Rci Hospitality Holdings, Inc. Q2 FY2021 Earnings Call

Greetings. Welcome to RCI Hospitality Holdings Conference Call and Webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Gary Fishman, who handles Investor Relations for RCI.

Thank you. For those of you listening on the phone, you can find our presentation on the RCI website, click Company and Investor Information just under the RCI logo. That will take you to the Company and investor Info page, scroll down and you will find all the necessary links. Please turn to Page 2. I want to remind everybody of our Safe Harbor Statement. It is posted at the beginning of our conference call presentation. It reminds you that you may hear receive 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 to Page 3. I also direct you to the explanation of non-GAAP measurements that we use. Now I am pleased to introduce Eric Langan, President and CEO of RCI Hospitality. Eric?

Thank you, Gary. If you please turn to Page 4, thank you for joining us today, I’m here with our CFO, Bradley Chhay. After the market closed, we reported our second quarter numbers. Results reflected a continued rebound in financial performance due to the COVID pandemic. We posted strong increases in earnings per share and free cash flow. Nightclubs had their best overall performance since the pandemic began and Bombshells served up another strong quarter. This enabled us to keep our teams employed and generated higher levels of free cash flow and profitability. Once again, we thank our loyal customers, dedicated team members and steadfast investors. We hope these trends continue as the COVID-19 situation continues to improve. As of today, 36 clubs and 10 Bombshells are open. Nightclubs and Bombshells sales exceeded $18 million in April. Restrictive curfews, which have affected many of our northern clubs are beginning to end. Minneapolis, where we have three clubs, we have an 11 PM curfew on Friday. New York, where we have three clubs plans to eliminate the midnight curfew starting May 31 and we hope the curfew in Chicago where we have one club will be lifted soon. Looking forward, we are working on all fronts to grow free cash flow. I’ll talk more about that when I return to the wrap and then we’ll have our Question-And-Answer Session and now here is Bradley, to review the financial data.

Thanks, Eric, and good afternoon to those who tuned in on the call. We reported total revenues of $44.1 million for the second quarter, that’s up 9% year-over-year. This is our first year-over-year quarterly increase since the pandemic began in the year ago quarter. GAAP EPS was $0.68, compared to a year ago loss of $0.37. Non-GAAP EPS was $0.75 compared to $0.47 in the March 2020 quarter. Looking at cash, we had $20.2 million as of March 31st. Second quarter net cash from operating activities was $11 million and free cash flow was $9 million, that’s the third highest quarter in the company’s history. Please turn to Page 5. The Nightclubs segment continues to rebound. Revenues of 30.8 million were up 22.2% from the December quarter and down only 1.8% from the year ago quarter. The sequential increase reflected more locations open on a more consistent basis and strong demand. Same-store sales increased 3.6%, based on clubs that were open enough days to qualify in the March 2021 quarter and the year ago quarter.

I think it will be a little headwind going forward. There are a couple of reasons. First let’s start with your first question why we did so well this quarter? I think we did so well this quarter, because we have very loyal employees. Our revenues increased very rapidly and our employees worked through it. We have a lot of staff. We kind of froze wages when COVID hit. We are reviewing a lot of people, a lot of our employees right now, a lot of our management teams, corporate staff and whatnot. We are probably a little below market. So we are going to have to step that up. So, I would say you are going to see it return, increase a little bit over quarter-by-quarter for the next couple of quarters, maybe three, depending on how quickly we react and what we need to do. We are also short a little bit in some places right now. So we are trying to hire. It is very difficult, it’s a very difficult employment market right now.

Hey. Thanks for taking my questions. My first question is I just want to dig into the salaries and wages. I think you mentioned, they came in obviously at 25.4%. Obviously, it’s a big topic of – there might be difficulty finding people to come back to work. So, can you explain why you did so well on that metric in this quarter? And what the pathway you said normalization expected to kind of get back to 28%. But can you kind of walk us through?

The curfews are killing us. To give you an idea, when the curfews were lifted in other states, we typically did 40% of our business in the last four hours of the night. So in New York, we are open until 4 AM. And you are talking about the full 40% is gone. In markets where we are open up to 2 AM, we are still getting a little bit of that business, but not the prime business. And the biggest problem we have is, the main cities may be closed down, but they can just go someplace else. For example, in New York City, we close at midnight, but you can go across the bridge until 4 o'clock in the morning. So what happens is the customer that would normally go out at 11:30 at night, they just don’t come to our place. They go someplace else. So, I think it’s going to be very big for us. Putting in numbers, I think right now, Pittsburgh opened about a month ago to regular hours. Their numbers are returning back to normal and actually increasing year-over-year.

Okay. And then just one more if you can just kind of – just real quickly, just trying to understand the margins at Bombshells, any kind of conceptual color on average checks? Is that something that just kind of ballooned? I am just trying to get a better sense of the margins there and maybe what was driving that?

I don’t think average checks really ballooned. I just think that fewer numbers of people and the number of hours that we are busy - the world is busy and we have increased. And I think that’s a lot of what we are seeing. It’s traffic-driven.

Hey guys. Awesome quarter. Just I want to follow-up a little bit on the Bombshells commentary. I mean, I am trying to internalize like how much of it you think is sustainable all the streaking strength, but once all the local restaurants, bars and what not, reopen which I think a lot of them have already been open in Texas, I mean where do you think that this eventually levels out?

They are open in Texas. I think we peaked in the fourth quarter of last year. And the last two quarters have been very consistent with $13 million. I think that’s where we are at. I am talking with the management team. Then looking at the numbers, I said I’ve been in some of the Bombshells to see kind of what’s going on. I think this is where we are at now. I think this is the normal for that brand right now.

Got it. So, if you take the April number and you add kind of the $600,000 or so you were talking about for the restrictions lifting in Minnesota, New York and Chicago, I mean, you are looking at a business that’s probably a run rate like $250 million plus of revenue.

Well, we say $5 million a week, I mean, we could be close to $5 million a week. There is something. I think, $220 million to $230 million is very safe. I think $240 million, $250 million is possible. And if you said $260 million I wouldn’t say it’s out of the question on a run rate.

Hi guys. Congrats on another strong quarter and really excellent capital management and capital allocation for the last few years. You’ve done a great job.

We just keep following the program. That’s the name of the game right now.

Thank you Eric and Bradley. On behalf of Eric, Bradley, the company and all our subsidiaries, thank you, and good night. Stay safe. Stay healthy. And as always, please visit one of our clubs or restaurants. Thank you.

This concludes today’s teleconference. You may disconnect your lines at this time, and thank you for your participation.