Sure. Well, from the acquisition side, I mean, there are there are lots of, you know, competitors for acquisitions and that, you know, their own management team, you got LBOs, you've got other operators that would like to expand in in local markets that they're operating in. I do think we're the acquirer of choice. They know we have cash. They know we can come up with large sums of cash.

Speaker 1

We've done it multiple times through the last two decades. They know if they wanna carry paper and create an annuity for themselves or for their family or for their trusts. We're we have an unbelievable track record and unmatched track record from other operators of making all of our payments on time even through COVID. So I think those things weigh in. We don't really bid against anybody or against ourselves.

Speaker 1

We kinda have a set formula. We ask for their numbers. What we do is we evaluate what we believe is the longevity of that cash flow, whether it's licensing restrictions in the area, how easy competition can open up, whether the license has court protections or is, you know, grandfathered in. And then we use a three to five times multiple based on, what we what we believe, the protection of that license is. And that's how we've always done it, and that's, I think, how we'll continue to do it.

Speaker 1

It's it can slow the process sometimes, but it also saves us from making big mistakes. And I think right now, especially in this environment, the most important thing we can do is not make not make mistakes. And then your second part, the the tax bump. I mean, I think that, you know, the tax bill just passed. I think companies are starting to realize they've got, I guess, what, we're in August now.

Speaker 1

So you got five months left. You wanna make a major purchase and get it closed by December 31, you better get on it. So I think those transactions are I think companies are starting to look at that. I think you're gonna start seeing some capital improvements done at some major companies. I you know, I I know we've been hearing all these manufacturers that you know, saying 600,000,000,000 here and a trillion dollars there and 500,000,000,000 here in new plants and whatnot.

Speaker 1

You know, I don't know if those will all hit this year. They did make the tax cuts permanent, so it's not like they have to rush out and do it by December 31 unless they owe taxes for this year. But I I do believe that as we are going to see some of that look. Our clubs do very well when there's new money or money's really moving. You know, the pace of money has slowed down considerably.

Speaker 1

Right? They're having record numbers in money market accounts. A lot of people sitting on the sidelines. Only the only the top stocks in the in these indexes are are really performing well. So I think there's, like I said, a lot of money still on the sidelines.

Speaker 1

As that new money starts moving into things, as we move forward, I think that'll be a considerable bonus for our company. As far as, you know, liquor sales were down 3.9%, but our service revenues were actually up just a little bit over last year. So I would say service revenues are coming back a little bit. We'll we'll see what happens as we move through these next two quarters. Hopefully, we'll continue to see, the service revenues increase.

Speaker 1

They are our highest margin, revenues for sure.

Operator

Thanks so much for that question. And next up, we have Adam Wyden, and I'd like to encourage anyone who has a question to raise their hand, and we'll bring you up. Adam, take it away. Hey, Adam. You're on mute.

Speaker 5

Can you hear can you hear me now?

Speaker 2

Yes.

Speaker 3

Yes.

Speaker 5

So on this is for Bradley. So on on the insurance reserve, you guys have $9,000,000 year to date, and I guess you'll have some on the fourth quarter, but you're not paying for insurance anymore. So the question I have is, at some point, I know it's gonna normalize. I mean, can you sort of quantify how much I mean, because it's obviously noncash. You're taking this charge, but the cash is sitting in your on your balance sheet.

Speaker 5

It's in treasuries or somewhere. I don't if it's but, like, how how should we think about sort of the total sort of weight on EBITDA this year relative to what you would expect it to be going forward? I mean, I is there any way we can try and do that? I mean, I I think the goal in this was to save money. So and at least from when I read the filings, it looks like you're it's costing you money year over year.

Speaker 5

So I'm just trying to understand, you know, at some point, build enough reserve that eventually you don't have to reserve anymore in some capacity or the reserves go down. I mean, how how should we be thinking about that?

Speaker 2

From from a net income standpoint and adjusted EBITDA standpoint, these charges are very real, from a GAAP basis and non GAAP basis. So, technically, yes, it's hurting EPS. It looks like a negative charge, but we don't get to add it back because it's normal and reoccurring. Now you're saying it cost us money. It doesn't really cost us money because it's not impacting free cash flow.

Speaker 2

So those are the clarifying points I wanted to make. As far as the run rate, like Eric once mentioned, I hate to just lean back on this. We just don't know. It's every quarter, we have an actuarial expert, and they go and they look at all our claims, all our losses, any new claims, any closed claims, and they do what's called a true up or true down. So on a normalized run rate, call it somewhere between 10 to 12,000,000 based upon this year's year to date actuarial estimates, and that's all there is.

