RCI Hospitality Holdings, Inc. (NASDAQ:RICK) Q3 2023 Earnings Call Transcript August 11, 2023

Mark Moran: Greetings, and welcome to RCI Hospitality Holdings Third Quarter Fiscal 2023 Earnings Call. You can find the company’s presentation on RCI’s website, click Company and Investor Information under the RCI logo. That will take you to the company and investor info page, scroll down and you’ll find all the necessary links. Please turn 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 here in New York with Eric Langan, President and CEO of RCI Hospitality. CFO, Bradley Chhay is participating from Houston. Please turn with me to Slide 3. If you aren’t doing so already, it’s easy to participate in the call on X, formerly known as Twitter Spaces. Go to @RicksCEO and select a space titled RICK RCI Hospitality Holdings Inc.

3Q ‘23 earnings call. To ask a question, you’ll 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 traditional landline and webcast. At this time, all participants are in a listen-only mode. The 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 involved 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 afterward.

Now please turn with me to Slide 5. I also direct you to the explanation of Rick’s non-GAAP financial measures. Finally, I’d like to invite everyone listening in the New York City area to join Eric and me tonight at 7:00 O’clock 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 5th Ave and Broadway, a little in from Herald Square. If you have an RSVPed, ask for us or Martin Shkreli at the door. Now I’m pleased to introduce Eric Langan, President and CEO of RCI Hospitality. Eric, take it away.

Eric Langan: Thank you for joining us today. Thanks, Mark. Please turn to Page 6. We thought we’d begin by summarizing our third quarter and 9-month results in one place. It should be noted, that year-ago quarter, aided by the end of COVID restrictions, had one of the highest levels of operating leverage that have been experienced in the last 5 years. This affects direct comparisons to the third quarter of this year. Comparisons are also affected by the fact that the year ago, free cash flow included a benefit of $2.2 million from a tax refund. Otherwise, the third quarter was similar to the second quarter with non-GAAP earnings per share of $1.30 and it was approximately 9% better than first quarter’s non-GAAP EPS of $1.19.

Now let’s turn to the Slide 7 for the key takeaways. We achieved record revenues of $77.1 million in the third quarter up 9% year-over-year. We generated $1.30 earnings per share non-GAAP. Year-to-date, free cash flow and adjusted EBITDA margins are in line with our targets of 20% and 30%, respectively. The Nightclub business continued to be solid. After 9 quarters of same-store sales growth, we view the third quarter decline as a bump in the road that we experience from time-to-time. Bombshells continues to be profitable. We view the decline in sales we’ve been seeing as a return to the pre-COVID run rates of $5 million AUVs. No doubt, same-store sales for both clubs and Bombshells were held back in the third quarter by the uncertain economy, the huge amount of vacation travel and the extreme heat in Texas.

To date, fourth quarter ‘23, we purchased 10,440 common shares at an average $69.48 each. We still have $18 million remaining in our stock repurchase authorization. And we’ve got a strong lineup of new clubs, Bombshells, casinos, getting ready for the fourth quarter and fiscal 2024. Now here’s Bradley to go over more financial details of our results.

Bradley Chhay: Thanks, Eric. Please turn to Page 8 to review the performance of the Nightclubs segment. Revenues increased 14.2% year-over-year primarily reflecting an increase in newly acquired and remodeled clubs partially, offset by same-store sales decline. By type of revenue, service increased 4.8% while alcoholic beverages up at 24.1% and food at 17.7% increase. The year-over-year changes reflect, in part, the lower proportion of service revenues from the newly acquired Baby Dolls-Chicas Locas sales mix as compared to the nightclub averages. GAAP results also included $2.6 million in noncash impairment related to 2 clubs. Operating income was $20.4 million versus $22.5 million. On a non-GAAP basis, it was relatively flat at $23.6 million versus $23.3 million.

I’ll talk more about the margins in a couple of slides. Please turn to Page 9 to review the performance of our Bombshells segment. Revenues declined 8.8% year-over-year, primarily reflecting a decline in same-store sales, partially offset by an increase in newly acquired and open units. Operating income was $1.7 million versus $3.1 million. On a sequential quarter basis, however, revenues have now increased 3 quarters in a row. We still have more work to do on the margins. Now please turn to Slide 10 to review our consolidated operating margin. As Eric noted, the year ago quarter had one of the highest levels of operating leverage that we’ve ever experienced in the last 5 years. We believe that this was due to the benefit of the end of COVID restrictions had on sales.

As a result, non-GAAP operating margin was 25.3% compared to 31.16% a year ago quarter. However, looking at our performance, this year, the third quarter was generally in line with non-GAAP operating margin of 25.6% in the first quarter and 26.6% in the second quarter. Please turn to Slide 11 to look at some of our other key metrics. We ended the quarter with cash and cash equivalents of $23.6 million up from $22.8 million at March 31. Free cash flow was $14.3 million. This was in line with the level that we have been generating for the last 3 quarters. Again, as Eric mentioned, year ago free cash flow included a $2.2 million from our previously disclosed tax refund that boosted free cash flow. Adjusted EBITDA was $22.7 million. This was the highest quarterly amount to date this fiscal year.

Free cash flow margin was 18.5% and 29.4% for adjusted EBITDA. Year-to-date, it was 19.2% and 29.7% respectively. Please turn to Page 12 to review some of our debt metrics. The debt at June 30 declined $2 million from March 31 quarter. Weighted average interest rate on our debt was 6.52%, in line with what we’ve been paying. Total occupancy costs increased to 8%. This increase relates to new debt that we’ve used to buy properties that we haven’t opened or fully optimized yet, but 8% is well within our range of 6% to 9%. For similar reasons, debt-to-trailing 12-month adjusted EBITDA stayed relatively flat at 2.7%, June 30 versus March 31. Debt maturities and our debt pie charts are similar to the second quarter. Now in the interest of time, let me skip Slide 13 and turn the presentation back to Eric.

