Q3 2024 RCI Hospitality Holdings Inc Earnings Call
Now I'm pleased to introduce Eric Langan, President and CEO of RCI hospitality, Eric take it away.
Eric Langan: Thank you everyone I'll turn to slide six.
Speaker Change: I'd like to thank you for joining us today.
And we made a lot of progress during the third quarter.
Speaker Change: It reflects the first full quarter of our back to basics approach to our business and our capital allocation strategy.
Speaker Change: Specifically, we have taken aggressive actions to increase revenues reduce costs and expand margins are concentrating our core club businesses, improving the bombshells and buying back shares all with the goal of increasing free cash flow per share.
Speaker Change: Yes, we had a lot of impairment that affected our GAAP results in the third quarter, but that was noncash the key takeaways.
Speaker Change: Our 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 'twenty three.
Speaker Change: Sales also increased from the last quarter.
Speaker Change: Bombshells sales increased sequentially and margins grew from five 9% last quarter to 10, 8% this quarter, reflecting our back to basics approach starting in February of 2024.
Speaker Change: Looking at our list of new projects, we have opened converted or enhanced seven locations to date. This fiscal year and we are working on opening reopening of Reformatting seven more.
Speaker Change: As fast and efficiently as possible.
Speaker Change: As part of this effort, we formally withdrew our application for the Colorado Casino license to better focus on projects that will provide more immediate results.
Speaker Change: Okay.
Speaker Change: Looking at our capital allocation strategy, we added $20 million to our war chest through a bank real estate loan.
Speaker Change: The board of directors authorized increasing the amount available under our share repurchase program by $25 million.
Speaker Change: And we took advantage of our low stock price during the third and fourth quarters.
Speaker Change: To that end I am pleased to announce we have reached our short term objective of reducing shares outstanding to less than $9 million.
Speaker Change: Please turn to slide seven.
Speaker Change: I'm also pleased to announce that part of our as part of our share buyback program. We bought back 700000 shares in the open market, reducing our share count by the same number we use in our Big October 21, and March 2023 acquisitions as you will see on this slide we bought back 700000 shares at a 22%.
Speaker Change: Discount to the average share price used in those transactions.
Speaker Change: Please turn to slide eight.
Speaker Change: Over the last few years, we have achieved some major accomplishments in more than survived Covid. We then manage through the post Covid bounce and then we made our two biggest acquisition ever successfully integrated them and improve their results.
Speaker Change: 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 the best increased free cash flow per share and return value to our investors.
Speaker Change: We are now working on a five year strategic plan, we plan to implement it starting in the fiscal quarter of 2020 for fiscal year 2025, and tell you more about it on our next earnings call Here's a general outline.
Speaker Change: Right now we see two pillars of the plan. The first is to continue our back of the basic 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 improved margins and rebrand and reformat underperforming locations or sell them.
Speaker Change: The second pillar is capital allocation, assuming no growth, we should have approximately $250 million of free cash flow to deploy.
Speaker Change: Our priorities would be to target less than 10% of discretionary free cash flow to ensure a stable and modestly growing dividend.
Bradley: Target about 50% of discretionary free cash flow for selective M&A, focusing on basis and the occasional homerun, making sure we capture synergies at the acquired clubs and to target any access cash not used in M&A and dividends for regular share buybacks now here's Bradley.
Bradley: Thanks, Eric Please turn to slide nine.
Bradley: The core strength of our business enabled us to generate $76 $2 million in revenue in the third quarter.
Speaker Change: GAAP EPS was a loss of 56 per share.
Bradley: This primarily reflected a noncash impairment of $79 million in the current quarter.
Speaker Change: A good portion of that is related to the impairment of right of use and leasehold improvements on several operating leases.
Bradley: Now on a non-GAAP basis EPS totaled $1 35.
Speaker Change: In addition, free cash flow reached a year high of $38 million as did adjusted EBITDA at $20 $1 million.
Speaker Change: Please turn to slide 10.