Speaker 2

As far as the actual captive insurance program, once that's live and operational, we would be paying ourselves somewhere between, like, 400,000 to $500,000 a month for the premiums.

Speaker 5

But okay. But but I think I mean, again, I'm just going back in time, then I got another question. My understanding was that you guys had never really paid out more than a few million dollars in any given year for settlements. So the idea was you were paying, like, 10 or 12,000,000 insurance, but the actual settlements on average never really were more than 3,000,000. So I guess the question I have is, you know, you're you're you're basically reserving as if it's 12,000,000, but that I mean, his you've never paid out $12,000,000 in a year.

Speaker 5

So, like, some this can't, like, sort of continue. Right? I mean, that that's just sort of, like, right, real logically? You never paid out 12,000,000 in in lawsuits in a year, right, ever?

Speaker 2

Correct. Well, are some years, the New York one, that was, you know, about decade ago that, yes, some settlements are large lot bigger.

Speaker 1

That wasn't insured.

Speaker 2

Okay. That wasn't insured.

Speaker 5

Yeah. So so that's sort of my question. If, I mean, if we're run rating 12,000,000 of insurance reserves, that would imply that we would pay 12,000,000 in lawsuits a year. So I just you know? Because, again, the EBITDA number the free cash flow looks great, right, obviously, in light of what what's going on, but the EBITDA number doesn't make a whole lot of sense.

Speaker 5

So that's why I'm just trying to reconcile those two because if I sort of just think about it, like, you guys don't wanna pay insurance anymore. You are run rating 12,000,000 of reserves. You're not paying it out in cash, obviously, because we can see it in the free cash flow. So it's sort of like, presumably at some point after you build a big enough buffer, right, with these charges, at some point, you would expect them to go down. Right?

Speaker 5

I mean, like, realistically?

Speaker 1

I you know, I hope so, Adam, to be honest. I I just don't have enough data on it. We really thought our captive would be active before we ever went into any type of self insurance mode to where we're that we're at today. It just took the state a long time to get it done, and now we're really working on our policy. The more we study it, the more we learn about it, we just wanna make sure we do it right the first time because we don't wanna set up a cap that then goes bankrupt.

Speaker 1

So we we believe we we we have the formulas down. We're working on them. But when it comes to these actuarials, these are this is a completely different math. It's a, you know, it's a it's a it's a gap principle that has to be followed, to do these actuarials and do these accruals. And, I mean, you know, you've heard me say it before.

Speaker 1

I don't think it's rooted in any type of reality of what is. It's always what ifs. And all of your gap stuff, when you're accruing stuff and doing these things, must take into account the absolute worst case scenarios, not best case scenarios. So what you wanna look at is best case scenarios, and what they have to look at is worst case scenarios. If you look at average, you know, for the last fifteen years of actual areas where we've what we've actually paid out versus, you know, what we paid in premiums, we would have come out way ahead if we had self insured all of those years.

Speaker 1

In fact, I think there's only one year where we wouldn't have, and that's because we allowed someone to sell us way too much insurance, and then we couldn't settle any cases because everybody would rather try their luck in court and go after the big lottery ticket versus, you know, settling the case for a reasonable amount. And so that particular year, we had some high stuff, but that was many years ago. And of recent years, it's it's been much more realistic. And then the problem was when we got our insurance quote this year or for this year, they wanted you know, between the fees and everything, we would have paid almost $9,000,000 or $10,000,000 worth of insurance. And to me, that just did not make any economic sense whatsoever.

Speaker 1

When we could not do that, we could do this, captive referral system where we put the money in. Part of the actuarial system is you don't get any, return on what what you put into reserves. Right? So it's just basically held in reserves, and it's not growing. Whereas you when you have a cap or an insurance company, they take the premiums and invest those premiums, which then help offset the cost and expenses.

Speaker 1

And so the actuarial is very, very different in a self insurance versus a captive. So, hopefully, we'll have this captive set up soon. I'm I would like to see it set up by October 1 if at all possible. I think we're we're definitely working towards that date. Whether we'll be successful or not, I don't know.

Speaker 1

But I think by calendar year end, we we should be able to have everything in place for it. And then we'll have then we'll have the actual insurance cost because we'll be paying insurance cost, not accruing an actuary. The insurance company will accrue actuarials, but they'll do that based on their premiums and whatnot. Not, and and Yeah. Not their claims, not, not past ones.