Eric Langan: Thanks, Bradley. Please turn to Slide 14. Everything we do is centered around our capital allocation strategy which is similar to those outlined in the book, The Outsiders by William Thorndike. First and foremost, our goal is to drive shareholder value by increasing free cash flow per share at a 10% to 15% on a compound annual basis. We’ve stuck to the strategy since implementation at the end of fiscal 2015 with 3 different actions, subject to whether there is strategic rationale to do otherwise. one, mergers and acquisitions. Specifically, buy the right clubs in the right markets. We like to buy solid cash-flowing clubs at 3x to 5x adjusted EBITDA, using seller financing and acquire the real estate at market value.

Second is growing organically, specifically expanding Bombshells to develop critical mass, market awareness. Our goal in both M&A and organic growth is to generate annual cash on cash returns of at least 25% to 33%. And three is buying back our shares when our free cash flow yield on a per share basis is more than 10%. Turning to Slide 15. In line with our capital allocation strategy, here’s an update on the new projects we have in the works for the fourth quarter and fiscal 2024. Fourth quarter nightclub sales should benefit from late June completion of the newly remodeled and expanded Baby Dolls, Fort Worth. We are also looking at adjusting some nightclub personnel, developing new drink promotions, party packages and changing keyword searches in our social media marketing.

In fiscal ‘24, a new club and a reformatted club should open in Fort Worth and Tye, Texas. Both are currently being remodeled. We also anticipate opening the replacement club in Lubbock, Texas. Fourth quarter Bombshells sales should benefit from the opening of a new location in Houston suburb of Stafford. Construction has started on our Rowlett and Lubbock locations both in Texas. Remodeling should begin soon for our Downtown Denver site. All 3 of these new locations are expected to open in fiscal 2024. Looking at our Central City, Colorado Casino projects, the liquor license process has begun and gaming license are continuing through the review process for Rick’s Cabaret Steakhouse & Casino and the Bombshells Sports Casino. Both are planned to open in fiscal year 2024.

Building permits have been submitted to the city or Rick’s location and remodeling is expected to begin soon. Please turn to 16. Before we go into Q&A, I want to remind everyone we’ll be holding our 30th anniversary Gentleman’s Club EXPO Convention August 20 through August 23 at the Paris Hotel in Las Vegas. Judging by our hotel block, attendance looks great. A room block is 100% full, so numbers are fantastic. Recently, I talked to Ed Anakar, President of Management Company, he told me that his team has completed the integration of Baby Dolls-Chicas Locas acquisition and is ready for more. I’m looking forward to EXPO and meeting with owners who are hopefully willing – will be ready to sell. Thanks to all of our local and dedicated teams for all their hard work and effort.

We can’t do without them. Now here’s Mark.

Mark Moran: Thank you very much, Eric and Bradley. Before we get into the Q&A segment, I’d like to encourage everyone to check out the recently launched Ricks Store at shop.ricks.com. Now for the Q&A. If you would like to ask a question, please raise your hand in the X Space. When you finish, please mute your microphone to eliminate background noise. We have a limited number of speaker spaces. After your question, we may move you to the back of 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 larger shareholders.

Q&A Session

A – Mark Moran: First off, we have Scott Buck of HC Wainwright. Scott, please take it away.

Scott Buck: Hi, good afternoon, guys. Thanks for taking my questions. Eric, first, I’m curious whether it’s the 2 new clubs or the relaunched Baby Doll clubs. Typically, what’s the ramp period for those to start to see similar, I guess, revenue profiles as the existing clubs?

Eric Langan: Baby Doll has taken up pretty quickly and is doing very well. But typically, a new club will take about 6 months to ramp up to where we like it, and then it will continue to grow for about – up to about 18 months where we’ll level up and turn into a steady flows basically.

Scott Buck: That’s helpful. And I’m curious, could you remind us when the year-over-year comps start to get a little easier on the Bombshells side? Is it going up here this quarter?

Eric Langan: This quarter, I’d expect to be about the same as we’ve experienced over the last 3 quarters. I mean it’s still 100-plus degrees in Texas. It makes the patios impossible to use. I mean, you can’t even hardly walk your car, let alone set outside for 25, 30 minutes to eat. So, our interiors are doing well, but we really need our patios back. I suspect that, that will happen hopefully mid-September. I think the weather will break. It could break a little earlier. It’s Texas, who knows. But the comps get easier. If you go back to first quarter of 2023, you’ll see about mid-October, we started seeing a little bit of slippage that ran in a pretty strong slippage in November and continued in December. So that’s the nice thing.

We’ve got a lot of exciting things coming up as well as the Baby Dolls-Chicas Locas – acquisition will be about 6 months old at the beginning of quarter, we closed right at the end of March. And if you look back historically, when we take over an acquisition, especially a multi-club acquisition, it takes us about 3 to 6 months to get everything flowing properly and that third quarter that we own it, you start seeing a lot of that new revenue increase and flow through to the bottom line to EBITDA. So I’m very excited about how the first quarter of 2024 looks, easier comps and a lot of exciting stuff that’s kind of going to all peak at the same time and should put us into a really nice growth and run rate for 2024.

Scott Buck: And then last one for me. You guys didn’t buy back a little bit of stock. Are we kind of sitting at that threshold level here at about $70 where that looks attractive from a capital allocation standpoint?

