RCI Hospitality Holdings, Inc. (NASDAQ:RICK) Q1 2023 Earnings Call Transcript

RCI Hospitality Holdings, Inc. (NASDAQ:RICK) Q1 2023 Earnings Call Transcript February 9, 2023

Mark Moran: Greetings and welcome to RCI Hospitality Holdings First Quarter Fiscal 2023 Earnings Call. You can find RCI’s presentation on the company’s 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 with me to slide two of our presentation. I’m Mark Moran, CEO of Equity Animal. I will be the host of our call today. I’m here in New York City with Eric Langan, President and CEO of RCI Hospitality; and Bradley Chhay, CFO, who is in Houston, home of one of my favorite clubs Club Onyx managed by Josh Brooks. Please turn with me to slide three. If you aren’t doing so already, it’s easy to participate in the call on Twitter Spaces.

On Twitter go to @RicksCEO and select the space titled Rick RCI Hospitality Holdings Inc. 1Q ’23 Earnings Call. To ask a question, you’ll need to join the Twitter Space with a mobile device. To listen-only, you can join the Twitter Space on a personal computer. RCI is also making this call available for listen-only through traditional landline and webcasting. With Twitter having glitches today, in the event of a crash we’ll restart the Space, and if that fails, more to the tiling. A question-and-answer session will follow. And this conference is being recorded. Please turn with me to slide four. I want to remind everyone 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 measurements. I would like to encourage everyone, to retweet and share this date. Finally, I’d like to invite everyone listening in the New York City area to join me and Eric tonight at 7:00 to meet management at Rick’s Cabaret, New York, one of RCI’s top revenue-generating clubs. Rick’s is located at 50, West 33rd Street between Fifth Avenue and Broadway, a little in from Herald Square. If you have an RSVPed, ask for Eric or me at the door where I will be deploying my own capital allocation strategy after 9:00 p.m. Now, I’m pleased to introduce Eric Langan, President and CEO of RCI Hospitality.

Eric, take it away.

Eric Langan: Thank you, Mark. Thanks everyone, for joining us today. Total revenue came in generally as expected with Nightclub segment having another great performance. This offset difficult Bombshells comparisons. GAAP EPS and net cash from operating activities and non-GAAP EPS and free cash flow were affected by repairs and maintenance CapEx that occurred in the first quarter. GAAP EPS also included $0.16 in non-cash, intangible amortization and stock-based compensation compared to a year ago quarter. Nonetheless, adjusted EBITDA was up 13.9% year-over-year and we ended the quarter with $34.1 million in cash. That was after making a number of club and restaurant and real estate acquisitions. Probably, the most important thing that happened in the quarter, is that we got off to a terrific start with our big three year initiative.

The goal is to continue our mission of growing free cash flow and EBITDA of a higher revenue base. Now, we have — we now have numerous acquisitions and projects and development. Highlights include our pending acquisition of a group of five Baby Dolls and Chicas Locas clubs in Texas. The Rick’s Cabaret Steakhouse Casino in Central City, Colorado. In addition, we have an even stronger lineup of new Bombshells locations in three states in Alabama, Colorado and Texas. I’ll be back to tell you more and answer questions. Now, here’s Bradley to review financials.

Bradley Chhay: Thanks, Eric and good afternoon, everybody. Looking at the sum of the major numbers for the quarter, total revenues were $70 million, up 13.2%. GAAP EPS was $1.11, up less than 1%. Non-GAAP EPS was $1.19, up 8.2%. Net cash from operating activities was $14.9 million. That’s off 8.4% from last year, mainly because we paid down more liabilities on our books in the first quarter compared to a year ago. Free cash flow was $13 million, that’s off 14.6% because of the change in net cash from operating activities and about $1 million more maintenance CapEx that fell in the first quarter. Adjusted EBITDA was $20.5 million, up 13.9%. And weighted average shares outstanding declined 1.9% year-over-year, due to repurchase over the last year.

Please turn to Page 7, to review Nightclub segment. Revenues totaled $56.3 million, up 20.4%. GAAP and non-GAAP operating margin was 40.4%. That reflected increased operating leverage from higher sales in particular higher-margin service revenues, which increased 23.4%. This was partially offset by increased amortization of club licenses at lease locations. As a result operating income increased 21.4%. Now fiscal year 2022 and first quarter acquisitions added $15.3 million in sales. Same-store sales were up 1.2%. This reflected strong contribution and growth from our white collar clubs mainly New York, Illinois and Florida, partially offset by some softness in our blue collar clubs. In the second quarter, the 11 clubs we acquired in October 2021 will fall into same-store sales.

Based on current trends this should result in growth in same-store sales. Please turn to page 8 to review the Bombshells segment with me. Revenues totaled $13.4 million compared to $14.8 million last year. Operating margin was 13.8%, primarily reflecting reduced operating leverage. Operating income was $1.8 million. Bombshells Arlington, which opened in December 2021 added $1.3 million in sales. Same-store sales were down compared to last year when the chain was experiencing very favorable local economic environment and the combination of government stimulus people returning to work and a little competition. However, compared to pre-COVID, first quarter of fiscal 2020, our December quarter same-store sales were up 3.6%. Please turn to page 9 to review our consolidated statement of operations with me.