Speaker 5

Right. So it's yeah. I I get it. So the idea is is, like, long story short, like, when you guys get the captive set up, the the noncash charge to EBITDA will be a lot less because you're going to you basically they're they're it's a separate insurance company that you're gonna pay premiums to that you control. And so all of this, you know, $12,000,000 a year stuff is is is probably gonna go away.

Speaker 5

Because if you look at on the slide 12, you look at the free cash flow, it's basically flat year on year. And most of the most of the quarters, it's more or less been flat. So e EBITDA on this case, the way you reported is sort of not a great reflection of financial performance because, you know, you're not actually paying out the money, if that makes any sense.

Speaker 1

Makes a lot of sense for for fiscal twenty twenty five.

Speaker 5

Yeah. So it's so I mean, all all I'm trying to say is next year when you get the captive set up, you should get a reversal on reported EBITDA because you're not gonna be taking these types of insurance reserve charges realistically.

Speaker 1

There are a few things we can possibly do when that time comes, and that is we can leave this 2025 as a self insured year, and then they'll run ash boreals every quarter going forward. If there's x reserves, they would be put back in. If more reserves are needed, we'd have to expense more. The other thing we could possibly do, is buy an insurance policy once once we know all the claims. There's a two year statute of limitations, I think, but we could figure out what the claims are.

Speaker 1

A lot of insurance companies do this where they will then what's called selling the book. So we would take all the potential liability and sell that book for a set dollar amount where, basically, we would pay a company x amount of dollars, and then they would take all the liability on a go forward basis for those deals. And what they do is they hope to settle those cases for less than less than reserves. And if if the reserve if we if we can sell let's say we've got $12,000,000 in reserves, but we can sell the book for $8,500,000. Then maybe we sell that book for $8,500,000, and we get the other, you know, 3 and a half million dollars as an income back in on our books.

Speaker 1

So there's lots of there's lots of things as we move through the future of this and and and figure out this insurance math, let's call it, you know, in in a much better format. And and, of course, our actuarials I mean, as we get the actuals, we'll be able to actual cost, we'll be able to have a much better idea as well. So and we we may have no claims. Right? I mean, we just right right now, you don't know.

Speaker 1

Typically, a claim in an insurance year usually takes anywhere from eighteen to twenty four months to be made. And since we've only been doing this for nine months, you know, it's all guesswork. It's literally 100% guesswork, everyone's part.

Speaker 5

Two other questions. These should be easier. One is on the startup cost, Bradley. You know, you guys talked about, Rowlett or Lubbock, Central City, and some other stuff. I mean, obviously, that's not being added back.

Speaker 5

But, I mean, what do you think the burden on EBITDA is in terms of startups and, you know, other stuff that you would expect to sort of go down? I mean, I think we covered the insurance thing pretty closely, but on the on sort of the startup costs, like, do you think or preopening costs, what do you think that sort of cost you in the quarter?

Speaker 1

It's typically a couple $100,000 per unit, Adam. And it's just we have to put people up. We have to train. We start we send people out two to three weeks ahead of time. They start training.

Speaker 1

They hire staff. So we've got hotel rooms. You've got training costs. You've got, you know, the hourly wages with no revenue coming in yet.

Speaker 5

Things like that. So, like, a half a million of EBITDA in the quarter, basically.

Speaker 1

Is that fair? 400 to 500,000 is what I'd guess. Yeah.

Speaker 5

Okay. So we got the insurance. We got the the the start up cost. And then on the real estate, you talked about in the past, you know, potentially selling bombshells. I mean, I think you got rid of all the leased locations because you didn't control the real estate.

Speaker 5

You now have, I guess, 10 locations. I guess that includes does that include the Grange, or does that not include the Grange?

Speaker 1

That does not include the Grange. The Grange is gone. We actually have 11 locations open with Lubbock, as of July. Now it didn't open in this last quarter. That's that's, you know, after the June ended of it opened.

Speaker 1

So for the for this quarter that we're in right now, 2025, we'll have 11 Bombshells locations open.

Speaker 5

Not not including Rowlett?

Speaker 1

Not including Rowlett because Rowlett's not open yet. Now if Rowlett opens before September 30, then that will change, but, I don't suspect that Rowlett will make September 30, based on some of the construction reports I got yesterday. So I think it's gonna be a little bit longer.