Eric Langan: Yes, I think so. I mean basically, we were – we talked in the office stock went below $70. We said, well, I guess we should be buying and we started buying about 100,000 a day. Then stock went up back above $70 for a few days, and it’s back below $70. So, we want to get the earnings out. Haven’t bought anything this week, but probably would look at as early as Friday, depending on what the stock price does over the next couple of days. And probably definitely be back out there next week when we get the market time to take all the new information before we pull it back in the market.

Mark Moran: Thanks so much, Scott. Next up, we have Anthony of Sidoti & Co. Anthony, take it away.

Anthony Lebiedzinski: Good afternoon and thank you for taking the questions. So looking at your service revenue, it did lag the growth of alcohol and food sales. I know you said something about Baby Dolls. But just wanted to get a little bit more insight into that as to, are you seeing less traffic with the service component of your business or is it just a lower average ticket? I mean, I just wanted to get a little bit more insight since that’s a high-margin category for you.

Eric Langan: Sure. That’s a two-part answer. So, Dallas doesn’t allow VIP rooms. And so therefore, we lose a lot of that private room revenue in the Dallas market. So, that will affect the service revenues as a percentage of total sales in those markets. But the reality is, also especially June, we saw lower service revenue and same-store sales of about $2 million. And we believe that the biggest portion of that is because our high-end customers – the guys that come in to New York and Miami and whatnot, are on European vacations or in the Caribbean or wherever, they’re with their families or doing vacationing, and they’re just not out spending the big tickets in the clubs. I think that as we – school starts back up in Texas and Florida in mid-August to the end of August that we’ll start seeing those customers returning.

And also, we’ll have a pretty good idea of that when we announced the July, August, September numbers. In early October, we’ll have a pretty good feel for where that has headed and give us a really good idea of how we can predict and project the first quarter of 2024.

Anthony Lebiedzinski: Got it. So, as far as the rest of your business, I mean, can you give us maybe just an update as to what you’re seeing in the first few weeks so far in the fourth quarter?

Eric Langan: Well, we’re only 9 days in July, I guess. We have July.

Anthony Lebiedzinski: What would you like in for early August?

Eric Langan: I mean we’re seeing more of what we’ve experienced in April, May and June. That’s why I said, I expect this quarter to be pretty flat with how we’ve basically done these first 3 quarters, maybe a little bit better. It really depends on how quickly that VIP spend comes back. It’s kind of tapered in May, went down in June. It’s kind of holding steady. We have – I know we’ve got a couple of decent VIPs this weekend. It was actually a really good weekend, especially with the fight. So, that helped. But we knew those VIPs back home and back in the clubs. The problem we have is, we can put a lot of people through the door at $100. Put good guys that spend $100 in the club and it takes a lot of them to make up a guy that drops $40,000 to $50,000.

And so that’s kind of the process we’re going through right now. We are seeing strong customer accounts. We’re happy with the customer counts. We just want to see that VIP spend come back up in the next 3 to 6 weeks.

Anthony Lebiedzinski: And then just quick other question. As far as Bombshells, so you’re looking to expand that. Admittedly, you guys have struggled in that segment and certainly a lower portion of your overall cash flow. So just how should we think about that as far as your willingness to continue to invest in that segment given the recent performance?

Eric Langan: I mean, we’re working on the top line numbers. We’re seeing those numbers start to grow a little bit quarter-over-quarter. And so we’ve just got to get to the point where now we’re focusing on that bottom line and getting our margins back to that 18% to 22% rate that we’re shooting for. I think we’ll be there pretty quickly, hopefully, in the next 2 quarters. We just reviewed everything, did some more minor pricing increases to get certain items in line with costs. We have a couple of points of labor cost to treat. Our food costs are now back to pre-COVID levels where we like them to be. So, just like I said, I’ve got a couple of other little items we need to adjust there. And then, of course, adjust the marketing and a few other items that are helping bring people in and get those costs back to a more normalized level, so we can bring the margins up to that 18% to 22%.

Anthony Lebiedzinski: Okay. Well, sounds good. Yes, if you could get those margins back to that 18% to 20% in couple of quarters that that would be wonderful. So, all right. Well, thank you very much and best of luck going forward.

Eric Langan: Thank you very much,

Mark Moran: Thank you very much Anthony. Next up, we’re going to have Lynne Collier of Water Tower Research. Lynne, the floor is yours.

Lynne Collier: Thank you so much. Congratulations on a great quarter. Just have a couple of questions that are somewhat general and then one specific. First of all, I want to ask you about any trends that you’re seeing geographically. I know Texas is slower and it has weather issues, but what are you seeing across the country? Any sort of trends geographically that you’re seeing?

Eric Langan: Yes. I mean, overall, we’re not – I mean, we have a few locations that are still up pretty strongly from 2023. And I think that is – you see Chicago, you see Denver. It’s the very – what I call the late bloomers. The cities that kept everybody locked down a little longer. We’re still seeing some nice boost in those markets. But generally, across the country in the other markets, we’re seeing slight declines in same-store sales. But like I said, the biggest part of that is the VIP revenue. And we try to throw parties, we’re going to throw VIP parties and our host will call VIPs and they’re like, I’m out of the country, I can’t make it. Thanks for the invite. Stuff like that. I’ll see you when I get back.

And so we know that a lot of our big spenders are on vacations, not just articles in the Wall Street Journal that tell us. That it’s actually talking to our guests and saying, when we’re try to throw VIP parties, we’re postponing VIP parties. We’ll try to pick a lot of those up in that October, November, December quarter as we welcome everyone back. And I think we’ll see a nice boost from that. And like I said, we have easier comps that we’re going against. So, I think it will be right. Now, If you look historically, whenever we see a downturn in our same-store sales that typically will last 2 quarters, and then it starts to run back up for us on the Nightclub side. Now the Bombshells has been a little different for us and a little tougher in comps.

