Q4 2021 RCI Hospitality Holdings Inc Earnings Call
[music].
Okay.
Greetings and welcome to the RCI Hospitality Holdings conference call and webcast. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
<unk> or comment you would hit simply star one on your Touchtone phone.
This conference is being recorded its now my pleasure to introduce Gary Fishman, who handles investor relations for RCI.
Thank you John.
If you're listening on the phone you can find our presentation on the RCI website click company and Investor information under the RCI logo that will take you to the company and Investor information page scroll down and you'll find all the necessary links. Please turn to page two of our presentation I want to remind everybody.
You of our Safe Harbor statement, it's posted at the beginning of our conference call patients. It reminds you that you may hear or see forward looking statements that involve risks and uncertainties actual results may differ materially from those currently anticipated.
And we disclaim any obligation to update information disclosed in this call.
As a result of developments.
That occur afterward.
Please turn to page three.
I also direct you to the explanation of non-GAAP measurements that we use I'd like to and I'd like to invite everyone listening in the New York City area to join US Tonight at six o'clock to meet management at Rick's Cabaret in New York.
It happens number one gentleman. This club you can also tour its sister club hoops Cabaret and sports Bar next door is located at 50 West 30, <unk> Street between fifth Avenue and Broadway around the corner from the Empire State building, if you Havent RSVP, Ed ask for Eric Langan or me at the door now I'm pleased to introduce Eric Langan, President and CEO.
Of RCI hospitality Eric.
Thanks, Gary Thanks for joining us today.
I'm here with our CFO Bradley shape. After the market closed we reported our fourth quarter and year end numbers. We had another strong performance with record fourth quarter revenues fiscal year revenues and cash generation as always we thank our loyal customers and dedicated team members and steadfast investors for their support.
We are continuing to work on all aspects of executing our growth plan for fiscal 2022.
At the end of the quarter, we closed on our $99 million Bank real estate refinancing at <unk>.
Rates and terms in October and November we closed on our big acquisition of 11 clubs in six states and the mansion and Newburgh New York.
Last week, we opened our 11th Bombshells in Arlington, Texas.
Dallas market.
And our first franchise is close to opening its first location in San Antonio.
Brian and I will talk more about the growth plans later, here's Bradley to review the financials.
Thanks, Eric and good afternoon to all those who are listening.
During the fourth quarter, we reported total revenues of $54 $9 million that is up 91% from a year ago quarter.
Also up 22% from the pre pandemic fourth quarter and fiscal 2019.
GAAP EPS was <unk> 26 cents and non-GAAP EPS was $1 58.
GAAP EPS was impacted by a noncash impairment charge of $11 $9 million.
Most clubs rebounded significantly through the year on a favorable trajectory.
However for the full year contribution from the clubs in certain locations, which had a more stringent COVID-19 restrictions did not recover as fast as previously projected.
Net cash from operating activities was $9 $8 million and free cash flow was $8 $5 million for the fourth quarter.
Net income with $2 $3 million in.
And adjusted EBITDA was $17 $6 million.
For the full year fiscal 2021, we reported total revenues of $195 3 million.
That is up 48% from a year ago quarter, but also up 8% from fiscal 2019.
GAAP EPS was $3.37.
And non-GAAP EPS was $4.08.
GAAP EPS was impacted by a noncash impairment charge of $13 $6 million for the full year.
The net cash from operating activities was $42 million.
And the free cash flow was $36 1 million.
We ended the year with $35 $7 million in cash and cash equivalents.
Now if youll turn to page five.
Nightclub segment revenues operating margin and income from operations.
All up significantly year over year as a result revenue rose to $43 million, which is great for our seasonally slower fourth quarter.
GAAP operating margin was 16, 1% and non-GAAP operating margin was a whopping 43, 2%.
GAAP income from operations increased to $6 5 million and non-GAAP was $17 $4 million.
Our Florida club did particularly well in our high margin service revenues, mainly from our northern States clubs.
Essentially year over year.
Looking at results compared to pre Covid fourth quarter of 2019.
Revenues were up 12%.
Income from operations increased 4% on a GAAP basis, and 58% on a non-GAAP basis.
Excludes impairments.
Now if you'll please turn to page six.
Bombshells had a great quarter with revenues of $14 4 million.
GAAP operating margin of 28% and income from operations of $3 million.
Revenues were below the third quarter and the unusually strong year ago fourth quarter.
But they were 11% of the first and second quarters of this fiscal year 2021.
68% higher on 25% more units compared to pre Covid fourth quarter of 2019.
Operating margin was lower sequentially there was less in the way of operating leverage during the fourth quarter were experienced and were heavily impacted by food and labor inflation costs.
Also had preopening expenses related to bombshells in Arlington, which opened earlier this month.
Please turn to page seven still fiscal year 2021 was a record year for bombshells.
I'd like to spend a moment reviewing our progress.
Now over the last five years, we've gone from five to 10 locations.
We've seen a 200% increase in revenues and an increase of seven percentage points and GAAP operating margin.
Our fiscal 'twenty, one average unit volume compares very nicely some of the biggest and best brands in the business.
We believe there are several factors that are driving the success.
Number one our bombshells team.
Led by restaurant <unk>, David Simmons.
Number two we believe that bombshells is a great concept and we've done a really fine job at refining it.
And lastly, our site selection has resulted in better locations and higher average sales per location.
Now please turn to page eight to review.
And our fourth quarter consolidated statement of operations.
Sales were higher expenses were lower.
There's a CFO analysis right there improvement in the margins of cost of goods sold salaries and wages and SG&A were all attributed to higher nightclub revenues during the quarter and.
In part that's due to high margin service revenues growing from 23% of the total and.
And a year ago quarter to 31% this year.
Certain costs overall in general such as insurance and legal were significantly lower.
As a result, GAAP operating margin was six 6%.
Non-GAAP operating margin was 28, 4%.
Our interest expense also declined as a percentage of revenue I'll talk about more of this later when I get to the debt analysis slides.