Speaker 5

So so I guess the question is now you've sort of got it cleaned up. You got rid of all the leased locations. You know, you know, you got a lot of big expanding restaurant chains, Texas Roadhouse, and a bunch of groups that are looking for locations. I mean, I think one of the biggest issues as you've encountered is basically, building a restaurant is taking a very, very long time, and you've got basically 12 locations that have more or less been open for not that long. I mean, the oldest ones, I think, you closed.

Speaker 5

So I I guess my question to you is, like, given where your stock is and given, you know, how valuable, you know, I don't know, $6,575,000,000 dollars of real estate is in terms of getting capital. I mean, how how do you think about sort of going all in on the stock and and, you know, nightclubs, you know, given that, you know, there's you know, the the restaurant real estate is still trading at a relatively low cap rate. And, you know, you have you know, you sort of have control of the whole all the locations now.

Speaker 1

I mean, look. We we've been talking with with different groups for the past year or so. More groups were in in in recent last last month or two, we're getting more calls. So I'm guessing that, you know, restaurant, especially Prime a restaurant space, which is what most of our bombshells locations are, are are being sought after because we are getting lots of calls. Of course, you got every leaseback group in the world trying to call us, which we're not interested in doing sale leasebacks.

Speaker 1

We are interested if we were to if we were to sell the real estate, you'd have to buy the operating businesses as well. But we would put together a a package of the operating businesses and the real estate for for the right price. We're just not looking to sell at the bottom of of of the bottom of the of the range. We would want a fair price, for our shareholders. And if somebody comes and makes us that offer, then, we'll we'll consider it.

Speaker 5

Yeah. I mean, look. Obviously, given where your stock is and, you know, given the fact that, you know, I suspect the nightclub stuff is gonna ramp up because, you know, you did some deals this year, you didn't do any in '23 or '24. I suspect there's probably more nightclubs to buy. But, you know, I sort of do the math and I say, you know you know, I don't know what is it, a 100,000 of net income or GAAP non GAAP income.

Speaker 5

And I don't know what that what that works out in terms of EBITDA. But let's say for a minute that, you know, EBITDA bombshells is, you know, I don't know, a million bucks. I don't know. I don't know what the DNA is now, but let's just call it a million dollars. And let's say you get, a little bit of EBITDA from Lubbock and a little bit of EBITDA from Rowlett.

Speaker 5

I mean, you know, even best case, you know, it's, you know, $45,000,000. I mean, if you could sell the real estate for 65, 70, you know, 75,000,000, I mean, it it would, I mean, it would go a long way, you know, in in terms of buying nightclubs and buying stock. And

Speaker 1

Yeah. I mean, just I I don't I mean, you know, right now, I I will tell you my number's been about 85,000,000. Would I take 75? I don't know. No one's offered it to me yet.

Speaker 1

If someone comes in with an $85,000,000 offer, it's something we definitely have to, you know, put the pencils to and see if we make it work. I can tell you that at 65,000,000, I wouldn't be interested. I think the real estate alone will appraise somewhere around 65 to 67,000,000. Our current debt load on that real estate is about 35,000,000. Our current book value is around 45,000,000.

Speaker 1

So, you know, if somebody comes in at 85,000,000, I I don't think there's much to think about. That would be about a 40,000,000 overbook. Yeah. I think we would probably jump on that pretty quickly. At 75,000,000, we're gonna sit down and put the pencils to it, see if it makes sense, see what our stock price is.

Speaker 1

I mean, you know, if I could buy a million shares of stock back, in exchange for, the bombshell segment, that's, what is that? What? 8.7 divided by 1,000,000 divided by 8.7 is one divided by 8.7. About 12%. Yeah.

Speaker 1

Almost 12% of the company. You know? Yeah. I think I have to think real hard about that. So I think those are things we just like I said, we have to put the pencils to and see if we can make it work.

Speaker 5

So the 60 the 67,000,000 includes Rowlett and Lubbock even though they haven't have those been reappraised at market yet or not? Or does that include the

Speaker 1

Those are those are both at cost. Both of those would those would it's 6 about 65,000,000. That's why I said it's between 65 and 67. I think both those appraise for about a million more than than cost they typically do.

Speaker 5

Got it. And so at that point, you'll sort of see how much EBITDA those things are doing. And, you know, if someone you know, because, basically, those will be making money. The other ones do you think that the other locations will start making more money? I mean, do you think that, you know, you're

Speaker 1

We have three locations that are pretty solid right now. Lubbock is doing fantastic. Lubbock's Lubbock's averaging between a 190 and 200,000 a week right now. If that continues for the twelve weeks that'll be open, you know, you're talking 12 times I'd say 12 times one eighty even. It's 1.2 plus 80 times twelve, nine point six.