Bradley: Nightclub revenues of $62 $8 million increased $374000 year over year.
Bradley: This primarily reflects the same store sales growth of one 7%.
Bradley: Two new and Reformatted clubs and our strong pro sports playoff lineup in May.
Speaker Change: In turn this was partially offset by some temporary closings of clubs being reformatted to liquor from BYOB and severe weather in Texas and South Florida.
Bradley: By revenue type alcoholic beverages increased four 9% food.
Speaker Change: Food merchandise and other increased by five 1%.
Speaker Change: Service revenue decreased by five 3% the.
Speaker Change: The different growth rate, primarily reflected a higher alcohol and lower service revenue mix from clubs acquired in the past year and a half.
Speaker Change: Noncash impairment of $7 $6 million in goodwill sob, and leasehold improvement impairments related to six clubs.
Speaker Change: GAAP operating income was $13 6 million compared to $24 million with a margin of 21, 7% of revenues compared to 32, 7%.
Speaker Change: non-GAAP operating income was 12, $21 9 million compared to $23 $6 million with a margin of 34, 9% compared to 37, 7%.
Speaker Change: Comparing to the last quarter revenues increased five 8% non-GAAP operating increase income increased 10, 5% and margin increased to 34, 9% from 33, 4%.
Speaker Change: All of these improvements reflected higher sales, including service and reduce costs.
Speaker Change: Okay.
Speaker Change: Please turn to slide 11.
Speaker Change: Bombshells revenues of $13 $1 million declined by eight 7%. This primarily reflected reduced same store sales and temporary closings due to severe weather in Texas in turn this was partially offset by three locations not in same store sales.
Speaker Change: <unk>, San Antonio and Stafford in Texas, and Cherry Creek Food Hall in brewery in Colorado with its bombshells kitchen.
Speaker Change: The strong pro sports playoff lineup and May also helped.
Speaker Change: Noncash impairment of $10 $3 million reflected operating lease right of use asset impairment and lease hold improvement impairment related to five bump shelves.
Speaker Change: 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%.
Speaker Change: non-GAAP operating income was $1 $4 million compared to $1 $8 million with a margin of 10, 8% compared to 12, 8%.
Speaker Change: Now looking comparing it to last quarter. However, revenues increased two 9% non-GAAP operating income increased 89, 3% and margin increased to 10, 8% from 95, 9%.
Speaker Change: These improvements reflect the first full quarter of changes initiated in mid February 2024.
Speaker Change: Yeah.
Speaker Change: Please turn to slide 12.
Speaker Change: We've made some progress on reducing corporate expenses year over year. They were nine 4% of total revenues compared to $8 one.
Speaker Change: But compared to last quarter, they work level at nine 4% on a GAAP basis, and a non-GAAP basis, they were eight 4% compared to eight 8%.
Speaker Change: Please turn to slide 13.
Speaker Change: This slide 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.
Speaker Change: We also added some data on the number of locations the closures for clubs and bombshells during the third quarter due to severe weather.
Speaker Change: During the third quarter, we had one day closure for clubs and 10 for Bombshells to date in the fourth quarter. We've had 10 day closures for clubs and 26 four bombshells all in Houston due to hurricane barrel.
Speaker Change: Please turn to slide 14.
Speaker Change: We have a couple of slides coming up to this that discuss free cash flow and adjusted EBITDA, which are non-GAAP and <unk> that we wanted to present the closest GAAP equivalent on the slide which are operating and net income.
Speaker Change: Okay.
Speaker Change: Please turn to slide 15.
Speaker Change: We ended the third quarter with cash and cash equivalents of $34 $9 million.
Speaker Change: This included proceeds from a $20 million bank real estate loan.
Speaker Change: During the quarter, we used $9 2 million to buy back shares.
Speaker Change: As a percentage of revenues free cash flow was 18% and adjusted EBITDA was 26% both highs year to date.
Speaker Change: Please turn to slide 16.
Speaker Change: Debt at June 30 increased by $13 $5 million from March 31.
