RCI Hospitality Holdings, Inc. (NASDAQ:RICK) Q2 2024 Earnings Call Transcript

RCI Hospitality Holdings, Inc. (NASDAQ:RICK) Q2 2024 Earnings Call Transcript May 11, 2024

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).

Eric Langan: Thank you, Mark, and thanks, everyone, for joining us today. Please turn to Slide 6. Despite the uncertain economy, the core strength of our business enabled us to generate $72.3 million in revenue in the second quarter compared to $71.5 million last year. While GAAP EPS of $0.08 primarily reflected noncash impairment, non-GAAP EPS totaled $0.90 near the high end of analyst expectations. The nightclub segment generated $59.4 million in revenue in 2Q ’24 compared with $57 million last year. Separately, the effort began in mid-February to improve Bombshells segment, resulting in steady sales and better margins on a sequential quarter basis. Please turn to Slide 7. We also continue to make progress with our new project developments.

These efforts are focused on developing new locations and upgrading existing ones to further grow the company. In doing this, we are committed to following our capital allocation strategy, concentrating on our core nightclub business, evaluating potential acquisitions and buying back stock. To that end, subsequent to the end of the quarter, we increased our cash position $20 million by closing our planned bank loan. Now here is Bradley to go into more details on our results.

Bradley Chhay: Thanks, Eric. Please turn to Slide 8 to review our Nightclubs segment. Second quarter revenues increased $2.4 million year-over-year. This was primarily due to a $7.4 million increase from acquisitions, which partially offset declines of $2.9 million in same-store sales and $2.1 million from clubs in transition. By revenue type, alcoholic beverages increased 16.9% and food, 10.8% and other by 4.3%. However, service declined 8.3%. The sales mix reflected higher alcohol and food sales from newly acquired clubs and same-store sales declined due to lower service revenues. As we mentioned in the second quarter sales call, PT’s Centerfold in Lubbock, a new club they’re not open until late in the quarter. Baby Dolls Abilene, our reformatted Liquor Club didn’t open until early April.

A BYOB club in El Paso temporarily closed during the quarter to start reformatting into a Chicas Locas liquor Club. Although we didn’t talk about it on the sales call, severe cold and rainy weather in Texas did have an impact in January as it had for other hospitality companies. We had to palpartially close partially or fully closed clubs and Bombshells for a number of days during that period. Impairment resulted in operating income of $11 million or $18.6 million of revenues compared to $8 million or 31.6%. On a non-GAAP basis, operating income was $19.8 million or 33.4% of revenues compared to $22.4 million or 39.3%. The non-GAAP margin decline primarily reflected lower [surplus] revenues, higher insurance and increase in Texas patron tax and wage inflation.

One of the reasons why insurance is higher is because we received a refund in the year ago quarter. Now please turn to Slide 9. The Duncan Barch acquisition has continued to perform well. We closed on the acquisition in mid-March in 2023 with four clubs open. We finished remodeling and opened the fifth club in mid-June 2023. As of fiscal ’24 second quarter, revenues have grown 23.9% from a year ago third quarter, which was the first full quarter post acquisition, and operating margin has expanded 394 basis points. Locations have benefited from increased credit card transactions, reduced management costs and more effective RCI marketing management and purchasing methods, partially offset by the increase in patron tax, which started in September of 2023.

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Q&A Session

Please turn to Slide 10 to review our Bombshells segment. Revenues declined $1.5 million year-over-year. This primarily reflected a $2.7 million decline in same-store sales and a $1.2 million increase from acquired or new locations. Operating income was $0.7 million or 5.5% of revenues compared to $1.8 million or 12.4%. On a non-GAAP basis, operating income was $0.8 million or 5.9% of revenues compared to $2.2 million or 15.4%. The year-over-year decline in profitability primarily reflected lower same-store sales. On a sequential basis, however, revenues were approximately level and GAAP and operating margin expanded 480 basis points and 470 on a non-GAAP basis. As Eric mentioned earlier, this reflected the effort by upper management to return the brand to its core focus on being a sports bar.

