Rci Hospitality Holdings, Inc. (RICK) Q3 2026 Earnings Call Transcript

Good afternoon, greetings, and welcome to RCI Hospitality Holdings' third quarter conference call. My name is Bradley Che. You can find the company's presentation on RCI's website. Go to Investor Relations section. All the links are at the top of the page. Please turn to slide two of our presentation. RCI is making this call exclusively on X spaces. To ask a question, join the space with a mobile device. To listen only, you can join space on a personal computer. At this time, all participants are on a limo. A Q&A will follow shortly after. This conference is also being recorded. Please turn to page 3. I want to remind everybody of our Safe Harbor Statement. You may hear or see forward-looking statements that involve risk and uncertainties. Actual results may differ materially from those currently anticipating. We disclaim any obligation to update information disclosed in this call as a result of development. Turn to page 4, Explanation of RIC's non-gap financial measures. Please turn to slide 5. Our speakers today are Travis Reese, interim president and CEO, and Albert Molina, interim CFO. Thank you, Travis.

Turning to slide 7, I'll start with the review of Arkansas-legged results. All comparisons are year-over-year for the quarter, unless otherwise noted. Total revenues were $73.9 million, compared to $71.1 million, a 4% increase. Impairments and other charges net were insignificant compared to $2.3 million. Net income attributable to RCIHA shareholders was $6.4 million, compared to $4.1 million, a 57% increase. GAAP ETS was an 80% increase and non-GAAP was $0.90 per share, a 17% increase. Net cash provided by operating activities and free cash flow were $2.5 million and $2.7 million lower, respectively. These primarily reflected payments of more outstanding payables compared to prior year quarter. On a sequential quarter basis, both net provided operating activities and free cash flow were 14% and 26% higher, respectively. Adjusted EBITDA was $16.9 million, an increase of 10% year-over-year and 9% sequentially. Moving to slide 8, I will now cover our results by segment nightclubs first. Revenue increased by 1% or record $63 million. Four newly acquired opened and reformatted clubs generated $4 million, and the 52 clubs in terms of sales produced $58.5 million. These more than offset $1.2 million in sales from four clubs close subsequent to the year-ago quarter. Per revenue type, service increased by 7.6%, food, merchandise, and other declined by 1.4%, and alcoholic beverages declined by 4.2%. Operating income was $19.6 million compared to $17.9 million, with margin at 31.2% of segment revenues compared to 28.6%. Non-GAAP operating income, which excludes impairment and other net charges, was $20.2 million compared to $20.8 million, with margin at 32.1% of segment revenues compared to 33.3%. A slide line are the results for the bombshell segment. Revenues increased by 25.4% to $10.8 million. Three new locations generated $2.6 million, and the nine locations same-store sales produced $8.2 million. By revenue type, alcoholic beverages increased by 33.6% and food and other increased by 16.6%. Profitability improved substantially as we increased higher margin beverage sales and improved operating leverage in segment. Operating income was $759,000 compared to $67,000 with margin at 7% of segment revenues compared to 0.8%. Non-gap operating income was $801,000 compared to $80,000, with margin at 7.4% of segment revenues compared to 0.9%. Moving to slide 10, you will see the summary of our corporate expenses. Gap operating expenses declined by 19.7%, or $1.8 million, and 16.3%, or $1.4 million on a non-gap basis. Both the gap and non-gap declines reflected a year-over-year reduction in insurance expense. Please turn to slide 11. We have slides coming up that discuss free cash flow and adjusted EBITDA, which are non-GAAP. In advance of that, we wanted to present the closest GAAP equivalents, which are operating income, net cash provided by operations, and net income. Slide 12, please. We ended the quarter with cash and cash equivalents of $26.4 million, down by less than half a million dollars from March 31st. Our strong cash generation during the quarter enabled us to make debt paydowns of $8.6 million, as well as buyback $1 million worth of shares. Pre-cash flow margin was 14%, improving for the second consecutive quarter, and adjusted EBITDA margin was 23%, improving for the third consecutive quarter. Let's turn to slide 13. As I mentioned, debt declined from March 31st, affecting paydowns across all categories. The weighted average interest rate was 7.05%, which would be considered to be a very good rate for commercial real estate these days. Total occupancy cost of 8.3% declined sequentially. Debt to trailing 12-month adjusted EBITDA was 4.3 times, excluding the fourth quarter legal accrual, debt to EBITDA was 3.7 times. Both are down from the second quarter. Debt maturities continue to remain reasonable and manageable, particularly with our plans to sell non-income producing properties. Now back to Travis.

