RCI Hospitality Holdings, Inc. (RICK) Earnings Call Transcript & Summary

Greetings, and welcome to RCI Hospitality Holdings Third Quarter 2024 Earnings Conference Call. You can find the company's presentation on RCI's website. Go to the Investor Relations section, all the necessary links are at the top of the page. [Audio Gap] 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 our RCI Hospitality; and CFO, Bradley Chhay are in Houston. 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. [Operator Instructions] 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. 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. Eric, take it away.

Thank you. If everyone will turn to Slide 6. I'd like to thank you for joining us today. And we made a lot of progress during the third quarter. It reflects the first 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. [Audio Gap] Our kind of 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 third quarter, but that was noncash. The key takeaways are that Nightclubs achieved record revenues with year-over-year increase in total sales and the first quarter of year-over-year increase in same-store sales since the second quarter of fiscal '23. Sales also increased from the last quarter. Bombshells sales increased sequentially and margin. [Audio Gap] from 5.9% last quarter to 10.8% this quarter, reflecting our Back to Basics approach starting in February of 2024. 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 million 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 million. And we took advantage of our low stock price during the third and fourth quarters. To that end, I'm pleased to announce we have reached our short-term objective of reducing shares outstanding to less than 9 million. Please turn to Slide 7. I 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, reducing our share count by the same number we used in our big October '21 and 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. 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. We plan to implement 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 to the Basics approach to our business. We want to make sure our locations are running as efficiently and profitably as possible. Our authorities 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 $215 million 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&A, focusing on base hits and the occasional home run, making sure we capture synergies [Audio Gap] clubs and to target any excess cash not used in M&A and dividends for regular share buybacks. Now here's Bradley.

Thanks, Eric. Please turn to Slide 9. The core strength of our business enabled us to generate $76.2 million in revenue in the third quarter. GAAP EPS was a loss of $0.56 per share. This primarily reflected noncash impairment of $17.9 million in the current quarter. 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 $13.8 million as did adjusted EBITDA at $20.1 million. Please turn to Slide 10. Nightclub revenues did $62.8 million increased $374,000 year-over-year. This primarily reflected same-store sales growth of 1.7%. [Audio Gap] new and reformate clubs and a strong pro sports playoff lineup in May. Turn, this was partially offset by some temporary closings of clubs being reformatted to liquor from BYOB and sever weather in Texas and South Florida. By revenue type, alcoholic [Audio Gap] 4.9%; food, merchandise and other increased by 5.1%; 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. Noncash impairment of $7.6 million in goodwill, SOB and leasehold improvement impairments related to 6 clubs. GAAP operating income was $13.6 million compared to $20.4 million with a margin of 21.7% of revenues compared to 32.7%. Non-GAAP operating income was $21.9 million compared to $23.6 million with a margin of 34.9% compared to 37.7%. [Audio Gap] to the last quarter, revenues increased 5.8%. Non-GAAP operating increase -- 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. Bombshells revenues of $13.1 million declined by 8.7%. This primarily reflected reduced same-store sales and temporary closings due to severe weather in Texas. In turn, this was partially offset by 3 locations, not in same-store sales. Bombshells, San Antonio; and Stafford in Texas; and Cherry Creek Food Hall and brewery in Colorado, with its Bombshells Kitchen. The strong pro sports playoff lineup in May also helped. Non impairment of $10.3 million [Audio Gap] operating lease right-of-use asset impairment and leasehold improvement impairment related to 5 Bombshells. GAAP operating results were a loss of $8.9 million compared to an income of $1.7 million, with a margin of negative 67.8% of revenues compared to 11.8%. Non-GAAP operating income was $1.4 million compared to $1.8 million with a margin of 10.8% compared to 12.8%. 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%. 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%. Please turn to Slide 13. That puts our operating performance into perspective, looking at the third quarter compared to the second quarter. 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 third quarter due to severe weather. During the third quarter, we had 1 day closure for clubs and 10 for Bombshells. To date, in the fourth quarter, we've had 10 day closures for clubs and 26 for Bombshells, all in Houston due to Hurricane Beryl. 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 third quarter with cash and cash equivalents of $34.9 million. This included proceeds from our $20 million bank real estate loan. During the quarter, we used $9.2 million 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 $13.5 million from March 31, This reflected a combination of the new bank loan and scheduled pay downs. The weighted average interest rate was 6.74%, 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 3.27x, primarily due to the new bank loan. This should decline over the coming year as sales grow from locations that have been -- that have come online recently and from those anticipated to open. Debt maturities continue to remain reasonable and manageable. Subsequent to the quarter, we paid down $1.5 million 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. As a result, that slice is larger at 61.4%, and all the other slices are proportionally lower adjusted for their net debt pay downs. Now let me turn the presentation over back to Eric.