And of course, like I said, this 100-degree heat is not helping that at all. So, hopefully, that will end soon. But I just look at my 10-day forecast or Dallas and it’s like 107 degree every day and Houston is about 102 degree every day. So, for the next 10 days at least, we know we’re going to have some pretty tough weather in those markets. So, we’ll ride it out. Well, like I say, we’ll keep pushing indoor stuff. We’re starting to do some different social media marketing and some other – trying some other new stuff, bringing some new faces into the Bombshells. But I think our – like I said, once our patio has come back, I think that – I mean, I know I’m dying to go sit back outside. I mean, sitting in the restaurants indoors and what not, I really love.

I spend a lot of time in Colorado where almost probably 50% of my meal is outdoors now in Colorado. And I’d really like to, because it’s 70 degrees up there and beautiful. So we’d love to see that back in Texas. I think our consumers will be right back on our patios once the weather permits.

Lynne Collier: I just have one more question regarding Texas, which you’ve spoken a lot about, and it’s obviously very hot here being in Dallas, I know for sure. But are you seeing any trade down in terms of tickets in Texas or is it just, it’s so hot, no one can go outside? Are you observing anything else in Texas other than weather?

Eric Langan: Not really. I mean, like I said, we’re missing big ticket spenders. That’s what we’re missing. I think that – I predict I would happen last year that the wealthy would run out of the United States and run to Europe and run to the Caribbean and go on all these fancy vacations. And, the reality of it is I was I was off by a year. It actually took another year before, everybody went out of town. If you look up European hotels and European flights. I mean, it’s crazy if you can find them. If you can even find anything available, it’s extremely expensive. And I think, people just didn’t go last year, and so they all started booking this year and everybody ran. I mean, you look last year, we got the benefit of no one left country.

And – but they all ran to Miami. They all ran to the south. They all ran – every tourist place in the United States was overbooked last year. All the Vrbos started filling up. And this year, you’re hearing about the Vrbos being down, a lot of them being empty, especially in tourist areas. And so I think that’s affecting our sales in certain markets that were really, really good last year. That are being off a little this year. And those are – those were big ticket spenders. I mean, those are – in the smaller markets, those are your $1,500 to $5000 order guys. In our bigger markets they’re $10,000, $20,000, $30,000, $50,000 guys. So with those guys out of town it doesn’t take a lot of them for $2 million of revenue.

Lynne Collier: Thank you. I just have one quick follow-up on Bombshells, your comment about pricing. Do you know approximately how much menu pricing of Bombshells you’re carrying this year versus last year? Just a ballpark figure.

Eric Langan: We’ve tried to price with inflation pretty much, but we’ve also made some adjustments, based on food costs coming down. So some items we, maybe just held steady because the food costs actually came down. So we’d already marked it up for the food costs. So we took the adjustment on that side. So we moved on the other side, where the food costs are up and we had to raise prices. But, I’d say overall, we’re trying to run about a 6% to 8% increase across the board as best we can.

Mark Moran: Thanks so much, Lynne. Next up, we will have Rob McGuire of Granite Research. Rob, please take it away.

Robert McGuire: Good afternoon. Hey, Eric, you’ve laid out your vision for 2024. Are you looking at anything in 2025 at this point?

Eric Langan: I’m really not at this point. I mean, yes, we have enough things on, like, we have about 14 – I think, we’re down to 12 projects now. I think we have about 12 projects that are running right now. If we get the 2 casinos open, the 3 Bombshells and the 3 clubs, that’ll be 8 of them. So we’ll still have about 6 items, on the burner that we can shoot for 2024 or 2025 with, I mean. And, of course, acquisitions. So I think, the focus as we open these new things, we’ll only need to find one or 2 more new locations for Bombshells and the rest are already set. And those will be toward the end of ‘25. There’ll be target for the end of ‘25, so we won’t need to plan for the end of ‘24, because it is close to 14 to 16 months before we really have to worry about that.

I’m hoping that the casinos will be heavily involved in close investment and spending in those between February and April, hopefully for late April or May openings, depending on licensing, of course, that’s the big unknown. And – but we have to get the heat and HVAC systems. There’s very long lead times on those right now, which puts us, at the end of January, early February, before we get those units in. And I just don’t want to spend any real money without the heat in there and have a pipe freeze or something in the winter or something not have fire protection on, because we decided to do some work, but we turned the water off. I don’t want to do any of the expensive stuff until we have the heat and air conditioning systems in the buildings.

So, the – one of the units, one of the buildings will have all their units put in, hopefully, by the end of September. We will begin, the remodel on that. But it’s lower cost remodel, on a smaller unit, on smaller casino. So it will take less expense and be quicker. So kind of where we are right now.

Robert McGuire: We’ve been in a somewhat inflationary environment, so when I look back at the pre-COVID nightclub comps, they’ve been somewhat flattish in 2019 to the present. Just wondering if you could give us a feel for that.

Eric Langan: I mean, like I said, if you look at this quarter, it’s – the first 2 quarters was kind of the blue collar. The blue collar has kind of stabilized now. We’ve kind of got that down. We were doing the right discounting, the right marketing to – that customer is kind of leveled off. Their spends kind of leveled and we’re pretty solid there. If you look – you can look at our – you can just look at the sales breakdown, you’ll see the service revenue declined, and we had the biggest drop this year or this quarter. And like I said, it started about mid-May. It was pretty strong in April. It started dropping to mid-May and June was pretty bad. July was a little better, I think, than June, but, but not a lot.