Speaker 1

A little over $2. They do $2,000,000. At that point, they're probably running 20 plus percent margins. I mean, you know, that that store alone could make $4,500,000 in a quarter. So

Speaker 3

Yeah.

Speaker 1

Let's let's see how let's see how we do. Like I said, we're we're talking with groups. We're talking with a private equity group, or we're talking with a restaurant operator. We're talking with a few just I I don't know what they wanna do with their real estate their real estate guys that we've been talking with. And, you know, we'll we'll see what we'll see what comes of it.

Speaker 1

But, you know, make it perfectly clear on the call, so maybe I won't get as many calls over the next week. We are not interested in sale leasebacks. So, you know, we we know we could do that anytime we wanted. We could pull, you know, probably, 30,000,000 in equity out out of the bombshells real estate at any time that we would get a sale leaseback, but, you know, it's just not something we're really interested in doing. We'd rather just hold on to the assets until we can sell everything as a whole.

Speaker 1

We believe that it makes the by owning the real estate, it makes the operations much easier to sell to someone who wants to turn around and grow the concept because what they'll do is they'll come in, they'll buy it from us, they'll turn around, do the sale leaseback, pull their cash back in, and and and expand the concept is is what we're it's what we're told by brokers that we've been talking to. So

Speaker 5

Well, they'll do that after they fix it. But the reality is is they own it. They control it. They fix it, then they do it.

Speaker 1

They can do anything they want once they write me the check. I don't care.

Speaker 5

And and and and about the and what about the club the backlog for M and A for clubs? I mean, are you are you seeing that backlog increase? I mean, are you I mean, I know you've done a little bit this year. You did the, whatever, Detroit and that whatever those ones, but you're only I don't know what that works out.

Speaker 1

We bought three we bought three locations so far. I mean, we're looking we're actually looking to sell a cup of of our of our clubs. So we've got a few clubs that we're in loc negotiating with some local operators that are very interested in a couple of our underperforming locations, which we were talking about rebranding. And we're thinking maybe instead of rebranding, we'll just sell those locations off, put some more cash on the balance sheet, take that and buy other clubs someplace else in markets that are are more competitive and and more profitable for us and definitely easier to operate for us. Most of the clubs we're talking about, some we picked up in acquisitions where, you know, they were not the core acquisition we were trying to buy, but they were just a club that was part of the deal.

Speaker 1

And thinking that our thinking on that is that, you know, we it stretches our regional management to have to travel all those extra miles and, you know, for for for small amounts of income. You know? Why are we holding a club that's 600 miles from any one of our other clubs that, you know, generates us $200,000 a year in income? Let's go convert that into a million, million and a half dollars in cash and and take that million and a half dollars in cash and either buy back stock or go invest it in a in a market that's easier for us to operate, that doesn't stretch our regional management teams. So those are the things we're looking at.

Speaker 1

Those are the things we've been been working on. As you'll see I mean, if you go back and look at 2016 when we first started the capital allocation strategy, we were up a little bit. If you look at '24 when we started the capital allocation, we were up a little bit. And then, in '17, we our revenues actually declined, because we sold off and and got rid of underperformers. I I think you're seeing that same thing happen right now.

Speaker 1

It's just in a condensed year. We're much better at it than we were in 2016 because we've done it before. So we didn't wait, you know, a full year or a year and a half to start divesting assets. We started doing that within nine months of adopting a new capital allocation strategy. We know when we as we closed the bombshells immediately that were underperforming that we leased.

Speaker 1

Now we're doing same thing with a few of the clubs that we're looking at right now, and then, of course, trying to buy more clubs that make make economic sense for us. So expo is in, what, fourteen days, two weeks from now. We'll be out in Vegas, with lots and lots of club owners, and very optimistic to have some good meetings set up to talk with a few people. I've got couple of brokers club brokers that wanna sit down with me and go over some inventory that's supposedly not public information right now, which I find hard to believe is not my public information, but I understand that there's there are there are deals that sometimes brokers bring to us. So we'll definitely sit down and talk to them.

Speaker 1

We have been looking at lots of locations around the country right now and trying to find the ones that make the most sense for us to to make our next investment in.

Operator

Fantastic. Thank you so much, Adam, for those questions. And on behalf of Eric, Bradley, and the company and our subsidiaries, thank you, and good night. Please visit one of our clubs or restaurants to have a great time.

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