Speaker Change: This reflected a combination of the new bank loan and scheduled pay downs.
Speaker Change: The weighted average interest rate was 674% only 22 basis points higher than a year ago.
Speaker Change: Total occupancy cost at seven 9% declined from 8% year over year on a sequential quarter basis.
Speaker Change: Year over year and on a sequential quarter basis.
Speaker Change: Debt to trailing 12 months adjusted EBITDA increased to 327, primarily due to the new bank loan. This should decline over the coming year as sales growth from locations that have been that have come online recently and from those anticipated to open.
Speaker Change: Debt maturities continue to remain reasonable and manageable.
Speaker Change: Subsequent to the quarter, we paid down $1 $5 million on the play May note and extended the balance 16 months out the balloon payment at the extended maturity date was adjusted accordingly.
Speaker Change: The monthly installment payment and principal and interest has remained unchanged.
Speaker Change: Please turn to slide 17.
Speaker Change: We continue to pay down <unk> license of our debt with the exception of real estate because of the new bank loan as a result, that's licensed larger at 61, 4%.
Speaker Change: And all the other slices are proportionately lower adjusted for the net debt Paydowns.
Speaker Change: Now, let me turn the presentation over back to Eric.
Eric Langan: Thanks Bradley please turn to slide 18.
Eric Langan: I want to make clear that everything we do is centered around our capital allocation strategy. We employ three different approaches subject to whether there is 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.
Speaker Change: Please turn to slide 19.
Speaker Change: With that in mind, we are laker laser focused on opening the seven reformatted, our new clubs and Bombshells currently under development.
Speaker Change: Rebuilding the baby Dallas Fort worth location that burnt down in July as fast and efficiently as possible.
Speaker Change: Reviewing all operating units to ensure they meet our financial objectives.
Speaker Change: Selling non income producing real estate to free up more cash and reduce debt and using free cash flow to facilitate buyback more shares and acquisitions of clubs.
Speaker Change: Please turn to slide 20.
Speaker Change: 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.
Speaker Change: <unk>, 1% for adjusted EBITDA 17, 2% for free cash flow.
Speaker Change: We have also reduced our fully diluted share count.
Mark: I 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 in make our success possible now here's mark.
Speaker Change: Thank you, Eric and Bradley if you'd like to ask a question. Please raise your hand in the <unk> space. When you finish. Please mute your microphone to eliminate any background noise. We have a limited number of speaker spaces. After your question. We may move you back to the audience to free up space.
Speaker Change: To start things off we'd like to take questions from Rick's analyst.
Speaker Change: And then some of its largest shareholders first off we have Scott Buck of H C. Wainwright, Scott take it away.
Scott Buck: Hi, Good afternoon, guys. Thanks for taking my questions.
Scott Buck: Nice progress on the Bombshells margins I'm curious.
Scott Buck: If we use the baseball analogy of what inning, you're in you know how far along are with the restructuring process, there and can we get those margins back to 20%.
Speaker Change: I mean right now my goal is 15% for sure I'd like to see us getting back to the deals I've, probably been a baseball analogy I would probably say we're in the fifth inning, probably the bottom of the pit.
Speaker Change: We're headed into the seventh inning stretch, which I think will be.
Speaker Change: In September and then heading towards the finals in October November December where I believe that.
Speaker Change: We'll certainly hit the 15% and maybe better as we open.
Mark: New stores and move into <unk>.
Mark: Calendar 2025 second quarter of our fiscal year.
Speaker Change: We might get back up to those 'twenty margins, we just have to see how these new club are these new.
Speaker Change: These new stores do.
Speaker Change: I'll hand pick flagship locations.
Speaker Change: And I'm very excited about those locations.
Speaker Change: So we will see we may we may also consider as we as we move forward.
Mark: Through the end of September.
Mark: Of maybe even taking some underperforming locations.
Mark: And either selling those locations off or closing some of those locations as well.
Speaker Change: And I know a lot of our restaurant chains have been doing that I've been looking at the numbers.