Now if you'll please turn to page nine.
As I also mentioned earlier, we ended the quarter with $35 $7 million of cash on hand.
While our total debt fell to $4 million to a two year low of $125 2 million.
The debt decline reflect the scheduled pay downs and a $1 $2 million pay down related to a sold property.
Free cash flow was $8 5 million for the quarter and a record $36 $1 million for the year.
As you know we pay a lot of bills in the fourth quarter.
This effects, our net cash from operating activities and our free cash flow for the period.
While many of our locations bounce back over the course of fiscal 2021, they were not open to their full capacity as they are now.
Adjusted EBITDA for the quarter was $17 $6 million and $62 million for the year.
Now back to that the next three slides show our debt as a result of the September refinance and then the new debt that we took unrelated to our October and November acquisitions.
Let's start with our 921 that Pie chart on page 10.
Real estate debt increased $18 6 million from June 30 to $102 $3 million September 30th.
Using the cash that we pulled out from a real estate, we paid down $7 million and higher rate seller financing and $12 4 million and higher rate unsecured interested.
<unk>.
Please turn to page 11 to review the 930 debt Manageability.
Our August occupancy costs continued to trend in the right direction on are well below our target range of 8% to 12%.
As a percentage of revenue they were 6% in the fourth quarter compared to 11, 8% in the year ago quarter.
And seven 6% in the fourth quarter of 2019.
This was primarily due to higher sales in the current quarter and.
The decline in interest expense.
We continued to reduce our weighted average interest rate over the last five years.
It has come down from seven 3% in the fourth quarter of fiscal 2016.
To 564% in the fourth quarter of this fiscal year.
Our 930 weighted average interest rate was 104 basis points lower than the 630, primarily due to refinancing and paying down the higher rate interest debt.
As we've discussed our periodic refinancings like the one we just did in September enables us to convert higher rate seller financing and other unsecured financing using the club acquisitions.
The lower rate commercial real estate bank debt.
Our periodic refinancing also enables us to smooth out our debt maturity schedule.
In this case the September refi enabled us to eliminate $4 million and balloon payments due in fiscal year 2022.
Refi also enabled us to reduce principal amortization by more than a $2 million annually.
Now if you'll please turn to page 12 to look at our 11 30 that Pie chart.
Now going into October and November.
We're able to take on $39 $2 million of new debt.
This was in the form of seller financing and unsecured debt that was used to make our recent acquisition of our clubs in real estate.
I'd also like to note on this slide that we have reached the end of our SBA loan through forgiveness and have a small amount of repayment lab.
We are also nearing the end of the Texas Comptroller settlement.
Now, let me turn over the call back over to Eric and thank you.
Thanks, Brian.
Turning to slide 13.
We've continued to talk with new investors, So I'd like to review our capital allocation strategy.
Our goal is to drive shareholder value by increasing free cash flow per share, 10% to 15% on a compound annual basis our.
Our strategy is similar to those outlined in the book the outsiders by William Thorndike.
He studied companies that focus on generating cash per share and allocating that cash effectively to generate more cash we.
<unk> been applying these strategy since fiscal 2016 with three different actions subject of course to whether there's other strategic rationale to do otherwise.
One is mergers and acquisitions, specifically buying the right clubs in the right markets.
We'd like to buy good solid cash flowing clubs at three to five times adjusted EBITDA use some seller financing and acquire the real estate at market value.
Another strategy is using cash to grow organically, specifically expanding bombshells to develop critical mass market awareness and sell franchises.
Our golenbock MMA M&A and organic growth is to generate annual cash on cash returns of at least 25% to 33% for <unk>.
Third action is buying back shares when the yield on our free cash flow per share is more than 10%.
Currently we believe the yield is within our buy range. However, we are seeing some great opportunities to expand bombshells as well as additional club purchases with opportunities to earn cash on cash returns of 25% to 50%.
We have been letting our cash build.
Once cash gets to a point beyond.
But we feel we can deploy quickly at these great returns our plan is to use excess cash to buy stock in the open market. If the stock price continues to stay in the current range of 60 to $65 per share.
And we would be more aggressive.
Better than Youll becomes under $60 per share.
For our growth initiatives, please turn to page 14.
Here's an update on our current growth initiatives, we have a lot going on.
We're making important progress with the 11 clubs that we acquired in October. This is a COVID-19 rebuilding effort similar to what we did with our own clubs in fiscal 'twenty and the first half of fiscal 'twenty. One the new clubs are backed up to about 80% of their pre COVID-19 run rate.
We're continuing to staff them with the right people.
As this happens we expect to make continued progress towards the next over the next few quarters.
Our other acquisition the mansion is doing well and our new bombshells in Arlington is off to a terrific start with a record single week.
Sales for a floor for bombshells.
Our first franchise location in San Antonio should open in the March quarter.
<unk> is our second fiscal quarter also during that quarter, we expect to reopen our remodel club in Louisiana and the club we are reformatting in rebranding in San Antonio.
We are in the process of obtaining our credit card processor or admire <unk> dot com.
<unk> is also scheduled for beta testing in the second quarter.
We have to access properties under contract for sale.
And as we announced last week, we are under contract for purchasing land for two new bombshells in Dallas.
Give us four locations in that market. We are also under contract for purchasing land in Stafford, Texas, which would give us nine bombshells in the Houston market.
As always we continue to talk to owners about acquiring their clubs and we continue to look for new bombshells locations and franchisees.
Sales for our first quarter are doing well.
With our acquisitions, we should have another great quarter.
These are big Thanks goes out to our teams nightclubs and bombshells and corporate for all your hard work and dedication.
And Barry and Merry Christmas.
Let's open the lines for questions operator.
Thank you ladies and gentlemen, the floor is open for questions. If you have any questions or comments. Please press star one on your Touchtone phone pressing star to remove you from the queue should your question be answered and lastly, while posing your question. Please pickup your handset if listening on speaker phone to provide optimum sound quality. Please hold while we poll for questions.