And, like, I guess, I’d suspect over the next 2 weeks to start seeing that spend come back. We saw little bit of it this weekend. So we may just see it on the weekends for right now. But we’ll just have to keep watching right there. I just don’t know when it’s going to come back. I don’t you know – I guess, when – as said, I think when school starts back up and everybody gets back from their vacations and starts settling back in and going back to work, we’ll see that spend come back.

Robert McGuire: When we emerge from an environment like COVID, do you find that RCI tends to be the price leader raising prices coming out of it into a stronger economy? Do you tend to be a lagger?

Eric Langan: Actually, we lagged is what I would say. I mean, we’re not – we’re making plenty of money and we’re doing very well with our customer accounts. And we see our competitors raising prices. We will hold off and take some of that, especially the – on the lower end, on the blue collar, we were able to do that very well. As you’ve seen, we’ve steadied off very quickly. Like I said, it tends to be about a 6 month trend for us. Or this quarter into it, like I said, we saw a little bit of the weakening with the blue collar earlier on, and now we’re seeing that, like I said, level off and actually saying a little building in some markets. So we’re just going to have to watch the white collar spend, the high end spend.

That’s the key to success, I believe, on the nightclub side. On the Bombshells, obviously, like I said, we need to get the patios open. We did raise prices, but it was towards the end of June when we made a lot of those changes and adjustments as we got enough data from April and May to figure out where we were headed and what we needed to do. So you’re not seeing any of that results in this quarter, which is why the margins were, I think 12% or 13% – between 12% 13% for Bombshells this quarter. I do suspect that – and I’m very hopeful that as we get through July, August September that we’re going to be closer to the 18% to 22%, if we’re not in the 18% to 22%. And I definitely think in the first quarter of 2024, we will bring those margins back.

The new store will be open. There’s other stores in construction, are moving along. So starting to energize the team. They’re getting excited about the growth again. COVID stopped all growth at Bombshells. And without growth, the restaurant chains, it’s hard to keep some of your top people, right, because there’s other chains they can try to steal them away and promise them new positions and that. So, we want to make sure we can keep and attract the management team that we need, keep Bombshells going and that’s, I think, part of it. The growth is part of that process.

Robert McGuire: Okay. And last question. The company’s laid out a lot of cash for a number of projects at this point. At what point would you see bank financing or obtained bank financing for those projects?

Eric Langan: Well, when I need it, I can go get money from the bank anytime. And we’re still sitting on $25 million in cash. I don’t see a reason to not just keep using our cash. We’re tying the cash up. The only other thing we have to do is buy back stock with it. The stock’s not in a such a huge discount rate that I think, oh, let’s borrow money to buy back stock. And we’ll just use normal cash flow and buy our $100,000 a day in stock, like we’ve always done. We’re not trying to affect the stock price. We’re trying to get the best price for the stock we could get for our for our long term shareholders. I just don’t need the cash. I mean, we’ve got – we’ve put out about $29 million to $30 million, I think, in the last 9 months in cash.

So we’re not building up on the balance sheet, but it’s being invested that is going to give us fantastic returns. When you think about how we’ve typically grown in the past, we’ve added $20 million, $30 million in debt. We’ve had those debt carrying costs. And so when the new stuff opens you’re still carrying that interest expense. We’re going to have very little interest expense with these new operations as they open, which is going to increase the flow through to the bottom line, stop the carrying cost drag, what little there is, from utilities and property taxes and those things, which will all be paid out on operating revenue. So I think it’s going to be – I think 2024 is going to be a great year for us. We had that momentum rolling we ran into 2019 right before COVID hit us, right?

I mean, we were just hitting our stride, really taken off in that January, February, March quarter. Even though we were closed for – I think we’re closed for 15 days, we still beat the previous year without having 15 days. So if you look at ‘19 over ‘18. And I think you’re going to see ‘24, we’re going to have another one of those types of jumps. And that’s all with no acquisition. I do believe the team is ready. Like I said, Ed – I’ve talked with Ed. Ed is in New York with me. He’ll be at the meet greet tonight. His team is ready. They’ve got the Baby Dolls acquisition all up and running. They’ve got great management teams in place now. Our systems are in place. We’re starting to see the revenue growth that we expect to see as we enter that 3 to 6 month period.

We’re working early to get that flow to the bottom line. Making some pretty decent adjustments to lower some of the costs that we had – that we picked up with the acquisition. And, like I said, I think everything kind of comes to a great meeting point starting the first quarter of 2024. So I’m excited – very excited for 2024. I think that’s – it’s just going to be our best year ever.

Mark Moran: Thanks so much for the questions, Rob. Next up, we will have Josh of Noble. Josh, please take it away.

Joseph Gomes: Hey, good afternoon, guys. Thanks for taking my questions.

Eric Langan: Thanks, Joe.

Joseph Gomes: Hey. So, you guys kind of answered most of mine, but I just kind of want to see how just the overall environment is just looking like for any just new potential club acquisitions, how are owners being obviously in this kind of cautionary environment?

Eric Langan: Yes, I mean, we haven’t pursued, so I don’t really know. I’ve told almost everyone that has called me in the last 2 months that we’ve got to get this other acquisition under our belt. We’re working on it. Let’s talk at EXPO. Let’s talk at EXPO. I’m hoping – I mean, seeing the hotel room count full already, means there’s going to be lots of people there. So I’m very optimistic that – and I’ve got some meetings set up, and some people that I’m going to make sure we talk to, while we’re out there. And people that want to talk to us while we’re out there. So I think we’ll get a kind of a list put together and we’ll talk multiples and locations and try to figure out what what’s the quickest and easiest for us in timing and what the best deal is.