Mark: On a couple of locations underperforming locations.
Mark: And it may just make more sense at this point to eliminate those locations versus.
Mark: Continuing to put the effort into fixing them and taken those efforts and put them on others.
Mark: Come up with those decisions over the next probably 45 to 60 days.
Mark: Great I appreciate that that color and Eric I think you were in.
Eric Langan: 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.
Eric Langan: Sure we've been getting lots of calls.
Speaker Change: We went to the Detroit market, it's a market we're not in.
Speaker Change: There's some very successful clubs in that market.
Speaker Change: We've been told are some.
Mark: Some of those are for sale, we're actually talking and meeting with some of those owners.
Mark: This weekend and probably through next week.
Speaker Change: And hopefully by Expo.
Speaker Change: We will meet some of them some of them are coming to the Expo as well as other club owners, we've been talking with.
Speaker Change: The pipeline is really heated up people are starting to get more reasonable they're starting to realize that 2022 was a onetime event.
Speaker Change: For the industry and realizing that going into 'twenty three 'twenty four 'twenty five.
Speaker Change: You know a more.
Speaker Change: Reasonable number to sell their clubs that are versus those high earnings from 2022, and so I'm very optimistic going forward.
Speaker Change: Over the next.
Speaker Change: 12 to 24 months, we're going to see some.
Speaker Change: Some nice acquisitions coming forward in a.
Speaker Change: Closer to five five X multiple with real estate included.
Speaker Change: Great. That's helpful. And then I wanted to ask about the Colorado properties I think Youre still full go on the steakhouse, but the other properties you have there what's the timeline to liquidate or do you have something else in mind.
Speaker Change: We're talking with several people we may lease those properties, we may sell those properties.
Speaker Change: Several groups on a one particular property I expect.
Speaker Change: An LOI on that property probably in the next few weeks if not sooner.
Speaker Change: The other property, we're talking with several it's got a tenant in it right now.
Speaker Change: But there's additional space in there. So we may add additional tenants to that or we may.
Speaker Change: So that property, if we find the right casino operator to sell that property too.
Speaker Change: The Ricks cabaret Steakhouse property will.
Speaker Change: We will open that property I'm, hoping to make October.
Speaker Change: If we don't make October is very difficult to open full winter up there. So we may push that to a spring opening and Senate for a while or we may do.
Speaker Change: Some temporary.
Speaker Change: We can only opening or something like that haven't really got a full plan because right now I'm planning to get be finished back over but unfortunately construction is out of my hands.
Speaker Change: So there's going to be whether they can get it done in time for us do that.
Speaker Change: Currently the plan on that one.
Speaker Change: That's helpful and then last question.
Speaker Change: Bradley she should we see a meaningful decline in interest rates or are there any opportunities for potential refinancings that good.
Bradley: You know help with cash flow.
Speaker Change: As of right now there youre seeing what I'm seeing as far as the news media.
Speaker Change: <unk> spoken to the bank yesterday and there is nothing immediately in the future for us to refinance or anything like that but you know.
Speaker Change: We're closely watching that because we've got.
Speaker Change: Quite a bit of that that we're trying to lower our interest rate and that's what was done.
Speaker Change: Great.
Speaker Change: It's helpful guys I appreciate the time thank you.
Speaker Change: Thank you.
Speaker Change: Thanks, So much Scott next up we have orchard well please take it away.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Thank you immune adjacent.
Speaker Change: Alright very good.
Speaker Change: Let's talk about you guys see $10 million on the share buybacks from.
Speaker Change: From the clubs that you purchased.
Speaker Change: And I'm, assuming I forgot what the old things, where you paid about five times earnings for both Colorado and for Chico's logos right.
Speaker Change: Ah well.
Speaker Change: The.
Speaker Change: Club purchases were five times, plus the real estate on Colorado, and I believe we were four times plus the real estate on.
Speaker Change: The AR on the Dallas I called out the <unk> acquisition, David All right and then since you guys have taken over those properties you've seen improvements from what their sales numbers were before correct.