Once again Thats Star one if you have a question or comment.
And the first question is coming from Anthony.
Zen ski from Sidoti and company your line is live.
Yes, good afternoon, and thank you for taking the questions certainly terrific quarter on the terrific year as well.
So just.
Looking at the segment margins, obviously very strong performance.
For both the quarter and the year so.
As we think about the <unk>.
Rising food costs and labor costs, how should we think about the segment operating margins going forward.
I mean, I think we've been able to pass most of those costs on obviously, if the costs continue to rise and we're unable to pass those on.
Those margins could get squeezed a little bit.
We had some considerable preopening cost.
Obviously for the bombshells.
We will again this quarter.
But but the Arlington store will also.
Have about.
Just under four weeks of revenue as well, so that'll help offset some of that.
And so I think the bombshells margins will probably stay within a range of 18% to 22% which is in our target.
As far as the nightclubs go.
For the quarter I think we are seeing increase was to continue to see increase in our service revenues.
In our northern markets.
As people coming back out we will have to see.
Obviously, how this new variant.
That if it does or not the new mass mandates are in New York could become a factor as well we're going to be watching that.
They just started Monday, so theres no real.
No way to judge anything at this point.
On that but other than that everything else I think were very strong in our other markets.
And I think what the club margins will hold or expand.
From where they're currently at.
Got it okay. Thanks for that and then.
Just to follow up on that as far as the Preopening costs do you have those numbers what that was for the quarter and what.
Should we expect for the first fiscal quarter for Preopening now.
No we don't really have it broken down because basically we train at our existing locations.
What I can tell you is our labor costs are up.
In the quarter, but a lot of a lot of that labor cost is training it is not necessarily cost inflation.
Some of it is cost inflation about the cost inflation.
I said, we've been able to pass most of that on and pricing increases.
So.
And so I'm not too worried.
About margins being hit by that at this point.
And youll see some of our existing stores I think their margins.
Returned to more normal labor margins.
As we move forward as all the employees are now employed Anthony store in Arlington. So.
So all the training that we've been doing for the last six months as you know, it's been basically spread around different stores.
The company will go away.
Understood and then.
You mentioned that the Q1 to date the trends.
Pretty good so.
Is that just just mostly traffic driven or are you seeing also increases in average ticket as well.
We're seeing some we're seeing higher VIP spend which is why I said I think we will continue to see the service revenues as a percentage.
Continuing to grow a little bit.
<unk>.
But I mean right now we're just very solid I don't what I don't really have as you know we have 12 new locations.
And I don't really have the full breakdown on those locations at this time.
I've been watching the numbers on a much more macro level.
But as we get to the end of this quarter.
And the next Q, we'll have a better idea of.
More of the micro on those locations, but those locations are like I said, it's more of a COVID-19 rebuilt set right now of some of the locations just barely opened in October to be fully open they bought <unk>.
Restricted hours.
The previous owners didn't necessarily open for all of their normal business hours. So they had limited hours. So we're in the process of basically expanding those business hours getting everything back open full time.
Staffing staffing the staffing the locations are better.
And I believe that will be on a I think it was back to a 100% 2019 run rate probably by March.
In a worst case scenario may and then we'll start seeing it.
And what kind of growth, we can get out of those locations.
Got it okay, well, thank you and best of luck going forward.
Alright, thank you.
Okay. The next question is coming from Adam Wyden from AWS Capital. Your line is live Eric.
Eric.
Can you hear me all right.
Yes.
Perfect I just wanted to do a little bridging that.
Anthony I think alluded to this but.
The fourth fiscal quarter is a seasonally slower quarter and it was burdened by.
It was burdened by some preopening costs and whatnot, but I mean, if I, just take that quarter and I annualize it I get to about $70 million of EBITDA and perhaps it perhaps the run rate is maybe 75% or 80 when adjusted for seasonality.
When I add loudly, which was doing 14 or 15 kind of before you got them up and running.
I'm seeing a business that's doing nearly 100 of EBITDA and that's kind of before the new bombshells locations I mean.
Look I I don't want to sound like a broken record, although I often do.
With a market cap of $564 million.
Or maybe it's a little bit more with another 564 and $100 million of EBITDA.
You're you're.
Youre trading cheaper than pretty much any restaurant hospitality company out in the marketplace I mean.
What are you guys doing.
<unk> narrowed the gap on the cost of capital.
In terms of.
Getting getting.
Getting the market to see that.
The value I mean, maybe maybe.
Maybe buying back shares at these prices it makes more sense than M&A I mean, obviously at three times EBITDA, maybe not but I mean at five five times whatever you want to call. It that's a pretty a pretty high bar.
Yes, I agree and that's why I said I think we're well within.
Our buying range right now we're looking at all the opportunities we have but you're actually one of the things we're doing.
We are going to the noble conference.
In April we're doing IRC in January were doing the Sidoti Conference also in January.
I'm looking at a possible conference maybe in March so we're going to get out in the queue.
The story.
But the main thing we're going to do is continue to focus on.
On building the free cash flow getting that $100 million in EBITDA.
And then and then growing from there.
I believe that.
We're a little off that run rate right now, but I think that by March I guess that between March and May that's going to be our go forward. Our go forward run rate with the with the.
Lowry clubs coming on up to up to speed and starting to see the.
So what we do when we when we take over these locations and growing typically 15% to 20%.
I think we will see that that growth come into play the new bombshells in Arlington had a record week.
It's a fantastic location.
We're working on the.
The rollout property I just talked we had development meeting this afternoon before this call.
Like everything is going good to the whole.
We closed on that property at the end of January.
Early February.
And we'll be getting that one started we've got all the stuff in on the grapevine location. Its about a 42 day deal I think it started at 42 day started December 6th so that process will hopefully that process go on we'll get started on construction that one shortly thereafter.
And on the early stages of a new location in Houston as well and I've also got multiple other properties.
We've got the LOI is out of that were working or negotiating on right now.
To continue to build the bombshells I want to get the eight locations that we've that we've discussed in the past and get those eight locations under contract and get them all under construction and get them going.