This began in mid-February to improve results. Some key changes included replacing management, cost cutting and going back to the basics, touching tables, make sure wait staff is attentive among others. Please turn to Slide 11. Corporate expenses totaled $6.8 million, an increase of $0.6 million on a GAAP basis. On a non-GAAP basis, expenses totaled $6.3 million, an increase of $0.8 million. Both GAAP and non-GAAP results primarily reflected more corporate level management from the Duncan Burch acquisition, casino preopening operations and accounting and professional services due to the recently acquired clubs and new projects along with the timing of billing. Now on a sequential quarter basis, expenses declined $0.3 million. Please turn to Slide 12.

This puts together consolidated operating income on a segment basis. Please turn to Slide 13. We have a couple of slides coming up that discuss free cash flow and adjusted EBITDA, which is on a non-GAAP basis. And at that of that, we wanted to present the closest GAAP equivalent on this slide, which are operating and net income. Please turn to Slide 14 to look at some of our other key metrics. We ended the quarter with cash and cash equivalents of $20 million. During the second quarter, we used $1.5 million to buy back shares. Second quarter free cash flow was $8.8 million or 12% of revenues. Adjusted EBITDA was $17.2 million or 24% of revenues. Recent free cash flow and adjusted EBITDA conversion rates reflect the combination of lower percentage of service revenue and higher costs.

Please turn to Slide 15 to review our debt metrics. Debt as of March 31 declined $2.2 million from December 31 due to scheduled paydowns. The weighted average interest rate remained at 6.61%. Total occupancy costs at 8% decline on a sequential quarter basis. At 2.99 times debt-to-trailing 12-month adjusted EBITDA inched up just a bit, but continues to be in our comfort level of less than 3. Occupancy costs and debt to adjusted EBITDA reflect the fact that we were developing a number of projects as they open and we begin generating revenue and EBITDA, both metrics should improve. Debt maturities continue to remain reasonable and manageable. Please turn to Slide 16 for our debt pie chart. We continue to pay down all slices of our debt. The percentage share of the difference license remain largely the same as the first quarter.

As Eric mentioned, subsequent to the quarter, we completed our $20 million cash out bank loan. Now let me turn the presentation back to Eric.

Eric Langan: Thank you, Bradley. I want to reiterate — I’m sorry, please turn to Slide 17. I want to reiterate 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. Mainly mergers and acquisitions, organic growth and buying back shares when the yield on free cash flow per share is more than 10%. Since refocusing myself on Bombshells in mid-February, I am starting to have our teams question everything like we did in 2016. This has caused us to rebrand some club locations, and we are currently evaluating several of our nonincome and underperforming assets. We are doing performance reviews throughout our operations to ensure we are getting ROI from our team members and making sure we are awarding those members probably for great performance and fixing or removing others.

We had a little complacent during the post cobidtimes when times are easy, and I believe we must return our focus on the basics of our capital allocation strategy. Please turn to Slide 18. We continue to make progress with new projects since our April 9 call. We have received our liquor license for XTC Dallas, which is being renamed and repositioned as Dallas Show Club. We received our liquor license for the planned conversion of BYOB club in Harlingen, Texas into a Chicas Locas Liquor club, this should open this quarter. We also farmed up our plans to open Rick’s Cabaret Steakhouse in Central City without gaining in our fourth quarter. Please turn to Slide 19. By sticking to our capital allocation since the end of fiscal 2015, we have generated compound annual growth rates of 10.2% for total revenues, 12.1% for adjusted EBITDA and 17.2% for free cash flow.

We also reduced our fully diluted share count even after shares issued for acquisitions. I’d like to say thanks to our local and dedicated teams for all their hard work and efforts and all our shareholders who believe in us and make our success possible. Now here’s Mark to start the Q&A session.

A – Mark Moran: Thank you, Eric, and Bradley [Operator Instructions]. To start things off, we’d like to take questions from Rick’s analysts and then some of its largest shareholders. First up, we have Scott Buck of HC Wainwright.

Scott Buck: Bradley, apologies if I missed it, but could you give a little color on what the increase in other charges was in the income statement this quarter?

Bradley Chhay: You’re talking about the impairment. We had $8 million worth of impairment charge.

Scott Buck: And then just I was hoping we could get a bit of an update on M&A. The call a quarter ago, it sounded like you guys were close to announcing something. I don’t remember seeing it. Kind of curious what — if there’s a hold up or if the situation has changed there?