Speaker Change: Great.
Speaker Change: Good luck <unk>.
Speaker Change: So so the idea being is you guys have been able to up the earnings on the clubs for what you paid and then what you pay you guys have been able to get for 22% lower or if it was a five it was like a 4.2 in terms of what you pay for it now that you've adjusted the new prices right well, let's say.
Speaker Change: 22% less stock not the total purchase price.
Speaker Change: I mean, it depends on how you want to look at it if you looked at if you split the $10 million split the baby.
Speaker Change: I can say you take $5 million less for so.
Speaker Change: So let me say $83 million for the Colorado acquisition, we only paid $61 million for the.
Speaker Change: <unk> acquisition, I mean, you're going to figure out those multiples that way, that's how I would do it but.
Speaker Change: Yes, it's still a considerable savings on the overall deal and the nice thing is on our free cash flow per share basis. There's all those shares are no longer outstanding yet we have all that new revenue coming in so great.
Speaker Change: It seems like the majority of the shares you basically took down when the stock broke below like 45.
Speaker Change: Because there was like a huge amount of shorts that came into the market in the last.
Speaker Change: Let's say five to six weeks mass where it looks like they've put on 500000 shares bringing the total to 925000 shares that are outstanding and they're going to have to buy it back. So we're the guys.
Speaker Change: Over the I.
Speaker Change: I believe we bought if you look at.
Speaker Change: The last two months, we probably bought over 50% of the shares we bought 400133, so far this quarter.
Speaker Change: Probably about a quarter of a million or more of those shares.
Speaker Change: And basically June and July Okay, and a lot of it under we made some very large purchases when the stock went under quality right. It wasn't for very long as only a few days but.
Speaker Change: But we were 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.
Speaker Change: And then under 42, I think I'd say under 42, we bought pretty heavily and then we've just bought average between.
Speaker Change: <unk> 40, and 42% and $50, we just bought basically pretty much steady number of shares everyday occasionally bumping it up because we we set a target an internal target of being under 9 million shares.
Speaker Change: August 5th.
Speaker Change: So we were buying the shares we needed to buy.
Speaker Change: Basically taken a total number we needed dividing it by the number of trading days left and so we are buying 3000 shares a day 5000 shares a day or.
Speaker Change: If we couldnt get stock somebody's willingness to act and I think for a brief period, we were buying probably 8000 shares a day.
Speaker Change: And then got it back to a normalized number and dropped it down again so.
Speaker Change: And then my last question would be obviously this furcate do put out like this tweet and he was a picture of some people standing in front of the clubs or whatever can you comment on any of this stuff that they were trying to make it seem like you guys are like up to no. Good.
Speaker Change: With whatever that police thing was about I would refer you to the 10-Q and the disclosures in the 10-Q.
Speaker Change: And safe and I cannot make any comments on an ongoing and any type of ongoing investigations at this time.
Speaker Change: But there are disclosures in the 10-Q, if you want to see.
Speaker Change: See what that is.
Speaker Change: You'll see that he was a little off base on.
Speaker Change: On a lot of the activation something like a little bit or a lot of it alright, 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 magic.
Speaker Change: Okay. Thank you I mean, I was very important to me too.
Speaker Change: Fantastic and with that this will conclude our earnings call on behalf of Eric weight, Brian do you have a hand, you haven't raised I think check again.
Speaker Change: If anybody wants to ask questions you can I show a request yes.
Speaker Change: Okay.
Eric Langan: Eric Yes zero followed this go south on you.
Speaker Change: Okay.
Liam: Liam take it away.
Speaker Change: Liam you're muted if you'd like to on mute yourself and ask the question.
Speaker Change: Yeah.
Liam: I'm trying to have an excellent and we've got a few more than that.
Speaker Change: Perfect. So next up we're going a bit boring.
Speaker Change: Okay.
Speaker Change: Not sure what that was [laughter], let's bring up.
Speaker Change: While Huawei, we buy.