We're meeting with.
Couple of other franchisees and we're talking with the.
Couple that we've been we've been talking with them moving those forward down the line a little bit and of course, our current franchisee is very excited to be.
Hope we opening in January early February as well.
We opened before Super Bowl so.
I think that's achievable for them as well.
They originally wanted to be opened in December, but we've kind of told them look we watch these things be built a million times, we we figured they'd make about mid January in that.
It looks like it looks like where they're headed right now so that they get it done by then they should be able to open by February which Youll give us our first franchisee and I think what's what.
Once that franchisees starts putting their results out I think people are going to see.
The value of franchising bombshells, and we're going to end up with even more franchisees.
The franchise economics on Bombshells are great. Obviously royalty revenue was 100% return on invested capital, but I mean, if you look at taking one of your deck before you were showing the the cash on cash returns on bombshells I mean on a levered basis. They are like 50 or 60%. So I mean, it's kind of been saying that that we're still trading at five five times EBITDA when you've got.
This segment with those return profile.
And then you've got Chipotle and all these things trading at 40 times EBITDA at Wingstop at 100 times EBITDA I mean granted.
Wingstop franchise, but Chipotle is all company owned with leases right and you've got it you have got an owned real estate base with arguably better cash on cash return. So look obviously you guys reported a great quarter and look it's with you now.
Pre COVID-19.
You were doing 50, EBITDA or whatever it was now you're exiting 'twenty one with a double no. It's super impressive I mean look I I think.
And any initiatives and efforts you can put on expanding your audience base and.
To get the appropriate cost of capital I think will be beneficial because you know obviously.
The company is executing and we are.
Not getting a we're not getting a I guess the appreciation in the public markets I mean, it's almost the same we will get there I mean, you know this as well.
This is a we've got to keep putting information out there.
The market's overall, a little weaker right now I think people are little little freight of this new variant at first but I think that figure is kind of going by us.
People are really getting that sick from it it seems.
From the reports that that I'm reading it.
It hasn't slowed down business at all or we got a great a great week last week.
I don't think it will continue this week is going to be a great week for us as well.
We run our weeks when the first of the seventh eight through the 14th and 15th through 'twenty one.
So I think that as.
As we see these weeks coming in through through December will have a very strong strong December was going to read a lead us to a very very strong quarter.
And then going into January February March I think it just it just keeps getting better.
That's what we've been seeing so.
I think we will continue to play or not made.
Maybe my 100, <unk> hundred million dollars of Ebitdas are getting a little bit light, but.
That's what I'm working for like Miami make you would be under me for a change [laughter] Oh, my goodness wouldnt that be nice alright, guys I have to jump off for zoom, but keep up the good work. Thank you alright have a good one.
Okay. The next question is coming from Joe Gomes from Noble capital markets. Your line is live.
Hi, guys. This is Joshua was awful filling in for Joe Joe.
My first question is just based on the acquisition pipeline you guys have going on I know you guys are just finalizing those 11 clubs.
But just how is it looking and I noticed that just like for new exposure market. So you guys are doing with kind of like a trend youre seeing sort of a new strategy for those for those acquisitions.
Well I think.
We've gotten more aggressive.
In the past, we were paying three times or less for most of our acquisitions. The current acquisition that we just did was a five times EBITDA acquisition.
For some great locations like you said four new markets.
We dominate in those markets with those locations.
And basically some of them. They are the only locations in those markets. So we're very excited about that.
It's woken up some other owners that have some some some quality clubs that said.
I didn't know you pay me five times I thought you're only paying three I said well we will.
Look at yourself.
There are certain clubs that in certain markets, where I'm going to pay three to three to four times and the nurse.
What would I call supermarkets, but I would pay.
The higher multiple for it.
And in certain clubs.
And so I'm getting calls from some of those some of those owners now.
We're starting to discuss where they fit in that three to five times ratio in.
Let's see if we can make them happy to get a deal done.
There's a lot of lot of clubs right now.
Our people are considering just because simply the large amount of cash that we have.
If you look back 2019.
I'm coming up with eight or $10 million cash with a lot of cash down payment for us.
On this deal.
We put up $36 million in cash down.
So we're able to do much much larger deals.
And bigger cash, which.
Its actually more attractive these owners, obviously then being paid back.
So we over time, but I am talking to a few that are looking for 20 year annuities look I I need the cash every month.
I'm 68 years old, but I, probably would have another 20 years and I just want you to pay me a payment every month for the next 20 years I want guaranteed money. So we've got some deals like that that we're talking to some owners on right now.
So there's a lot of exciting stuff out there for us.
Yes, thank you for the color on that.
Just kind of wanted to switch over to the bombshells portion I wanted to see how the franchisees is going I know you alluded to Arizona State Youre looking at outside of Texas.
And then maybe in that possibility of other states that you're looking at.
I mean for the Arizona, we're looking at the Phoenix.
Phoenix market for company owned stores.
For franchising, we've got about three three other states that were talking with groups right now.
<unk>.
Once kind of in a.
They had a fight that we thought were going to get it done and then they ended up having a.
With the <unk>.
Department of transportation getting a curb cut into the property.
And without the curve that they have to put extra wrote in so the property there wasn't enough land there.
To make it work they would have lost about 45 parking spots.
Which makes the site not usable so they're not looking for another spot.
So hopefully they'll find climbed one soon and.
And we can get them going.
As I said, our current franchisee starts talking about their second location already they're excited to get open and get <unk>.
On their second location.
And then we've got several other that were you know kind of.
<unk> right now and talking with them and discussing the markets, they're very interested in.
The company's articles, obviously always still looking at Florida, we'd love to be in the Miami area, but I think were now open to looking we're gonna look in Jacksonville were looking Orlando a little bit.
And then maybe maybe even on the Ah <unk>.
First coastal Florida from Tampa down to look.
Look in those areas as well for a possible expansion of company owned stores in those markets as well.
Oh, great. Thank you for that.
