RCI Hospitality Holdings, Inc. (NASDAQ:RICK) Q1 2024 Earnings Call Transcript

RCI Hospitality Holdings, Inc. (NASDAQ:RICK) Q1 2024 Earnings Call Transcript February 8, 2024

RCI Hospitality Holdings, Inc. misses on earnings expectations. Reported EPS is $0.23 EPS, expectations were $0.93. RCI Hospitality Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Mark Moran: Greetings, and welcome to RCI Hospitality Holdings First Quarter 2024 Earnings Conference Call. You can find the company’s presentation on the RCI website. Go to the Investor Relations section and you’ll find all the necessary links at the top of the page. Please turn with me to Slide 2 of our presentation. I’m Mark Moran, CEO of Equity Animal. I’ll be the host of our call today. I’m coming to you from New York. Eric Langan, President and CEO of RCI Hospitality; and CFO, Bradley Chhay are in Houston. Please turn with me to Slide 3. If you aren’t already doing so, it is easy to participate in the call on X Spaces. Log into X, formerly known as Twitter, go to @RicksCEO and select space titled $Rick RCI Hospitality Holdings, Inc.

1Q ’24 Earnings Call. To ask a question, you will need to join the X Space with a mobile device. To listen only, you can join the X space on a personal computer. RCI is also making this call available for listen-only through a traditional landline and webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow. This conference call is being recorded. Please turn with me to Slide 4. 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 financial measures. Now, I am pleased to introduce Eric Langan, President and CEO of RCI Hospitality. Eric, take it away.

Eric Langan: Thank you, Mark, and thanks everyone for joining us today. If you’ll please turn to Slide 6. Our first quarter revenues were in line with what most people were expecting. They totaled $73.9 million, up 5.6% compared to last year. This was primarily due to club acquisitions, which more than offset a consolidated same-store sales decline of 9.8%. The fundamental nightclub business remained solid. We believe nightclub same-store sales reflect the macroeconomic uncertainty everybody is talking about. Margins were lower than what we had been expecting, mainly on Bombshells side of the business. Bradley will go into that in more detail later. EPS was $0.77 per share with non-GAAP at $0.87. Net cash from operating activities and free cash flow held up very well.

They declined only 8% and 3%, respectively. Please turn to Slide 7 for other key takeaways. We are pleased to report that during the quarter and after the quarter, we continue to make progress toward our key initiatives. We have a solid plan to lower costs, increase revenue and return our margins to their target goals. The newest development is an agreement to re-launch AdmireMe with a strategic partner already in the online and mobile adult entertainment business. During the first quarter, we also continued to buy back shares and we remain confident we have access to sufficient cash resources to implement our plans. Please turn to Slide 8 to review Nightclubs development plans. We continue to add value to our Baby Dolls and Chicas acquisition.

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Q&A Session

Sales in the first quarter were up 10% from the fourth quarter and have improved every quarter since we’ve owned them. In addition, our margin improvement program resulted in 130% basis point improvement on a sequential quarter basis and 260% basis point improvement versus the acquisition performance in fiscal ’23. Looking at new clubs, the replacement location in Lubbock, Texas, is nearing completion. Due to the success of the Baby Dolls brand, we are converting the Abilene location to that format, which is awaiting installation of its audio and video systems and furniture delivery. The planned Baby Dolls in West Fort Worth is simply awaiting the building permit to begin construction. Chicas Locas brand has also been successful for us and as a result, we have decided to remodel and convert our BYOB locations in Arlington, Texas, into a Chicas Locas, and we are currently awaiting the issuance of the liquor license.

Regarding acquisitions, we are evaluating a sizable number of targets. The hardest part we face is coming up with fair value because owners want to be awarded for post-COVID highs during 2021 and 2022, and we typically buy on a two-year historical performance. You please turn to Slide 9. We continue to be excited about our Central City Colorado casinos, Rick’s Cabaret Steakhouse & Casino and our Bombshells sports casino. In the few weeks since Christmas and New year’s, there have been no new developments with our gaming license. Meanwhile, interior construction on the Rick’s casino has been progressing on schedule and we anticipate completion in June of 2024. We will then await issuance of our gaming license so that we can install, test and configure the devices and systems in order to open the casino.

For the Bombshells casino, we are awaiting the building permit. We continue to anticipate both casinos to open in fiscal 2024 and that they will represent a significant free cash flow opportunity. In Colorado’s most recent fiscal year, Central City slots averaged 131 adjusted gross proceeds per day and nearby Black Hawk does 307, mainly because they run 24/7 as we plan to do. Please turn to Slide 10. AdmireMe is a service we’ve been developing to help club entertainers monetize their content and develop stronger relationships with their customers. Based on the agreement that we’ve recently signed, we worked out we will retain 75% ownership, our new partner will own 25%, and the service will be re-launched later in the June quarter under a new name.

This partner has an existing Internet platform with domestic and international traffic, safety controls, credit card processing, all necessary technology we need at a far less cost than if we did it alone. This includes highly valued live video streaming. The result is that overnight we obtained access to a strong technology infrastructure with significant distribution and proven revenue collection and disbursement capabilities. This will provide club entertainers with even greater potential to make money, and RCI will become the largest publicly traded entity owning a worldwide interactive social media adult platform with streaming video, both live and pre-recorded. Our vision is to create a digital extension of our physical brands, connecting tens of thousands of contractors and workers on the front lines, the entertainers and waitresses, et cetera, and the customer who come through our door so that they can continue to interact or receive content.