Eric Langan: Basically, we had two LOIs. We have told one and the other one is in kind of a negotiation lock at the moment due to the potential of unknown liabilities and the indemnification clauses that the company would require of the seller. I don’t know if that’s going to move forward or not at this time. I wouldn’t say it’s very promising. We are looking at several other acquisitions right now as well, though. And I think eventually, these people will figure it out and come back to us because no one is going to buy known liabilities from anyone. So they’re going to have to figure that out. And unfortunately, the way the licensing works in that particular market, their existing corporation has to be bought in order to keep the license valid.

So we’ll see if that one goes on. I’m looking at other locations around the country. And I think you’re at some point here, I’d say sellers are getting more reasonable. Now we just got to get some of the terms worked out with cash and carry of notes and whatnot. So we’ll figure that out shortly.

Scott Buck: And second, I was wondering, we’re about halfway through the second quarter now, I mean, second calendar quarter anyway. Curious if you could give us a little update on the trends you’re seeing. I’m guessing it probably looks fairly similar to the first quarter or the first calendar quarter?

Eric Langan: Well, April January, which was very important to me, we now need a May to beat March and then our June numbers to beat February so that we can be up sequentially on the quarter. The first week of May was very well. I don’t know if you follow sports, but for those that do, you should know that we have four NHL teams and four NBA teams that are all in playoff modes right now. We’ve got some great games out there, being a lot of traveling customers from our markets to our markets, for example, in Colorado right now. We have the Dallas stars playing the Avalanche. So we’re getting Colorado fans in Dallas and Dallas fans in Colorado, which is great for us. We have clubs in both markets as well as the Denver Nuggets and the Timberwolves, plan in Colorado and Minnesota.

So our Colorado locations are basically doing very well from both the NHL and the NBA. And so it’s Dallas because you have the Mavericks as well. So the mix and the ranges are both in. So we get hockey and basketball in New York, which has been great for New York as well. And then of course, we have the Panthers down in Florida. So all in all, very solid sports lineup. Last year, Mother’s Day weekend was very weak weekend, one of the weakest of the quarter. This year, I think we should have much better Mother’s Day weekend because we basically have 4 games that will affect us between hockey and basketball basically starting tonight all the way through Monday, I believe. So very excited about that.

Scott Buck: And then last, if there’s any update you can give us on timing in Central City, that would be helpful.

Eric Langan: Well, timing is just unknown. Other than we’re going to do everything we can do to get the club open in this quarter. So we’ll have the club and the steakhouse will be opened in this quarter. I’ve gotten some news from gaming, where they’ve requested a very large amount of money to continue our investigation through a third party and gave us a very long time line from where we are today. And I’m currently basically evaluating that time line with our new refocus on capital allocation, doing a lot of math right now and calculating whether or not we want to even continue to focus on that at all or take our money and energy and focus instead of casino operations back us back on our core business. If so, we would probably divest a property or 2 of the properties, obviously, we’ll keep the Rick’s location and the Steakhouse up there, but we may end up with actually withdrawing the gaming license at some point instead of paying all this money for the investigation and waiting the time line they want, I just don’t know yet.

When I know we’ll get that information out, that’s what decision has been made. But there’s just a lot of new information that’s coming in in the last week or so, and we’re evaluating all of that at this time, and we’ll have a better understanding where we’re going with that as we move forward.

Mark Moran: Next up, we have Anthony of Sidoti.

Anthony Lebiedzinski: So first, as far as the quarter, your services revenue were down a little over 8%. Can you share more details in regards to this decline? And what is your strategy to improve services as a proportion of your revenue mix?

Eric Langan: I can nail it right on the head for you. About $1.3 million of XTC and Dallas, as some people are aware and some are Dallas pass the new city ordinances, it’s in current litigation. Forcing us to close the club at 2:00. That was a major after-hours club. Did most of its revenue between hours of 2 and 5 a.m. We have rebranded that to the Dallas Show Club now or in the process of our liquor license in. We are — we have continued operations, I think we will close 1 night as we converted from BYOB into liquor. The rest of the conversion will happen as we’re open. That’s a big part of it. And then the rest is, of course, Miami’s service revenues last year were much, much higher than they have been this year. And that’s the majority of it.

Obviously, there’s a little bits here and there. There are success stories in some markets like New York and Minnesota and there’s other clubs that are declining a little but most of those offsets. The major part of it was the XTC Dallas and the Miami clubs.