And then one more question if I may.
I saw that ins and one of the slides at your Florida clubs are doing particularly well is there like any kind of reason for that increased traffic.
Better cost investment is going into those well I think all of our New York customers moved to Florida now.
Okay.
I just think.
The growth in <unk>.
Especially the Miami Fort Lauderdale area alone is phenomenal.
State of Florida has been very business friendly and.
And I think that's that's helped.
With a recovery in that market tremendously.
You know I.
I don't I'm not big on politics, but I do believe that it's definitely helping the helping.
Helping the clubs down there I mean <unk> is doing record numbers.
Week after week after week after week.
And Thats a site that was already doing you know 26 million was our best best year ever. This last year, we did almost 33 and our current run rate is probably 36 plus.
At that location. So you are talking about a 50% increase post COVID-19.
At Tootsies.
<unk> is up 40%.
So are you now.
As I always say the numbers don't lie.
The math is there the numbers are great and as our northern clubs are coming online now we're starting to see.
And even bigger influx and I think we're going to see.
As the new acquisitions, as we get past Covid.
Strength I can kind of call them restraints right. We had these restraints put on us and when you first take off the restraints you haven't use your muscles in a while so we're about a week and so now we're building off what we're going to the gym every day and we're building up and.
Those locations are I believe will be very very strong as we move into March and definitely through may.
Yeah.
Great. Thank you for the color on that that'd be all from me, but congrats on the quarter and the year. Thank you. Thank you looking forward to more.
We are too.
Okay. The next question is coming from Jason sure from Orchard wealth. Your line is live.
Hey, guys congratulation because look the fourth quarter was excellent considering it was your slowest.
Make some maybe your other quarters look.
Pitiful.
Unbelievable how much business you guys are doing a question for you about the sales from the new locations.
What do you think they're going to add in sales to the balance sheet, let's say for the next 12 months.
Well, if you'd asked me.
You know.
Three months ago, I would thought we'd already be on a run rate of about $14 million to $15 million.
We're running about 80% of that.
Oh, I'm, sorry, $40 million revenue 40 million around these four at four 8 million so in EBITDA.
But 40 million members worried about 80% of that.
So around about 32 on a run rate, but that's only based I mean, we've only had them for what.
Nine weeks now eight weeks now.
So it's still a little early to tell.
Uh huh.
You know it's.
It's hard because we're just not getting open hours, but we're in markets where in some of their market is really employment stuff has been very difficult. So we're having to bring people in or move people in and hire new people and training people. So that's taken a little bit longer than it would if.
If they'd already been helpful hours and had full staffing.
Or whatnot. So that's that's that's why it's adding about three months to it I do believe that our like I said, we'll be on about a 20% 15% to 20%.
Growth trajectory going into March or April over 2019, So they were doing 40 in 2019.
15%, we'd be at 46, 20% would be a 48, so I'm going to guess, where you know by the end of March we're on a go forward rate of about $46 million to $48 million.
In revenue and I would say at least 60% of that extra eight millions of elster.
Four and a half million goes to the bottom line. So we go from 14 to 18, maybe maybe round down a little bit. It was 14 to 17, so on a on an EBIT level.
<unk> 48 in 2017.
On a run rate by the end of March.
Right. That's a farm project in it right now and I don't see any issue with that I think we've gotten stronger as I've been talking with management.
A couple of the clubs have turned the corner there if they're running at or close to a 100% of their 19 around a 300% they've got they've got four hours open again.
When they close certain days they closer hours I don't know, we're just now ramping up to get those days reopened to get those hours are re staff and reopened.
So it will take a little bit of time, it's a day by day.
On the earlier, you said Youre bombshells operating margins, 18% to 22% you know like the range you're looking at what do you see your range for operating margins for the clubs.
But basically it's been between 40 and 55% really just depends on.
Sporting events affect us a lot certain certain locations affect us.
A lot of it depends on what sporting events in those towns.
What the local teams do.
If you take New York I think if the Knicks were.
Contenders and go on to the NBA finals, I think our New York clubs revenue during that.
Two month period towards the work for the finals in that.
And in the playoffs was probably around 25% higher than normal just because of the garden's right here beside us.
And it would be the big executives going to the games not the they're not give them would take us out in the mail room.
So it just depends on who goes to the games who comes to games.
The Rangers got on a real hot streak and then all of a sudden boom.
Full of hockey customers after every game.
It just it just varies.
From market to market and time to time, if all of our markets hit at one time.
It's you know that's a big difference so it's it's hard to judge her with with everything but I think.
40% on the on the low side 50, 55% on the high side.
Okay.
Then the question I have is with the only fans rollout that you guys are going to be doing is this going to be something that like every one of the dancers is gonna be encouraged to do this are you going to give them like a free site or something along those lines what what's the plan with we're definitely gonna be encouraging promoting in our clubs help them promote their you know their business at our clubs.
And bring customers into the club to see them and then of course communicate man.
Build their online business with their with their with their customers a lot of especially high I think it'll be very popular with our our business clubs or travel or the business travelers come to our clubs.
I think it would be very popular there because.
Typically you guys are coming to town on business come several times a year.
And the girl can create a create that relationship so that each time he comes to town or come to the club and visit.
As well and and win.
He's not coming into town he can still.
Say on stay in touch online and you know.
The what I call the fantasy relationship right.
Yeah sure.
Well good I'm very happy with the numbers I, usually for your slow quarter I was expecting.
Lower numbers, but you guys exceeded those yeah, I mean, we weren't and so congratulations it was a.
It was we were like this where you as Israel, sometimes ourselves so we understand.
Yeah awesome, Thanks again guys.
King.
Once again, if there are any remaining questions or comments. Please indicate so by pressing star one on your Touchtone phone. The next question is coming from Andrew Hollingworth from Holland Advisors. Your line is live.
Alright, thanks, very much I'm, just making sure you can hear me because the funding from the U K.
Yes, I can hear you.
Great. Thanks, Thanks for taking the question again, but what else.