And, cherry pick the best clubs like we’ve been doing for the last 10, 15 years. But EXPO – every year at EXPO, we always make someone and we always start the process. So, the reality is just how quickly we can do it. We’re ready now, so we could close something pretty quick quickly. I think we have, if I’m correct, approximately $45 million or $46 million worth of unencumbered real estate or under encumbered real estate we could roll in to a loan. At 70% loan to value that would pull about $28 million. With the under encumbered parts probably $4 million, $5 million we’d have to pay off. So we could easily pull a $20 million down payment out from our bank right now if we need it. I’m not counting our line of credit, so we could hit – we paid down our line of credit a little bit so we could probably hit that line of credit again if we needed to.

So we’re in good shape. And we still have $25 million cash on the books. So we’re in great shape to make an acquisition. Obviously, we’re not using equity at these prices. So it would be a debt, in cash acquisition right now. I don’t – unless, of course, the stock [indiscernible] runs back up over $80 over the next few weeks, which, the market where it’s at, some of the uncertainty out there. I think that’s probably unlikely. So I would love that it did, because it would give us even more ammunition, as we go to EXPO in a few weeks. But, if it stays under, then we’ll just continue to buy back a little bit every week with some of our cash and, just keep following our capital allocation strategy. We’ve proven from 2015 on, it works.

And there’s no there’s no flaw on it so far at this point. So I think we’ll just keep doing what we do. Yeah.

Joseph Gomes: Perfect. Yes, I’m just kind of, I guess, kind of leap frogs into this question. I know you guys talked about the $200 million investment goal the last couple of quarters. I just kind of want to see just the status of that right now. Do you think the company can achieve this – the goal this year?

Eric Langan: I think it’s going to be very difficult by September 30, but $200 million in the first year. And I’ve said before The goal is $200 million per year. We may not hit it each year. However, I think we can get pretty damn close over a 3 year period of buying the amount of EBITDA we want. Obviously, we did a $66.5 million acquisition. We’re at about $29.9 million, I think – or between $29 million and $30 million. So if you do that, we’re $96 million, $97 million. We’d probably put another 5 out in July that I know of. So we’re $100 plus million right now. There’s only a couple of months left. So probably not going to get $200 million, but we could. I mean, we could find an acquisition, in August. We probably wouldn’t close it, but at least we’d have that money lined up.

We still have, with everything going, we probably have about another $40 million to $50 million where we that we know we’re going to invest over these 12 projects that we have out there, maybe a little bit more than that. So it is lined up. We’ve basically allocated – I’m probably getting close to allocating $150 million of the $200 million. so we can go find another $50 million acquisition, then we’d at least allocated the $200 million for this year. I know we have to – may not all get put out to the following year, sometime probably between, I don’t know, November and April will be my guess.

Joseph Gomes: Okay, perfect. And then, I guess, the last one for me. Is there any really updates on AdmireMe? I know you guys mentioned the first quarter of new team, how they’re working on bug fixes and how?

Eric Langan: Yes. It is up and running. You can actually go on the site now. We have featured some new entertainers and feature stars on there. We’re actually doing a live hard launch at EXPO. so we have a bunch of feature entertainers that are going to be, going on the site that week – coming to the site that week, and start doing some push, some traffic. We’re going to start flowing some traffic to it and see what happens. We’ll get out there and do some marketing. Once we get the girls up, they call it on ramping or whatever. Once they get them on, on the site and have them posting and using the site regular, then we’ll start directing more traffic to the site. But should – we should have an interesting, next 3 months with AdmireMe. We’ll see how that goes.

I’m optimistic finally. I’ve been pretty pessimistic, and I won’t lie. I mean, it’s very difficult, but, I’m not a programmer, and understanding we had a team that worked on it for a year. The Ukrainian war kind of destroyed the team and the model there. And, finally, had to make a switch to get it done. And then, of course, now your new programmers have to learn everything and go back through and they pre-coded some things. And, because we had lost programmers throughout that year where it’s – the Ukrainian company was there, but one program we worked on, then another program would take over. And so there was some coding issues that had to be fixed and whatnot. But I believe that all that is done, we’re actually adding new features, I think almost on a weekly or biweekly basis right now, whenever they upload from the program environment to the active environment.

And it’s starting to come along pretty good. I’ve talked to a couple of the girls that post on there fairly regularly and they’re really starting to like how the features are. We’ve brought in a group of feature entertainers, that are on other platforms that are going to come to our platform as well. And, they’ve given us a lot of feedback and what we need to do and how we need to do it. They’ve been basically in the practice environment, not the, the programming environment, not the live environment. So they could, basically work through. And then we could – as they made the fixes or changes, they were able to basically beta test and make sure they’re working properly in that environment. It seems to be going very well. And like I said, we’re starting to see the changes in the live environment, on a weekly to biweekly basis.

So I’m very excited about it. We’ll see how it goes over the next 3 months.

Mark Moran: Thank you so much, Josh, and to all of our research analysts. We’re now going to open up the Q&A to the broader audience and would like to encourage everyone who has a question to please raise your hand, and we’ll put you in the queue. I’d also like to encourage everyone to retweet and share this space. First up, we’re going to have [Orchard Wealth]. The floor is yours. Hey, Orchard, I think you need to unmute.

Unidentified Analyst: There we go. Hey, just a couple of quick things. I think the main focus here should just be really talking about the casino plans for next year, because the cash flow looks a lot bigger than what I originally thought it would be. You’ve got 2 locations now for different casinos in the market. How many total slot machines do you guys think you might be coming to market with?

