Rci Hospitality Holdings, Inc. Q1 FY2023 Earnings Call

Greetings and welcome to RCI Hospitality Holdings First Quarter Fiscal 2023 Earnings Call. You can find RCI's presentation on the company's website. Click Company and Investor Information under the RCI logo. That will take you to the company and investor information page. Scroll down and you'll find all the necessary links. Please turn with me to slide two of our presentation. I'm Mark Moran, CEO of Equity Animal. I will be the host of our call today. I'm here in New York City with Eric Langan, President and CEO of RCI Hospitality; and Bradley Chhay, CFO, who is in Houston, home of one of my favorite clubs Club Onyx managed by Josh Brooks. Please turn with me to slide three. If you aren't doing so already, it's easy to participate in the call on Twitter Spaces. On Twitter, go to @RicksCEO and select the space titled Rick RCI Hospitality Holdings Inc. 1Q '23 Earnings Call. To ask a question, you'll need to join the Twitter Space with a mobile device. To listen-only, you can join the Twitter Space on a personal computer. RCI is also making this call available for listen-only through traditional landline and webcasting. With Twitter having glitches today, in the event of a crash we’ll restart the Space, and if that fails, more to the tiling. A question-and-answer session will follow. And this conference is being recorded. Please turn with me to slide four. I want to remind everyone of our safe harbor statement. You may hear or see forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call, as a result of developments that occur afterwards. Please turn with me to Slide 5. I also direct you to the explanation of Rick's non-GAAP measurements. I would like to encourage everyone to retweet and share this date. Finally, I'd like to invite everyone listening in the New York City area to join me and Eric tonight at 7:00 to meet management at Rick's Cabaret, New York, one of RCI's top revenue-generating clubs. Rick's is located at 50, West 33rd Street between Fifth Avenue and Broadway, a little in from Herald Square. If you have an RSVP, ask for Eric or me at the door where I will be deploying my own capital allocation strategy after 9:00 p.m. Now, I'm pleased to introduce Eric Langan, President and CEO of RCI Hospitality. Eric, take it away.

Thank you, Mark. Thanks everyone for joining us today. Total revenue came in generally as expected with the Nightclub segment having another great performance. This offset difficult Bombshells comparisons. GAAP EPS and net cash from operating activities and non-GAAP EPS and free cash flow were affected by repairs and maintenance CapEx that occurred in the first quarter. GAAP EPS also included $0.16 in non-cash, intangible amortization and stock-based compensation compared to a year ago quarter. Nonetheless, adjusted EBITDA was up 13.9% year-over-year and we ended the quarter with $34.1 million in cash. That was after making a number of club and restaurant and real estate acquisitions. Probably, the most important thing that happened in the quarter is that we got off to a terrific start with our big three-year initiative. The goal is to continue our mission of growing free cash flow and EBITDA of a higher revenue base. Now we have numerous acquisitions and projects in development. Highlights include our pending acquisition of a group of five Baby Dolls and Chicas Locas clubs in Texas. The Rick's Cabaret Steakhouse Casino in Central City, Colorado. In addition, we have an even stronger lineup of new Bombshells locations in three states in Alabama, Colorado and Texas. I'll be back to tell you more and answer questions. Now, here's Bradley to review financials.

Thanks, Eric and good afternoon, everybody. Looking at the sum of the major numbers for the quarter, total revenues were $70 million, up 13.2%. GAAP EPS was $1.11, up less than 1%. Non-GAAP EPS was $1.19, up 8.2%. Net cash from operating activities was $14.9 million. That's off 8.4% from last year, mainly because we paid down more liabilities on our books in the first quarter compared to a year ago. Free cash flow was $13 million, that's off 14.6% because of the change in net cash from operating activities and about $1 million more maintenance CapEx that fell in the first quarter. Adjusted EBITDA was $20.5 million, up 13.9%. And weighted average shares outstanding declined 1.9% year-over-year, due to repurchase over the last year. Please turn to Page 7, to review Nightclub segment. Revenues totaled $56.3 million, up 20.4%. GAAP and non-GAAP operating margin was 40.4%. That reflected increased operating leverage from higher sales, in particular higher-margin service revenues, which increased 23.4%. This was partially offset by increased amortization of club licenses at lease locations. As a result operating income increased 21.4%. Now fiscal year 2022 and first quarter acquisitions added $15.3 million in sales. Same-store sales were up 1.2%. This reflected strong contribution and growth from our white-collar clubs mainly New York, Illinois and Florida, partially offset by some softness in our blue-collar clubs. In the second quarter, the 11 clubs we acquired in October 2021 will fall into same-store sales. Based on current trends this should result in growth in same-store sales.