We want it to be an easy and seamless way for entertainers and waitresses to monetize their relationships 24 hours a day, seven days a week, 365 days a year. You walk into the club, the entertainers are on the platform promoting themselves, getting customers to sign up and subscribe to them and then come back and visit them in the club. Please turn to Slide 11 to review our Bombshells development program. Our newest location, Stafford, a suburb of Houston, opened in mid-November. Construction is continuing in our Raleigh location, which we plan to open in late June or July of this year, and the Lubbock location construction is well underway and we plan to open that in the fourth quarter of ’24 as well. We are getting ready to begin the remodeling of downtown Denver location as soon as we receive our building permits.

Since this is a simple remodel of an existing restaurant location, it should be a quick turnaround to get this site open. As for future developments, we have decided to list our Aurora, Colorado, site for sale or lease and to put our second Austin location on hold. Both moves are intended to help us better focus on other opportunities. The Huntsville franchisee is still awaiting his building permits. The bigger issue is Bombshells’ performance. After we’ve seen the results from the quarter, we have made major structural management changes in Bombshells team, and we are also considering any and all options to improve performance that potentially includes seeking an operational partner or selling the business. Now here’s Bradley to go into more details on our results.

Bradley Chhay: Thanks, Eric. Please turn to Slide 12 to review our Nightclubs segment. Fourth quarter revenues, can you guys hear me? It says you can hear me. Okay. Please turn to Slide 12 to review our Nightclubs segment. Fourth quarter revenues increased $4.7 million year-over-year. This was primarily due to a $8.9 million increase from acquisitions and a $4 million decline in same-store sales. By revenue type, alcoholic beverages increased 18.7%, food 14.1% and other by 8.2%. Meanwhile, service declined 1.6%. The different growth rates reflected higher alcohol and food in the sales mix from the newly acquired Heartbreakers, Baby Dolls and Chicas-Locas club. GAAP operating income was $20.4 million, or 33.4% of revenues. Non-GAAP operating income was $21 million, or 34.3% of revenues.

Margins were affected by a different sales mix from the newly acquired clubs, lower service revenues and wage inflation. Please turn to Slide 13 to review our Bombshells segment. Fourth quarter revenues declined $700,000 year-over-year. This primarily reflected a $2.7 million decline in same-store sales and a $2.1 million increase from the newly acquired and new locations. The acquired locations are Bombshells San Antonio and Cherry Creek Food Hall with its Bombshells kitchen. The new location is Bombshells Stafford which opened in mid-November. GAAP operating income was a profit of $86,000, or 0.7% of revenues, and non-GAAP was a profit of $149,000, or 1.2%. Please turn to Slide 14. The combined operating loss from our Other and Corporate segments was $400,000 less than that of last year.

On a non-GAAP basis, they were about $100,000 less. I also wanted to note the effective tax rate for the year was 19.9% compared to 22.8%. The rate is affected by state taxes, permanent differences, tax credits including the FICA tip credit. Now please turn to Slide 15. We have a couple of slides coming up that will discuss free cash flow and adjusted EBITDA which are non-GAAP. In advance of that, we wanted to present you with the closest GAAP equivalents on this slide which are operating and net income. Now please turn to Slide 16 to look at some of our other key metrics. We ended the quarter with cash and cash equivalents of $21.2 million. During the first quarter, we used $2.1 million to buy back shares. First quarter free cash flow was $12.7 million or 17% of revenues.

Adjusted EBITDA was $17.5 million, or 24% of revenues. Our more recent free cash flow and adjusted EBITDA conversion rates reflect a lower percentage of service revenues in our Nightclub business. Now please turn to Slide 17 to review our debt metrics. Debt as of December 31st declined $5.8 million from September 30th due to scheduled paydowns. The weighted average interest rate was 6.61% in line with what we have been paying. Total occupancy cost was at 8.2%, inched up a little bit from the sequential quarter — on a sequential quarter basis, but we are still in our comfort range of 6% to 9%. At 2.9 times, debt-to-trailing 12-month adjusted EBITDA also inched up just a little bit, but continues to be in our comfort zone of less than 3. Please note that both occupancy costs and debt-to-adjusted EBITDA reflect the fact that we are developing a number of projects.

As they open and we begin generating revenues and EBITDA, occupancy costs and debt-to-adjusted EBITDA should decline. Debt maturities continue to remain reasonable and manageable. We are also in the process of completing a $20 million cash-out bank loan using $30 million of our unencumbered real estate. Please turn to Slide 18 for our debt pie chart. We continue to pay down all our slices of our debt. The percentage share of our different pieces of debt remained largely the same as the fourth quarter. Now let me turn the presentation back to Eric.

Eric Langan: Thanks, Bradley. Please turn to Slide 19 before we go into Q&A. For our new investors, I want you to know that everything we do is centered around our capital allocation strategy. We employ three different approaches, subject to whether there is a compelling rationale to do otherwise, mergers and acquisitions, organic growth, and buying back shares when the yield on our free cash flow per share is more than 10%. All this is being done with the ultimate goal of driving shareholder value by increasing free cash flow per share by at least 10% to 15% on a compound annual basis. To see more about this strategy, please visit our new website @rcihh.com. Please turn to Slide 20. By sticking to our capital allocation strategy since the end of fiscal 2015, we have generated compound annual growth rates of 10.2% for revenues, 12.1% for adjusted EBITDA, 17.2% for free cash flow.