Reporting period.
Im just just a couple of questions from me I was going to ask you about the segmental margin and that's nothing but obviously the depth of them before and we've done that.
Just to be clear on that so obviously what that.
I'm going to ask you is really structural lift we've seen in margin how much of that is coming from sort of revenues in terms of you know the good trading or getting all that much about it coming from those type of structural change that you've done in terms of the cost base.
The two year period.
I'll put that in a sense of what youre studying.
Current level of run rates at the moment. The clubs you think you can put a low end of the range. So I'm just making sure that the 40 to 50 thought you just spoke about is comparable to basically slide five but my first question.
Yeah, I mean, I think some of the margin comes from you know we've upgraded our accounting systems.
Over the last five years, we've streamlined stuff there.
And with Covid, we made huge you know because.
We went from.
Tons of revenue to zero in basically one day.
Or about three days and so we wait for some pretty big cuts in what I call. The fact, the company you know as you grow over 2030 years you have some fat now we started cutting a lot of that fat in 2016, we adopt account application strategy and we thought we'd gotten rid of a lot about 18 in roofing.
Moving to the 18 and 19.
But why put your revenue zero and you realize you still got some fat in there.
So I think we were able to cut cut some more of that and we've been very conscious about not adding it back.
Keeping our costs.
Tight keeping our controls tight.
And Oh.
And I'm just wondering are running a tight ship and we're staying very focused on on the margins.
So some of that was.
From customers, but our VIP spend is not that high right now is in certain markets.
What we're seeing is.
As those big customers come back and the margins could be that's why when I say 40 to 50 or 55 Thats a huge for 15 presents a huge you know.
Margin difference, but it all depends on that VIP spend if that big VIP spend comes back in full force.
So that's where we'll be.
Okay.
I think in previous calls.
Hard to say.
So I'm, sorry, you're cutting out a little bit now I'm sorry.
And can just to just to say it previous periods of time, you talked about sort of six to eight quarters of having sort of a good trading and then things slow down for a while.
So in terms of that margin range. If you know if you had a wonderful group of trading six to eight quarters, then it behind that right.
Sort of a slower period do you think now associated with its probably it probably not.
I'll say this fiscal the next good rule, but yes from now that is what you're telling me is at the bottom end of the range could be 40 was about right. It used to be obviously much lower than that.
Yeah, I mean, I still think that we've gotten rid of when you look back long term, especially if you go back pre <unk> 16.
We have a lot of what I call anchors and those were.
<unk> legacy clubs that we've owned for years and years of property that we own that we carry we have carrying costs on it and we had clubs that weren't really making any money, but you know.
We were so concerned with topline revenue that we didn't worry we didn't pay as much.
Attention to return on investment.
Now as we started doing in 2016, and we eliminate those clubs in 16 and 17.
And so that's why you see those lower margins is when times were low and we went through a 40% margin we had a 6% drag from the clubs that were losing money and so the margin dropped 34% was that six per cent drag is gone and it's not coming back. If we have locations that are underperforming now we will sell those locations. We will move those locations do we have to do and then.
Reallocate that capital into and to a much higher margin.
Location are accurate.
That's that's really good that's really helpful can I just ask one more.
I think in terms of the presentations you gave it on past calls and obviously with a bit of help from Adam as well you know the outlook for the business is obviously impressive and appealing and it's really well laid out in terms of your capital allocation. So I congratulate you for that.
I'm a shareholder of the business and to fund that I run. The only question that really comes to mind to me when I look at this company it's.
What goes wrong.
And so I just it would be lovely to hit you just.
Talk about that a little bit, particularly in what happened in the sort of visa Mastercard situation in the last sort of six months or so.
On the world sort of like some businesses doesn't like others in the Facebook situation with the government. So it seems to be against companies just talk to US about you know if society youll politicians the beauty of it if you don't get the government what can you do to a pizza.
But would it be the government changes every for every 246 years right. So.
That's constant moving target and.
There's not really much we can do except from nuber through it and then we use the courts for win when we when we can't we tied up until we get another administration that deals with us or new City Council that deals with us and we work it out and then we have these settlements and then we move forward a lot of the litigation is pretty settled I think.
I think theres, a few cities and towns here and there that don't don't understand that there are protections in there they still try to squeeze us every now and then and we have to go to battle with them like we had to do in San Antonio, but we've come to a a nice compromise in San Antonio We're gonna get stores. When we reopen soon we passed the inspection today with the inspections, where we are this morning, they pass the inspections.
So that's moving forward.
And so I mean, it's just.
Oh, no it's white noise right, it's always white noise Theres always some white noise out there we always have some legal going on here some battle going on there.
You have to deal with slip and falls like Walmart at some point you just get so big you have a legal department.
Where we've gotten to.
Uh huh.
Every now and then we you know we lose one and most of the times, we win because of it.
If we're wrong, we try to do what's right and then.
We've made some legal settlement payments you've seen the payments we disclose them.
And so sometimes we make some payments.
And.
A lot of times, we win of course, you don't hear a lot of times, we win because we're not going to go out and put that in our 10, Qs and 10, Ks and brag about winning.
Not not not our way.
But we we we fight the battles and when do we have to fight and we pick our pick our battles.
Or where we think we can win if we can get out cheaper week, we tried to get out what we don't we don't throw our money away.
On frivolous lawsuits, we will spend money on our attorneys for frivolous, rather than paperless lawsuits or legal stays a little higher.
Well, we have great insurance, where we have a great reputation of our insurance company right now we hope to continue that relationship and keep that going and keeping our cost in line.
For insurance and.
That's really the only I think the only real negatives out there are the occasional deals now obviously you have the downturn in 2008 2009, we survived that we survived the pandemic leave spy being closed down.
Yeah.
I think we've as a company.
Proven throughout the years that they keep growing.
They throw something out is every now and then and and and we are we figure our way through it and come back even stronger each time.
No.
Hopefully we'll see.
Can you continue that trend.
I suppose all I'm really trying to do it.