Eric Langan: Well, the current estimate is about 500 gaming devices. This includes cable games and slots, about 500. But less than 20 of those will be tables. So mainly, it’s going to be slots. If you look at the average take in Central City right now, the keep is about $139 a day. If you look at Black Hawk, it’s about $330 something a day. I hope to be somewhere in the middle, to be honest with you. So each machine somewhere in the $200 range – $180 to $220 range per day, 365 days a year. You lose maybe 19 days a year because of weather up there. So you can do the math and use a 340 day year instead of a 365 day year, you’re going to get you a pretty nice deal there. And then you’ve got your gross revenue. And then, typically, after all your casino costs and everything, you’re running about 40% of margins on that.

So if we can keep that, that’s how our budgets are being built. That’s everything’s being set up with our player fair rewards, all those types of things, all in that budget. So it should, should be pretty. And then you have the table games and the night club revenue, the alcohol and food sale revenues. I think, yeah, the casinos are a little bit – we could do a little bit more money than we originally anticipated. But we’re getting lot more machines in space in there than we originally anticipated as well. And that does include the sportsbook. We’re going to have a sportsbook as well, so.

Unidentified Analyst: When – as soon as you receive approval from the gaming license people, is that then, I’m assuming you’re already talking with people about the sportsbook?

Eric Langan: Yes, absolutely. We’ve been talking with last week about sportsbook. We’ll have our skin deal done, prior to that license being issued, but it won’t be effective until a license is issued. And hopefully, I’m hoping – originally, we anticipated, getting a preliminary approval sometime between the end of August and the end of September. However, talking with the Colorado Department of Gaming, They are running behind. They have been short staffed. They are working on staffing issues and hiring right now. And hoping to speed the process up here, from what we understand. But it could be, maybe as late as, November, December before we get our preliminary. Once we have our preliminary, it’ll take us about 90 days to get everything, maybe – I’d say 90 days.

It could be 120. So that’s why I’m saying. I’m predicting now April to May openings at the earliest. That also has to do with how quickly you can get the AC and the construction. It’s kind of all – it’s longer than I wanted, but it’s all coming together at the same time. So it’s actually working out beneficial for us.

Unidentified Analyst: Okay. So I’m just going to kind of – the town next to you guys, Black Hawk, they do $330 on their slot machines. The town you’re in –

Eric Langan: I believe that’s right now. I don’t know how old that data is, because I haven’t ran it recently. But I tell you can just go to the Colorado Department of Gaming’s website, all of its public information by city. It won’t tell you by casino. It won’t tell you – but it’ll give you every slot machine that’s in the Central City, all of their keep, all of their coin ins, their keep, all those numbers are all available. Same with Black Hawk, same with Cripple Creek. So you can actually look at Cribble Creek, down in south of, Colorado Springs as well. So you get all 3 cities and you can see how many machines are in and what their average keep is and, do your math of this than. They did a $1 billion coin in. They kept this amount of money. And on a per machine basis, this is what it was, then divide it by 365, and you kind of get the – just how we do the math.

Unidentified Analyst: Well, the numbers you’re talking about are between $7 million $10 million, but – and just to work backwards though. When you do a slot machine in Colorado, you got to pay 20% a haircut off the top. I mean, from that number, you’re left with about 40% after you pay all your bills.

Eric Langan: Yes, pretty much.

Unidentified Analyst: Okay. So you’re looking at like something in the neighborhood of about $65 per machine per day. Is – in the town that you guys are in, are casinos open 24/7 or is it –

Eric Langan: No.

Unidentified Analyst: They’re not?

Eric Langan: No. That’s why I think we will run higher they – most of them close by 2:00 o’clock. Some close at midnight, some close by 2:00 am. And It’s just – it’s a different – it’s different than Black Hawk. Black Hawk, yes, most – everything in Black Hawk is open 24 hours a day. You’ve got some – these are the casino operators that have been there for years. They’ve owned their properties. They – now, one casino, if you look up Century Casinos, they’re publicly traded as well, they are open 24 hours. So they’re the only casino it’s open 24 hours a day in Central City. Like, I think the Z Casino might be as well. So I guess I should say some of them are. Less than half the machines are open or on 24 hours a day to say that. I always forget about the Z – I always forget about the Z Casino because it’s downhill. It’s not on Main Street there.

Unidentified Analyst: Okay. So in that number, if I go look it up, I’ve got to assume you guys are going to be open 24/7, so to speak.

Eric Langan: Yes.

Unidentified Analyst: And half the people in the town, when they come up with that 139 plus slot machine, I got to do some sort of a factor. Okay.

Eric Langan: Yeah, exactly.

Unidentified Analyst: All right. So I doesn’t understand why you’re modeling – I just want to understand why you’re doing the same. Do you think you could do about $180 to $200 revenue –

Eric Langan: Yeah. Well, I think part of it is going to be the fact that we’re open 24 hours, and we’re going to have entertainment and food, that the other that the other casinos don’t have. We’re going to have, I think we have a lot younger employees as we draw from our base of waitresses, bartenders, and entertainers in Denver, Colorado. They’re 45 minutes away where we can have a split – a split shift type deal where they work 2 days in, and up in the mountains and then work 3 days back home. So it will be an interesting, I think we’ll have an interesting draw on the quality of customer service that we’re going to be able to offer at our casinos versus Black Hawk – the most of Black Hawk Casinos. If you look up the numbers, Black Hawk went about 140% of their pre COVID revenue with 65% of their employed staff that they had in 2019.

So there’s a there’s definitely a shortage of employees up there. So if you can get the employees, which we believe we can get, we’ve been talking with our staffing, talking with our people. They’re very excited in the Denver market. we’ll get the new Bombshells open prior to these casinos openings, we’ll have another 200, 300 employees with that Bombshells to draw from as well. So we’re very excited about the potential to draw the younger people up there that the other casinos have not been able to do.