Photo by Drew Beamer on Unsplash

All comps as a percentage of revenue and compared to a year ago quarter unless otherwise noted. Cost of goods sold continued at 12.9%. This reflected the increased higher margin service revenues in the sales mix. Salaries and wages were approximately low at 26.7%. Now SG&A was 32.5%. This reflected $900,000 of non-cash stock-based compensation and $400,000 of repairs. Now if we exclude these two items, SG&A would have been 29.5% compared to a year ago quarter, which was 29.9%. Expenses associated with these newly acquired and reopened locations will subside as a percentage of revenues as their sales build. The non-cash stock-based compensation is an ongoing item. While we have repair expenses every quarter, they are not typically as large as they were in this quarter.

Depreciation and amortizations were 4.7%. This reflected an increase in depreciable assets from newly acquired and constructed units. It also included increased non-cash amortization of licenses from the clubs at lease locations. Operating margin was 24.2% and 25.6% non-GAAP the same as last year. Interest expense was 5.3% versus 4.2%. This reflected higher debt from our club and Bombshells site acquisitions over the course of the year. Now please turn to page 10. We ended the quarter with cash and cash equivalents of $34.1 million. Free cash flow was 19% of revenues and adjusted EBITDA was 29%. That’s a little below our targets of 20% and 30%, respectively. Please turn to page 11 to review our debt metrics. Net of loan costs, debt was $211.2 million at December 31st.

That’s an increase of $8.7 million from September 30th. This increase primarily reflected financing used in the acquisition of Heartbreakers deal, down in Dickinson, Texas, the Denver Food Hall and Atlanta, Lubbock, Texas for a Bombshells location. Our weighted average interest rate continued at 6.35% this compares to 6.26% a year ago and 6.73% five years ago. Our amortization continues to be within the $9 million to $10 million annual range which is very manageable with our cash flow. Now please turn to Page 12 to review some of our other debt-related metrics. The ratio of debt to adjusted EBITDA was 2.4x as of December 31, well below our MAX comfort level of around three. Our occupancy costs were 7.8% of revenues. This continues to be well within the 6% to 9% range which average when sales weren’t dramatically affected by COVID.

Please turn to Page 13 to look at our December 31 debt pie chart. Our debt now consists of 61.9% secured by real estate, 25.2% secured by seller finance debt — secured by respective clubs to which the real estate at applies to, 4.9% of the debt is secured by other assets and 8% is secured by its unsecured debt. Please turn to Page 14. Now we continue to talk to new investors, so I’d like to take a moment 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 strategy is similar to those outlined in the book, The Outsiders by William Thorndike. We have been applying these strategies since fiscal 2016 with three different actions subject to whether there is strategic rationale to do otherwise.

The first one is M&A, specifically buying the right clubs in the right markets. We like to buy solid cash flowing clubs at 3x to 5x adjusted EBITDA and will use seller financing and acquire real estate at market value. Another strategy is grown organically, specifically expanding Bombshells to develop critical mass, market awareness and sell franchises. Our goal in both M&A and organic growth is to generate annual cash on cash returns of at least 25% to 33%. The third action is buying back shares when the yield on free cash flow per share is more than 10%. Now let me turn the call over back to Eric to review our big three year growth initiative.

Eric Langan: Thank you, Bradley. Please turn to Slide 15. We currently have acquisitions and projects in development involving nine clubs. In October, we acquired Heartbreakers in the Galveston area. At the end of January, we reopened the day shift. We plan to finish the clubs remodel in February and that should help increase its contribution forward. In late December, we reopened and reformatted a location in San Antonio as the Jaguars Club. The first quarter provided a little contribution, but we expect it will be bigger contributor going forward. In mid-December, we announced definitive agreements to acquire a group of five Baby Dolls and Chicas Locas clubs in Texas. We are awaiting transfer of liquor licenses. The club should contribute $11 million in EBITDA in year one.

And once we complete our expansion plans, they should contribute $14 million to $16 million in EBITDA. In December, we announced acquiring club assets in Fort Worth to create another PT show club. The remodeling is underway and the reopening should occur in the second half of fiscal 2023. Last year, we had to close our Jaguars Club in Lubbock, Texas because of an intimate domain issue we acquired another location with the money the state paid us. It is currently under construction and opening is expected in the second half of fiscal 2023. Fiscal 2023 will also benefit from a full year of the 15 club acquisitions and three club and club-related restaurant openings we made last year. I’d like to highlight the value we added in our big October 2021 acquisition of the 11 clubs.