I think if you will.
Half of successful you look like you're going to be in terms of rolling up the industry and a Monday and all the rest of it youre going to become a much bigger company hopefully.
And you'll see that to be sure exactly our Minnesota.
I mean, when you figure it out I was just wondering from a rapid pace of growth, it's going to grow pretty quick.
Right when we got into that critical math, yeah. So that's what you needed to do.
My question is just more of a question of you know.
What have they been for most of the call. It wasn't about mostly just about somebody might've spring could that ultimately they were forced to react and I'm just sort of trying to put myself in a position that he has to come and as the business more sort of.
More of the public perception and therefore is there she's got workers right. So it's just I just wanted to know how you think about that as an organization in terms of what could go wrong with it.
Yeah, I mean, I mean, you know we we are obviously, we you know we care about our reputation and we worked through it.
You can't keep all the people happy all the time, we've learned that.
But I think as we expand more especially in the bombshells and and and more mainstream.
The days the strip club just arent popular to really pick on anymore.
You know theres very few of them.
Not like in the 19 eighties.
<unk> eighties and nineties win.
<unk>.
Clubs had no 300 clubs in the city of Dallas or Fort Worth you now than they were you know.
They were all biker bars and they are all low end I mean, these are multimillion dollar businesses nowadays a lot of the smaller clubs have disappeared from the on the marketplace you have a resurgence in certain markets.
With what I call a rogue operators are operating without <unk>, there are operating as bikini bars, and and kind of skirting the rules and that they last for a little while but they they don't tend to Oh, they don't kind of do things the right way so at either the tax people get them or somebody you know eventually they they they go away and then you know we continue to.
And then we've continued to do our thing.
Uh huh.
The key I think is just operating them being a good neighbor and just operating the best we can do.
I'll try to avoid a we try to avoid negative headlines.
Obviously, you know it's impossible for any business to.
To.
Boy all negative headlines because there's there's always haters out there.
But we do our best to do.
The best we can and present the.
Spreads on our side of how we do things and why we do things and.
I think as long as we continue that will continue to be successful.
No. That's I appreciate somebody like question I. Appreciate your answer thank you for taking the time here.
Yeah.
Once again, if there are any remaining questions or comments. Please indicate so by pressing star one. The next question is coming from Chris Smith private Investor Your line is live.
Hi.
Just had one question on the 11 nine impairment so was that in any particular market area or what's triggered that now with COVID-19 sort of.
Sort of 18 months on I'm sure I'll give you the easy the quick and easy it's multiple markets.
Mainly in some of our college towns, where the colleges haven't really open back up fully and Texas and of course, our northern Northern clubs, New York and some of our other markets that just got opened so late in the year that when you do the impairment on a 12 month basis, we just.
You just can't you just can't meet the numbers and Theres no COVID-19 exception in gap.
You know we argued and that's if you see we have the material weaknesses because management management use they are basically a non COVID-19 period. So we took out.
Covid period of about six months or nine months out of our out of our out of our growth projections and said. These these these months don't count because this was COVID-19 rebuilt. This is where we're really at this what we're really doing well blah and of course, the auditors came in and said no under GAAP you have to do it. This way, it's very very cut and dry theres no COVID-19 exception, we said.
Okay, no problem and.
We we read it and you know we used to.
Included the Covid numbers and when you do that you ended up with some impairments and and in some of these markets that we believe long term will recover in every one of those markets.
But like I said, there's you know there's just no COVID-19 exception for GAAP. So.
We follow the rules.
So do you see sort of part of that maybe reversing in the future.
Demand, while you can't reverse it once you write it off it's gone.
You get no write up in value. If we did 50 would be worth just these two things would have to be written up $50 million right now probably.
Based on the numbers, they're doing but yeah. You don't you you never get it back it just it's just a write off on book value. I mean, we don't really use book value as a gauge of what our company is worth anyway.
You know, we use our free cash flow and our cash generation EBITDA.
Numbers in <unk>.
Non-GAAP numbers kind of value of the company and see where we're going how much cash we can generate on a go forward basis.
So I mean, the book values not overly important.
Also.
Sorry, there's one other member should not go there.
So on your new debt financing is that it is that a fixed rate loan or is that floating at fixed rate for five years with 111 adjustment at the end of five years.
With a floor.
I don't I can't remember, if there was a ceiling in it or not.
But basically it's a it's a one time adjustment for which scary for another five years and then it becomes balloon at the end of 10 years.
But it's on a 20 year amortization.
Okay. So if tomorrow rates increase that's not really impacting you guys wont impact us for five years.
Then it was you know it could have a small impact for in five years from now.
Okay.
Okay. The next question is coming from Jason sure from Orcher Wells. Your line is live.
Hey, sorry, guys I, just wanted to get a little more clarification on stock buybacks I'm under the impression again because.
You gave away part of the deal was the five half a million shares at $60 a share anything under 60, you guys are going to be crazy buying back because that's just eat printing money right now.
That's the way we look at it.
I think were much more aggressive.
I think we would right now we've got a lot of stuff on our plate I'm trying to see what I'm getting to the holidays letting the cash build up.
Uh huh.
We made a huge acquisition, we'd be about $36 million in cash while we did borrow some of that.
I don't know Ralph something here, but I'm guessing were $24 million or so of cash on hand, right. Now today I don't know how we'll finish the end of the quarter. We are working on a on a debt financing for all of the real estate and the new acquisition plus the Arlington location, a couple of other pieces of property.
That we own free and clear.
They weren't in the first loan.
So theres a small small package being put together on that to give us some more cash.
You know I won't get into if we get that closed by the end of the quarter, we could in the quarter.
$45 million or so I.
I think we're growing free cash.
After debt service and whatnot probably it.
750, 800000, plus a week right now.
Maybe even a million a week Ah I just felt like I said, we've just been going through this cycle and you know getting the cade on getting everything done getting this acquisition done.
I've got a lot of I've got a lot of our homework so to speak as we get to the end of this quarter and move into January and February that after the first year I'll be doing a lot of homework trying to get a really good feel for.