Anthony Lebiedzinski: And then what were the main factors that drove the sequential margin gains at the Bombshells — and do you think that’s sustainable?

Eric Langan: Well, my goal with Bombshells is to return us to $60 million of revenue with 15% margins, which would put us about $9 million in operating income on an annualized basis. At this point, we will probably work very hard at strategic options with that asset, whether it’s a partnership, whether it’s selling the assets outright, whether it’s selling part of the assets or bringing in partners to expand the process at that time once we prove we can return it to those numbers. I think that’s a six month process from now, at least I hope so. I think the 15% margins are maybe doable earlier. The revenues being a little more difficult because while part of it has been management issues, the other part of it is the economy and people are just not spending as much and not drinking as much.

Yes, I believe that we will have that corrected. I think we’ve made some major changes. We’ve get lowered our cost. We’ve changed out a lot of the management teams in certain club or certain stores in certain markets. And we’ve been doing some hiring. We still have about three spots that we need to find the right people for, but the people that we’re bringing in are motivated and excited to be part of our team. And I think that the concept is definitely head in the right direction.

Anthony Lebiedzinski: And then you also have fed a number of projects in the pipeline. So as you’re looking to open the Rick’s Cabaret and Steak…

Mark Moran: Anthony, you’re on mute.

Anthony Lebiedzinski: So as I started saying, so you guys have a quite a number of projects in the pipeline, but I just wanted to focus more on the plans for the Central City location. So you are planning to open the Rick’s Cabaret Steakhouse in 4Q, even if there is no gaming. So how should we think about the revenue contribution once that’s up and running? And then if you do get gaming there, what could that contribute to revenue if you go ahead? I know there is uncertainty with that, but just hypothetically speaking, how should we think about that.

Eric Langan: I have not thought about the gaming at all anymore. My focus is on the club itself, I would like to — I think the club can open up in the $100,000 per week range, which was about $5 million annual. We run our 40% margins. We make about $2 million a year out of it. I’m only opening four days a week to start as we build up our clientele base and our entertainer base in that market, and we opened seven days a week, I think we can grow that to somewhere between $8 million and $10 million annually at 40% margins. So that’s my focus right now. Like I said, with the gaming, I’m weighing a lot of things right now to see what makes sense or doesn’t make sense for us as a company. I can tell you that from what we’re being told, we’re 18 months to two years away at a minimum.

There are two other licenses that have been applied for in Central City they’re now crossing the three year mark with without denial or approval. And so I just — like I said, we’ve got a lot of information that’s coming in the last week or so. We’re going to weigh that out and probably within the next two weeks, maybe three weeks, we will have a plan of action, and we will let everyone know what our plan is there. To me, it’s not really relevant or material to earnings this year or next year, obviously, if it’s 18 to two years away — 18 months years away, so we’re going to focus on what we do know. What we do know is we can open that club and the steakhouse and I think we’ll do very well in that market with it. And we’re going to continue to rebrand some of the cheapest — some of the BYOB locations in the Chicos so that we don’t face anything like we did in Dallas in the last 6 months.

We’re just getting ahead of everything just in case the loss don’t change. And we think these underperforming assets and some of the BYOB are underperforming, and they will be much better under the new branded concept. So that’s kind of where our focus is. I think we’ve got to — one thing I’ll say about being happy to focus on Bombshells for the last 2.5 months is that it’s really brought the team, especially upper management focus back to what are we really doing? What is our cap lock to station I don’t know. I guess really putting microscope to the existing assets. And that’s why you’ve seen us change. I mean we’ve had 4 clubs now that we’re going to close and rebrand I think that’s going to be a big increase as we move forward to the end of this year.

We’ve got the three Bombshells coming online by the end of this year as well, I believe, as well as sometime in the first quarter of fiscal ’25. I think we can get the Baby Dolls the West location open. And then we have no more drag. I mean to put it simply, we’ve had so much track. We’ve got to get rid of this drag. We’ve got to get focused on much quicker ROI that we get from acquisitions versus trying to build these new locations. I mean, I guess it was — I think it’s a great theory, and I think it was working, but the systems broke right now because governments just take forever, building permits taking forever, inspections take forever and it’s adding six months’ time, well when interest rates were 4% and 5%, that extra six months didn’t cost us very much.