Thank you, Bradley. Please turn to Slide 15. We currently have acquisitions and projects in development involving nine clubs. In October, we acquired Heartbreakers in the Galveston area. At the end of January, we reopened the day shift. We plan to finish the club's remodel in February, and that should help increase its contribution forward. In late December, we reopened and reformatted a location in San Antonio as the Jaguars Club. The first quarter provided a little contribution, but we expect it will be a bigger contributor going forward. In mid-December, we announced definitive agreements to acquire a group of five Baby Dolls and Chicas Locas clubs in Texas. We are awaiting transfer of liquor licenses. The club should contribute $11 million in EBITDA in year one. And once we complete our expansion plans, they should contribute $14 million to $16 million in EBITDA. In December, we announced acquiring club assets in Fort Worth to create another PT show club. The remodeling is underway and the reopening should occur in the second half of fiscal 2023. Last year, we had to close our Jaguars Club in Lubbock, Texas because of an intimate domain issue we acquired another location with the money the state paid us. It is currently under construction and opening is expected in the second half of fiscal 2023. We were a bit taken aback by some of the challenges we faced in late November and December. I anticipate that margins will stabilize to a more typical range of 18% to 22% as we progress. The Houston market was particularly weak and did not contribute at all this year, which is disappointing for that area. Overall, Bombshells has experienced some growing pains; in previous years, we faced less competition as many establishments were closed. We were among the first to reopen after COVID, during a time when many buildings lay vacant. However, over the past year, especially in the Houston and Dallas markets, those vacant buildings have been filled with new businesses and restaurants, which are currently enjoying their initial success. I believe that in the coming months, we will see a return to normalcy as customers begin to explore beyond these new spots. It's also worth noting that our same-store sales are still up 3.6% compared to our pre-COVID numbers in 2019. Overall, Bombshells remains on track.

Now please turn to page 10. We ended the quarter with cash and cash equivalents of $34.1 million. Free cash flow was 19% of revenues and adjusted EBITDA was 29%. That's a little below our targets of 20% and 30%, respectively. Please turn to Page 11 to review our debt metrics. Net of loan costs, debt was $211.2 million at December 31st. That's an increase of $8.7 million from September 30th. This increase primarily reflected financing used in the acquisition of Heartbreakers deal, down in Dickinson, Texas, the Denver Food Hall and Atlanta, Lubbock, Texas for a Bombshells location. Our weighted average interest rate continued at 6.35% this compares to 6.26% a year ago and 6.73% five years ago. Our amortization continues to be within the $9 million to $10 million annual range which is very manageable with our cash flow.

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

Thank you very much, Eric and Bradley. I want to encourage everyone to retweet and share this Space. And I'd like to give a special shout out to Cynthia Daniels. I was very much enjoying your profile while Eric was speaking. If you would like to ask a question, please raise your hand in the Twitter Space. When you are done asking your question please mute your microphone to eliminate any background noise. We have a limited number of speakers in the Space's. After your question, we may move you back to the audience to free up space. To start things off, we'd like to take questions from RICK's analysts and then some of its largest shareholders.

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

Yes, I still believe there is some weakness. I reviewed the sales trends over the last four months, comparing October, November, December, and January. This January's total sales were slightly higher than those in November and December, which I find encouraging. Generally, when we experience slowdowns, they impact us for approximately six months. I believe the slowdown began in November based on my observations. I'm optimistic that this period will be shorter and that March will represent a significant turnaround for us. Additionally, we have the Super Bowl this week, which will likely cause an unusual impact due to this one-time event, particularly in the Phoenix market. With the Eagles and Kansas City teams competing in the Super Bowl, I anticipate an increase in viewership, which should also benefit the Bombshells in Texas.

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

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

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

Yes. We were somewhat surprised by the weakness experienced in late November and December. I believe margins will stabilize at a more typical range of 18% to 22% as we progress. The Houston market was particularly weak, contributing nothing this year, which is disappointing for that area. Overall, Bombshells has faced some growing pains. In previous years, we encountered less competition since many establishments were closed. We were among the first to reopen after COVID, while many buildings remained vacant. Over the last year, especially in the Houston and Dallas markets, those vacated spaces have started to fill with new businesses and restaurants, which are currently enjoying their initial surge of interest. However, I expect that in the coming months, customer behavior will begin to normalize as the novelty of those new places wears off. I also want to highlight that same-store sales have risen by 3.6% compared to our pre-COVID numbers from 2019. Overall, Bombshells remains on track.

Okay. That's good to hear. And then given the choppiness in traffic in both of the blue-collar locations and Bombshells, are you guys maybe perhaps rethinking your promotional strategy to do maybe more specials as far as for food or drinks, or like how are you thinking about that?

Yes, absolutely. We switched our approach in early December. We didn't want to overdo it during December with preplanned parties and Christmas events. We were somewhat impacted; the period before Christmas was decent, but the week between Christmas and New Year's was slower. However, New Year's weekend turned out to be fantastic for us. It’s been an adjustment, which I refer to as a psychological recession, because there are plenty of jobs available, and people can easily earn money right now. It’s more of a mindset issue, as many believe that bad times are ahead and are noticing higher prices, leading to some sticker shock. Overall, I believe that by March we'll have adapted our plans. January was better than December, and November in terms of total revenues. February is shorter with only 28 days, so we won’t have those extra three days. We’ll see how February performs, but I expect average daily sales will be higher compared to January. I think March will help us get back on track, and we’ll need to see how things progress through the summer.

Thank you very much. Eric, I wanted to ask you do you have any other color that you can provide on the casino in terms of the progress you're making?