For our run rate on free cash flow.
We've just been you know we know what's good and we've been really busy so we haven't really.
Really nailed it all down, but I think I'm, hoping that we can do or maybe put a old chart back in.
You have a much better understanding by the you know by the February they're probably the make order might be to make order.
When we actually get that chart back in and kind of show you look. This is this is a run rate that's our free cash flow. This is what we buy I think if you go back some of our old slides yoyo.
From pre Covid Youll see those slides, where we basically tell you exactly what we're gonna be buying stock and exactly what prices.
And I want to get that back out there I like that it's just really hard to do because it's just been so crazy right I mean, I don't know if you know the.
Our city is going to close in mid.
Midnight next week or Theyre going to do what you know.
I think in our south markets were very very.
Well off and I think even the north I don't think anybody's gonna deal would close down.
I don't think that I don't think the voting public is going to allow it.
There was a big and in Minnesota with a defined police.
They're just a strict restrictions on everything there was a huge anyway like for city Council members, Yeah got voted out of office. This this last election.
So I think Theres, a big turn on like we want we want our business, we want or we want to be able to go out and we want to go eat we want to go we don't want to sit at home anymore.
So I think that that's you know Wayne positive in our favor like I said I think by by the make order right at the end of March we'll be able to have a much better idea.
Where we're at and hopefully get that back out it makes large hopefully.
Well you also have the good numbers coming from the 11 clubs being taken I mean.
Because there's no news.
The other problem is you know I mean like I said, we've got eight or nine weeks right now and there you know we're seeing growth trajectories in them, but they're still not back to 2019 at all the clubs yet, but I think we will be will be soon.
And as we get to that and then then demonstrated is picking up the growth.
Right, but I have a better idea.
Solidly where we're at and that's where I really want to know where are we at today. So like a snapshot that say this is where we're at based on seasonality based on this this is what our projections are.
And once we can get back to that free cash flow projection.
Then we can use that that projection to say this is one we're going to buy stock.
Okay, that's super easy to calculate the yield based on the stock price.
Yeah, just you know anything around 60 Bucks a complete scale anyway, yeah, we're finding we're definitely buying it if it's under 60, we'd be box, it's getting close so we'll see what happens tomorrow.
Alright, Thank you Yep Yep. Thank you.
Once again, if there are any remaining questions or comments. Please indicate so now by pressing star one on your Touchtone phone.
Yeah.
Are there any final questions. This is the last chance for questions.
Okay. We have a question coming from Michael to radio from it.
He is an individual investor your line is live Michael.
Hello, everyone and thank you for taking.
The last minute question here.
I I just had a question about the.
The dividend I remember you had mentioned on our call.
A few quarters back your.
You were at least maybe considering raising it slightly or something to that effect. So I just wanted to see if there was any guidance you could provide on that because I mean, I I do love a good.
I loved cash being distributed to me I guess, you could say, but by the same token you guys are able to deploy cash in a great.
And the businesses with great economic characteristics and things that I couldn't buy myself and the stock myself.
I don't.
Have one view or another as far as having said that it would be negative not thinking about it. Yeah. Go ahead I don't think we'll see a big increase but I mean, we we we talked about at the board meetings.
This would be the year.
I have to look at the I have to look at the quarters. When we would be due to rates to continue or are you know our annual growth rate. We've got you know basically when you want to come up with those dividends screens you have to have a growth rate of X.
So we will be will be re reviewing that it's on the agenda for before the March before the March dividends paid to review that and make sure that.
That we're keeping our growth trajectory.
But I mean, I, you know I could see us.
I think right now we're at 16 cents a year I can say its going to 18 cents a year.
Possibly paying two quarters of a nickel in two quarters or four cents.
Or I can say is you know maybe depending on things go into 'twenty, and just paying a nickel a quarter or something like that it's actually the worst.
You know tax efficiency of use of our capital as we because we have it doesn't it doesn't really go with our capital allocation strategy, but like you said it gives a lot of investors warm fuzzy feeling and it also puts us.
And a lot more screens and allows the you know.
A broader group of investors to buy and hold longer. So we do like you know I I personally like that aspect of the dividend and of course being a very large shareholder I don't mind those are those quarterly checks either.
So.
A question to follow up on that does the acquisition pipeline.
Is that a factor how much of a factor is it or is it not really entering into your thought process on that at all on the dividend I know we have.
Well what.
We've got you know if if if if we every raised it for central talking $400000, a year not even $400000 a year.
We generated $36 million in cash so I mean 400000 isn't it doesn't even debt so it.
What we havent growth than what we were set up has really no effect.
Our thought process at all I mean, our dividend yields.
What do you think even half a percent on you know what's half a percent right now.
It is so low that it's it's it's it's really a very very small portion of our cash and like I said, it's about the it's about the feel good right I didn't know you got cash coming in every quarter.
What kind of things unless like I said, unless a certain shareholder base increase.
Increase and can feel good about and feel good about owning the stock.
So.
Those are things we way when we when we when we discuss that at board meetings. So.
Uh huh.
You know that those will continue to weigh on it and like I said and continuing to grow faster.
I think it's important that that we keep that growth trajectory.
On a gross on a growth trajectory so that.
That will keep coming up and all the searches when people go and do a stock screens.
I think that's important.
Right.
I'd now like to turn the floor back to Gary Fishman for closing remarks.
Thank you John and thank you Eric and Bradley.
Just to reiterate what.
Very good mentioned, we've been invited to a number of investment conferences. The first half of calendar 2022.
We'll be at the ICR conference in Orlando January 10th to the 12th.
We'll be participating in the Sidoti virtual small camp conference January 19th and 20th.
We'll be at the noble capital markets small cap conference in Hollywood, Florida April 19th through the 21st.
For Vera Bradley as a company and our subsidiaries. Thank you and good night.
Stay safe stay healthy and as always please visit one of our clubs or restaurants. Thank you.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.
Okay.