Based on our management and optimization, we increased adjusted EBITDA 24%. That means we paid 4x for the operating assets compared to our original estimate of 5x their pre-COVID-adjusted EBITDA. Please turn to slide 16. We have nine locations in the process of acquisition or development. In late December, we acquired the Denver area food hall. We are currently remodeling it and installing the Bombshells kitchen. That is expected to be completed by the end of February, and an increased contribution in March. Earlier this week, we bought out our San Antonio franchisee for $12 million cash, and $2 million in debt. This is one of the best-performing Bombshells. Construction is continuing at our Stafford location in the Greater Houston area. Building permits have been approved for our Roulette location in the Greater Dallas market.

We are currently reviewing construction bids. In Lubbock, we are awaiting a building permit for our location. Our second location in Austin Texas is now pending site review. We have an LOI for a location in Downtown Denver with an existing building that will work very well for Bombshells, and we estimate it will take about $1 million or less in work to get it open. Our Huntsville, Alabama franchisee is awaiting his building permits and indexation of his land into the city of Huntsville. Regarding our other Denver location in Aurora, our plans are in process with the city. If you’ll turn to slide 17. In December, we announced acquiring a 30,000 square foot building in downtown Central City for only $2.4 million for our Rick’s Cabaret Steakhouse & Casino.

We have applied for our master casino license, and are moving full steam ahead on this. Turning to slide 18. This slide compiles all of our capital allocation to date for this fiscal year, including some shares we repurchased in the first quarter and the major acquisition we have pending. Altogether, we are looking at allocating about $93.2 million so far this fiscal year, and I estimate approximately $20 million in additional capital expenditures will be used to build the improvements for these properties that are still in development for last €“ and the properties still in development for last year. As I’ve said, our goal is to allocate about $200 million on average per year over the next three years. Please turn to slide 19 for an updated on our geographic focus.

In the first quarter of 2023, our regional revenue breakdown was Texas 38%, including Bombshells. Florida 25%. New York 9%, a little higher than fourth quarter 2022. Illinois and Colorado each at 7% and the other eight states combined for 14% of revenue. This demonstrates our geographic diversity. Our exposure to growth states like Texas, Florida and Colorado, and how we develop business clusters in key areas. I want to say thank you to all of our loyal and dedicated teams for all their hard work and effort. We can’t do it without you. Now here’s Mark.

Mark Moran: Thank you very much, Eric and Bradley. I want to encourage everyone to retweet and share this Space. And I’d like to give a special shout out to Cynthia Daniels. I was very much enjoying your profile, while Eric was speaking.

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Q&A Session

A – Mark Moran: If you would like to ask a question, please raise your hand in the Twitter Space, when you are done asking your question please mute your microphone to eliminate any background noise. We have a limited number of speakers Space’s. After your question, we may move you back to the audience to free up Space. To start things off, we’d like to take questions, from RICK’s analysts and then some of its largest shareholders. Our five analysts are Scott Buck of H.C. Wainwright, Anthony of Sidoti, Lynn Cole of Water Tower Research, Rob McGuire of Grant Research and Joe Gomes of Noble Capital Markets. First up, we have Scott Buck. Scott, take it away.

Scott Buck: Hi, guys. Thank you for taking my questions. First one, Eric, could you talk a little bit about the trends you’re seeing in the clubs in January and the first part of February? Still seeing some of the soft pockets in the blue collar clubs, or is that kind of worked itself out?

Eric Langan: Yes. I mean I still think there’s a little weakness. I was going over everything looking at a four-month trending deal with October, November, December, January. This January total sales were a little over October — I mean I’m sorry a little over November and December’s total revenues. So, I think that’s a promising deal. Typically when we see these slowdowns, they affect us for about six months. I think the slowdown started in November based on what I’m seeing. So I’m hoping that it will be a little shorter and that March I think is going to be the big turnaround for us. Of course we have Super Bowl this week. So this week we’ll be abnormally affected by a one-time event for this weekend, especially out in the Phoenix market and — as well as the two great teams with the Eagles and Kansas City in the Super Bowl, I think that’s going to be a help a lot with viewership. It’s to help the Bombshells in Texas as well I think.

Scott Buck: Great. That’s helpful. And my second question, Bradley, should we think about these higher than anticipated repair and maintenance costs as a pull forward from future quarters or is this in addition to?

Bradley Chhay: Now, last year was the same thing. We had $4.5 million in maintenance CapEx. I wanted to clarify something. So last year we had that. And this year we had $6 million as our target. So 1.5 per quarter what our maintenance CapEx should be. Now that’s an impact to free cash flow. However what we’re talking about is repairs and maintenance costs. Those repairs were done in part of the winter storm and all that stuff and some plumbing. We don’t anticipate higher than expected repairs and maintenance expense going forward.

Scott Buck: Great. Appreciate the additional color.

Bradley Chhay: Yeah.

Mark Moran: Thank you very much, Scott. Next up, we’re going to have Anthony. Anthony, take it away.

Anthony Lebiedzinski: Good afternoon and thank you for taking the questions. So as far as Bombshells, the operating margins there were lower than where we had projected. Can you just talk about kind of what happened there? And then how should we think about segment margins there going forward?