We are currently in negotiations and are working towards finalizing a deal with a national partner, which is not yet completed. However, we expect to have more information on this by next week, which we find promising. In terms of progress, we have conducted our 3D scans and are beginning our layouts. Our operational team will be visiting the site on Monday after the Super Bowl to create floor layouts and flow patterns for the architect. I anticipate starting repairs and replacements for the roofing and HVAC systems in April, with completion aimed by the end of that month. My goal is to have the casino fully ready to open by November 1. Achieving this will largely depend on obtaining preliminary approval by June 1, which we are optimistic about, as the process typically takes only three to four months, so we may receive it even earlier.

That's great. Thank you so much. I just have another question. It being in Dallas and the weather has been pretty unfavorable. I know we're only a few days end of February, but can you comment at all on how the weather has impacted the last couple of weeks or so in Texas?

Yes, we had 10 locations that were closed for two days, and six of those were closed for a third day. A tornado hit our Fuqua location in South Houston, causing it to close for a few days. We managed to complete some repairs, but the area experienced a power outage. The tornado was significant, as it damaged our dumpster and fence and affected our HVAC system. We're currently focused on getting everything fixed. The store was closed for about two days. There were minor issues, but overall, the closures in January and part of February impacted our performance. However, our January numbers were still better than in November and December, despite those 10 store closures.

That's great color. Thank you so much. I just have one final question and that's about Bombshells in Colorado. How many units or restaurants do you anticipate being able to build in the Denver area over the next couple of years?

We are exploring around six potential site locations, with one already established in Aurora. Additionally, we have a site in downtown Denver, very near the convention center, which I believe will be an exceptional location. While it's not entirely turnkey, it is quite close. All we need to do is cosmetic improvements since the previous operator left all the kitchen equipment in place. It’s a large venue in a prime spot. We are currently in contract negotiations to finalize the purchase. If we can close the deal within the next week, we should be able to open this location in time for the Denver Broncos' first home game this football season. Our aim is to complete this quickly and at a low cost, with an estimated build-out of less than $1 million. We are also securing bank financing for the property purchase, which will facilitate a swift cash-on-cash return for us. I am very enthusiastic about this location.

Nice quarter guys. Can you give us an update on perhaps when baby dolls could close? And anything unusual going on with those alcohol licenses, or any color around that?

Yes. I initially believed we would finalize the deal by February 1, and we were fully prepared to do so. We have a line of credit with our bank that we can utilize to complete the transaction whenever needed. Currently, there are a few outstanding issues. The Texas Beverage Commission has placed an administrative hold on the transfers, which prevents them from submitting their licenses so that ours can be issued. Our licenses are also pending due to some other issues with the cities, but everything is now submitted and processing with the Beverage Commission. We're essentially waiting on the government. I hope to provide more clarity based on our discussions by February 20. I would like to see us finalize the deal by March 1, but it could happen by March 15 or even March 31. However, I believe we will complete it within this quarter, which is seven weeks away. They should be able to resolve the issues even with state agencies. The challenge is that we feel a sense of urgency while they are proceeding at their own pace. We are ready to go, with all necessary preparations completed on our side, including the money available and the line of credit established. Our teams are set, and we have already preordered all the POS equipment to ensure immediate readiness. We are just waiting for those final approvals. So, again, it could be March 1, March 15, or March 31. I recall they provided some timeframes for typical processing, including dates around March 20 and March 30. Once the licenses are approved, we will likely aim to close the deal the next day or soon after.

Thank you. Turning to Denver, can you discuss the six potential Bombshell area locations? You have already secured two and acquired the land at a lower cost compared to Texas. Do you anticipate this trend continuing with the remaining four locations as you expand there?

I believe that's the case. We are observing some properties that are priced higher than those in Texas, but there remains a significant amount of vacant restaurant space available. In contrast to Texas, which reopened fairly quickly, other locations were closed for a much longer duration. This has led to many competent operators vacating their spots. There is still a considerable amount of land entangled in legal disputes and lease issues, and we're working through that to identify the right locations. Currently, I have seven projects in progress, so there's no rush on my end. We are preparing for 2024. One of the challenges for 2023 is that we've only been able to grow through acquisitions this year because we didn’t set up new opportunities in 2020 and 2021 as we normally would have due to COVID. Consequently, Bombshells has taken a temporary pause. However, as we come back online, the lack of new growth can dampen excitement for the brand. I expect that as we approach the end of this year and begin to open new locations, we will invigorate our management teams and will likely see positive developments for the Bombshells brand. If we don’t face another COVID shutdown, I believe the brand will thrive in the next three years, supporting our goal of achieving over 30 units and more than $50 million in EBITDA from our restaurant division. I’m confident we can reach these targets. Overall, I think we're looking at an exciting future. We're committed to making strategic acquisitions and expanding the Bombshells brand while also improving our existing operations. Our focus remains on enhancing shareholder value through prudent capital allocation and operational excellence.

Thank you very much for being here. This concludes today's RCI Hospitality Holdings First Quarter Fiscal 2023 Earnings Call. I appreciate your time and invite you to join us at our locations. Good night.