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 [Audio Gap] subject to whether there is a compelling rationale to do otherwise. Mergers and acquisitions, organic growth or buying back shares when our free cash flow per share is more than 10% -- the yield on our free cash flow, sorry about that. Please turn to [Audio Gap] With that in mind, we are laser-focused on opening the 7 reformatted and new clubs and Bombshells currently under development. Rebuilding the Baby Dolls Fort Worth location that burned 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. 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 the 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.

Thank you, Eric and Bradley. [Operator Instructions] To start things off, we'd like to take questions from Rick's analysts and then some of its larger shareholders. First off, we have Scott Buck of H.C. Wainwright. Scott take it away.

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%?

I mean right now, my goal is 15% for sure. I'd like to see us getting back to the deals. I probably -- on a base on analogy. I'd probably say we're in the fifth inning, probably the bottom of the fifth. We're headed into that seventh 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, second quarter of our fiscal year. And then we might get back up to those 20 margins. We just have to see how these new clubs -- these new stores do. They're all handpick flagship locations and I'm very excited [Audio Gap] 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 continue to put the efforts into fixing them and taking those efforts and put them on others. We'll come up with those decisions over the next probably 45 to 60 days.

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&A? And maybe a reminder of what it is you guys are looking for in a club property?

Sure. We've been getting lots of calls. We went to the Detroit market. It's a market we're not in. There are some very successful clubs in that market. We've been told some of those are for sale. We're actually talking and meeting with some of those owners this weekend and probably through next week. And then hopefully, by EXPO we will meet -- some of the coming to the 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 [Audio Gap] was a onetime event. For the industry and realizing that going into '23, '24, '25, that the -- a more reasonable number to sell their clubs at versus those high earnings from 2022. 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 and closer to 5x multiple with real estate included.

Great. That's helpful. And then I wanted 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 time line to liquid. [Audio Gap] have something else in mind?

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. 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 will, we will open that property. I'm hoping to make October -- if we don't make October, it's very difficult to open and full winter up there. So we may push that to a spring opening and center for a while or we may do maybe some temporary like weekend-only opening or something like that. I 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 so it's just 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.

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?

As occur right now, there -- 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 we're trying to lower our interest rate and debt service on.

Next up, we have [Audio Gap] Orchard Wealth. Please take it away.

All right. Let's talk about you guys saved $10 million 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 5x earnings for both Colorado and for Chicas Locas, right?

Well, the for 5x plus the real estate on Colorado, and I believe we were 4x plus the real estate on -- the -- on the -- I call it Dolls -- the Burch acquisition, Baby Dolls, yes.

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

Correct. [indiscernible] Last name is Buck, B-U-C-K.

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 it now that you've adjusted the new prices, right?

22% less stock, not the total purchase price. But I mean it's not how you want to look at it, if you look at -- you split the $10 million -- split the baby say you take $5 million less for -- so paid $83 million for the Colorado acquisition, we only paid $61 million for the Baby Dolls acquisition. I mean you can go and figure out those multiples that way. That's how I would do it. But yes. But it's still a considerable savings on the overall deal. And the nice thing is on a free cash flow per share basis, there's -- all those shares are no longer. [ Audio Gap ] that we have all that new revenue coming in.