Speaker Change: Biotech.
Speaker Change: Okay.
Speaker Change: Can you hear me now.
Rami: Can hear you got me Rami, Okay, great. Thank you. Thanks for the opportunity. So curious just cumulatively how much cash has been invested in the bombshells business and the casinos.
Speaker Change: Ah well casino properties and remodel of the Ricks cabaret. So we have to kind of divided up theres about $6 million in non income producing properties up there and we will have about $8 million invested in the AR.
Speaker Change: Rick's cabaret and that will end steakhouse that will actually help them.
Speaker Change: We have a we have one of the properties for sale right now for $5 million and I think we're gonna LOI on it I don't know if we'll get a full asking price, but I think we'll be very close.
Speaker Change: So we will have recouped almost 100% of the non <unk> non income producing properties will be almost regrouped other than the one property, but we have a tenant. So it's it's actually income producing I shouldn't really say, it's non income producing it as income producing just not.
Speaker Change: Not a significant amount.
Speaker Change: And then when the rigs opens I think we'll recoup that investment pretty quickly.
Speaker Change: And but a lot of that is that now because we did when we did the $20 million loan those three properties are a big portion of the collab.
Speaker Change: Collateral on the $20 million loan so we actually got our cash back so to do a true cash on cash I will have to have Bradley due a to a.
Speaker Change: Relation on it.
Speaker Change: Haven't been that concerned with it.
Speaker Change: Wasn't really material in the overall.
Speaker Change: Investment from the company right now as far as Bombshells goes I mean, I know I know in June of 2023, we were 140% cash on cash returned.
Speaker Change: For Bombshells, where we're at today I haven't run that Havent ran that again recently.
Speaker Change: But I know, we haven't invested 40% of the first.
Speaker Change: 13 stores and to these next three stores so.
Speaker Change: We're still probably a 100% cash on cash or more.
Speaker Change: Has been returned to US we've only invested profits. The bombshells is made in the past.
Speaker Change: And to the concept annually.
Speaker Change: Nowhere near the amount of whole profit so.
Speaker Change: On that basis, Youre, probably talking from an ROI standpoint, we haven't really no money invested in the concept.
Speaker Change: We made a $1 million for us.
Speaker Change: 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.
Speaker Change: Well it will still be making a significant amount of money on bombshells and we can look to.
Speaker Change: Take those assets and monetize them in another way and then.
Speaker Change: Invest that money back into our core businesses.
Speaker Change: Okay. Thank you I have no more questions.
Speaker Change: Thank you.
Eric: Hey, Eric we had.
Eric: We have an anonymous questions submitted if you'd like to discuss the fire that happened.
Eric: Okay sure, we don't know what happened.
Eric: It was inconclusive results on the fire investigation.
Eric: That building was completely remodeled in 2023, we believe it was some type of electrical fire based on where the fire burn through the roof, and which was collapsed first and basically where were the hottest part of the fire was that it was in that electrical room area.
Speaker Change: There was no kitchen real kitchen, there there is no natural gas there.
Speaker Change: Couldn't have been a gas leak or anything.
Speaker Change: So when you eliminate all of those things the last person that left the building with the cleaning crew at five or 440, a M. In the morning, According to the alarm system.
Eric: It's just one of those three things.
Speaker Change: Okay.
Speaker Change: It's a rough law for us because it was up to about 80000, a weekend sales.
Speaker Change: <unk> is doing very well.
Speaker Change: It was newly remodeled so there you know.
Speaker Change: So I feel but we are we've already started that cleanup.
Speaker Change: We've hired the architects within three days of the fire and started redesigning.
Speaker Change: Redesigning the property to be rebuilt into an image of the.
Speaker Change: The new Baby Dolls, West location, and we're building so when we move along pretty quickly there and get them back open for us.
Speaker Change: Okay.
Speaker Change: Fantastic and with that on behalf of Eric Bradley The company and our subsidiaries. Thank.
Speaker Change: Thank you and have a good.