Unidentified Analyst: Okay. All right. So we’re going to go from 13 Bombshells to 17 in the next year, give or take. You’re going to go from 57 clubs with the reopenings and so forth, you’re going to be at 60. Not counting any acquisitions that you make and you’re going to have 2 new casinos. Right?

Eric Langan: Correct. Yes. If we make no acquisitions.

Mark Moran: Next up, we’re going to have [Adi Sephora]. Please take it away.

Unidentified Analyst: Hey, Eric. Hey, Bradley, congrats on the great quarter, fellas. I really have two questions. The first one is around, you mentioned The Outsiders. And one of the most, accretive assets you can have is your IP or brand. And I’m wondering, is there something on your roadmap where you kind of stop investing in your own organic IP around Bombshells, building that brand up? And think about leveraging and buying something bigger that might have more of a natural presence. Why don’t you answer that first.

Eric Langan: Yeah. I mean, obviously, it would depend on the multiple we could buy it at versus the multiple we trade at. If we looked at other restaurant chains right now, they would have to basically be willing to merge with us at a multiple rating similar to ours, and then provide the multiple expansion up with us. If someone was willing to do that, I think we definitely look at that in the acquisition of that type, especially if we could bring a strong management team and a growth management team. While it have to have the right concept, it would have to have the right numbers to make sense to me. But the most important to me is that we’re bringing the team on that’s then going to take and run a true restaurant division, and not only build help us – but not only build the brand that we’re buying, but help us with our brand as well and expand and build our brand as well.

And then, of course, if that’s successful, we get that right team, we put that together, then we can basically wash, rinse and repeat, right. We do it – we’ve been doing it with strip clubs for, 30 years. So, acquisitions are acquisitions, it’s just math, right? Anybody can do the math and the rest is just, like I said, the right people. So far I’ve been pretty good at putting the right people together in situation to build the clubs, build out our teams. And then we just have to do the same for the restaurants. I want the process of doing it for the restaurants. I mean, we don’t have to buy anybody to pick up a team. We’re building our team. Just the building process is always slower than the acquisition process.

Unidentified Analyst: No, that makes sense. I’m glad you brought up people because that was kind of my second question. You know, it’s 2023, the era of ChatGPT and AI. I know you guys run pretty decentralized. But how do you guys think about automating even basic workflows or even team members and seeing other on productivity changes?

Eric Langan: Well, I mean, Bradley has been doing a great job of keeping our office – corporate office costs down using technology, to keep costs lower. We’ve been picking up and learning more of these FICA tip credits and all these other earning credits, tax credits you can get for different employment of people, different hiring, different in different markets, different areas, enterprise zones, all these things. We’re actually working on one of the casinos as a historic building, in a historic zone. So we’re going to get historic tax credits for all the improvement. We’re taking a building that hasn’t been used in 15 years, and going to make it usable. So we’re going to get tax credits on that, we believe. So basically Federal government’s going to help us build half of one of our casinos, I think. It’s kind of what it works out too. Bradley can probably explain it better than me at this point. But it’s kind of where we’re at.

Unidentified Analyst: Awesome. Well, that was – congrats on the quarter once again. A lot to celebrate. I’ll probably see you guys tonight at 33rd, so I’d like to finally meet in-person

Mark Moran: Fantastic. Thank you so much for that question. Now before we go on to a submitted question, I’d like to encourage anyone to raise their hand here for us to call on you. So, Eric, we have a question that was submitted from a follower in the audience. The capital allocation structure has been proven to its performance since 2015. Ratings downgrades increases risk of higher and longer interest rates by the Fed in addition to other macro factors, does that change your calculus? Are you comfortable with current debt levels?

Eric Langan: I mean, I’m comfortable with our current debt levels at the moment. Obviously, I’ve said in the past, we want to keep, say, under 3x. We’re at 2.7x. So – but I think that number will drop down as our VIP spend comes back October, November, December, new stuff opens in ‘24. You’re going to see a bunch of new revenue, new EBITDA come in and drop that back down probably in the 2.2x range. So that gives us plenty of room to take on additional debt. Of course, we buy anything we pick up the EBITDA from any acquisition as well that helps keep that debt level in check. I’m not too worried about it. I think I bought my first house in 1993 and my interest rate was 7.58%. So, 7.65% is not horrendous. I think rates are still below that.

So we’re still not at the 1993 level from when I bought my first house. So I I’m not too worried about it right now. I think our weighted is 6.52%. If we were to readjust right now and refinance a 100% of all our debt into one thing, I would probably get around a 7.5%. I think we just closed a loan at 7.12%. So to think we get a 7.5% loan, I mean, that wouldn’t be the end of the world to raise our interest point on $240 million in debt, which is a considerable amount of money, but nothing that’s going to stop our growth or stop us from continuing to take on debt.

Mark Moran: Fantastic. Thank you so much, Eric and Bradley and to all who asked questions. With that, we will be concluding the Q&A segment of the earnings call. I’d like to encourage everyone to check out the Rick’s Store at shop.ricks.com and to follow Eric @RicksCEO. For his 10,000th follower, we’re going to be doing a little giveaway with merchandise from the store as well as tonight. For those of you who joined us late, you’ll be able to meet management tonight at 7:00 o’clock at Rick’s Cabaret New York, one of RCI’s top revenue generating clubs. Rick’s is located 50 West 33rd Street between 5th Ave and Broadway, a little in from Herald Square. If you haven’t RSVPed yet, please ask for Eric Langan, myself, Martin Shkreli or DKNY at the door. On behalf of Eric, Bradley and the company as well as our subsidiaries, thank you and have a good night. As always, please visit one of our clubs or restaurants and have a phenomenal time. Thank you, all.