Great. it seems like the majority of the shares you basically took down when the stock grow 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. It looks like they put on 500,000 shares, bringing the total to 925,000 shares that are outstanding and they're going to have to buy it back. So you were the guys bought those shorts...

I believe we bought -- if you look at the last few months, we probably bought over 50% of the shares. We had 400,000 1 quarter, 133,000 so far this quarter. So we probably bought [ about 1 million ] or more of those shares in basically June and July. And a lot of it under -- we made some very large purchases when the stock went under $40. It wasn't for very long. It was only a few days, but we were buying about the maximum amount of shares. 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've just bought average between $42 and $50. We just bought basically pretty much steady number of shares every day, occasionally bumping it up because we got a target, an internal target of being under 9 million shares by August 5. 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 someday, we didn't get stack. And I think for a brief period, we were buying probably 8,000 shares a day and then get it back to a normalized number and dropped it down again. So.

Okay. And then my last question would be, obviously, this Bear Cave dude did put out like the tweet and there 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 with whatever that police thing was about?

I would refer you to the 10-Q and the disclosures [Audio Gap] Q and state that I cannot make any comments on our ongoing -- any type of ongoing investigations at this time. But there are disclosures in the 10-Q if you want to see, see what that is. And you'll see that he was a little off base on accusations, he made.

A little bit or a lot of bit. All right, great. I'm just blown away by the fact that you guys were able to save $10 million on the purchase price. That's like massive.

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

Thank you. And with that, this will conclude our earnings call. On behalf of the Eric...

You have a hands, I think, check again. If anybody wants to ask a question you can...

Liam, take it away.

There are a few more in there.

There we go. So next up we're going to bring -- I'm not sure what that was. Let's bring up [indiscernible] Biotech.

Okay. Great. So curious just cumulatively, how much cash has been invested in the Bombshells business and the casinos?

Well, casino properties and remodel of the Rick's Cabaret, so we have to kind of divide it up. There's about $6 million in non-income producing properties out there. And we'll have about $8 million invested in the Rick's Cabaret that will and Steakhouse that will actually open. We have 1 of the properties for sale right now for $5 million, 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. So we'll have recouped almost 100% of the nonincome-producing properties will be almost recouped other than the 1 property, but we have a tenant. So it's actually income-producing. I shouldn't really say it's nonincome-producing. It is income producing just not a significant amount. And then when the Rick's opens, I think we'll repeat that investment pretty quickly. And -- but a lot of that is debt now because we did -- when we did the $20 million loan, those 3 properties are big [Audio Gap] collateral on the $20 million 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. I haven't been that concerned with it because it wasn't really material in the overall investment from the company right now. As far as Bombshells goes, I mean, I know '23, we were 140% cash-on-cash return for Bombshells. Where we're at today. I haven't ran that again recently. I know we haven't invested 40% of the first 13 stores into these next 3 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're nowhere near the amount of full profit. So on that basis, you're probably talking from an ROI standpoint, we have really no money invested in the concept. And we made $1.4 million of Bombshells this past quarter. We get back to where I think we need to be, which is about $15 million of revenue and 15% margins. We'll still be making a significant amount of money off Bombshells, and we can look to take those assets and monetize them in another way and then reinvest that money back into our adult club business.

Eric, we have an anonymous question submitted. If you'd like to discuss the fire if that happened?

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. Where the hottest part of the fire was at. It was in that electrical room area. There was no kitchen, real kitchen there. There's no natural gas there. So 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 05:00 -- or 4:40 a.m. in the morning according to the alarm system. 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 is doing very well. It was newly remodeled -- so they're -- it's a tough deal. But we are -- we've already started to clean up. 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 of the building. So we've been moving along pretty quickly there and get that back open for us.

Fantastic. And with that, on behalf of Eric, Bradley, company and our subsidiaries, thank you, and have a good night. As always, please visit one of our clubs or restaurants and have a great time.