RCI's founder and head of M&A will also be on the Q&A. If you would like to ask a question, please raise your hand in the X spaces. When you finish, mute your microphone to eliminate any background noise. We have a limited number of speaker spaces. We may move you back to the audience to free up space. Please understand we cannot discuss the legal situation in New York other than to reiterate the company's statement that RCI, the individuals involved, and the three clubs have pled not guilty to all of the charges and are taking all necessary actions to defend themselves. Furthermore, I've also been told that we've experienced some technical issues, so a transcript will be posted shortly as soon as we're able to, to reflect what was said on this call. I'll start taking questions. I'm going to go ahead and bring in Orchard Wealth. They're on. Make sure you unmute. Listener, Brad, promote him to the speaker, please. One second. He's on mute. Mr. Wells, can you hit unmute? He's in listen only mode. He's in speaker now.

Still show him as a listener on my screen, guys, so I don't know whether you can promote him again.

I'm going to go ahead and remove him as a speaker and bring him back up. Go ahead. You're a speaker now. Looks like you're off mute, too.

I'm going to try promoting somebody else to see if that works. I see he's still showing listener on my screen still, so let's see if somebody else can be moved to speaker.

Maxwell Ellis? I'm going to go ahead and pull you up. Make sure you unmute your microphone.

Can you hear me?

Yes, we can hear you. We're on mute again.

All right, anyway, it seems like the call that you guys just did, I've spoken to multiple people. It seems like every six seconds you could hear something, and then every two or three seconds it would go completely blank. So literally half the call that you guys just did, nobody heard anything. My main concern, I think, Paul, right now is how long before you guys are paying down debt at the accelerated rate before you can begin buybacks again? Because at this current rate and the prices, it's just, you know.

I agree with you. Their prices are extremely favorable for stock buybacks right now. However, got very uncomfortable with a 4.17 debt-to-evit ratio, so I wanted to get that knocked down. We also had some very timely payments to be able to pay down a few things to prepare for making some acquisitions here, hopefully in the next three to six months. So we wanted to kind of line those things out right. And so we decided to just take a small break from buying back stock. You see, we bought through April. We slowed down in May. And we basically, in May and June, basically just mainly paid debt. The real story, I mean, I know we say three months here, but if you look, in the last six months, we paid down $16 million worth of debt. And through the debt schedule, you see, we plan to pay another $8 million this quarter. So we'll pay down almost $24 million in this brief period of time. We've got a property sale that should happen in number that will probably pay another million. So our three-month total should be a reduction of debt of almost $25 million, which should put our ratio. We just refinanced two things that you're going to see coming up in the next quarter, where we move some maturity dates and change some terms paid off of some 12% money to lower some of our debt service ratios. And we look forward to hopefully – I'm hoping we're back in the market around the 1st of October as we start into the next fiscal year.

Okay. And then, you know, it seems like you've had a big turnaround in bombshells, especially within – I guess it seems like you guys have flipped from being a restaurant back to being a bar that sells food. What have you specifically done that's been catching on? Because it seems like, you know, you started with that one that you were managing, and it's kind of increasing across the footprint.

Yeah, I'm getting a bunch of messages that people are still not hearing this call. I have not missed a single word of the call, and I'm in Colorado on a basic Wi-Fi connection on my cell phone, so I don't know. But to give you an idea of what we've done is we went back to our report. You know, we started the concept almost 15 years ago in Dallas, Texas, and the idea was to make a fun, you know, bar-type atmosphere with sports and girls and great food, you know, with no nudity that we could take and expand around the country. I think after COVID, you know, everybody had to become restaurants, and I think that too much of that got into our culture. So what we've really done is massively changed the culture of Bombshells. I've brought in a new director of operations for Bombshells who is a club guy. He's been in the club business since he was 18 years old. He understands fun. He understands creating the party, not joining the party. And we've kept enough of the food guys to keep the food at a quality level and just slowly transform the concept back to what it was supposed to be and what it should have probably always been. You know, we were doing some major expansions in 21 and 23 with these two large acquisitions, an $88 million acquisition, a $66.5 million acquisition. And so I think a lot of our focus was on that club growth, and, you know, we just kind of – the bombshells kind of slid into a rut. We kept telling you to change this, you need to do that. And, of course, the team that we had at the time was very good at restaurant business but just not the club side. So, to give you an example of what we've done is we've taken stores that were around 50-50 food and beverage to 62-64% beverage and increasing revenue at the same time. So, it's not like we're getting rid of the food business or losing the food business. We're actually generating more food business as well, but we're also making it a fun place to be again and a fun place to be late night. So come in, you know, at 10, 30, 11, 30, 12, 30 at night and fill those hours back up, which, you know, as a restaurant, there was almost no business during those hours. Those hours had slipped off to, you know, they were out. The group was actually, the previous management was actually trying to tell us that we should close at midnight. So we, because restaurants, you know, that's when we really got the concept of let's go fix this thing, Let's go turn it back into the bar. Let's take it back to the original core of the concept, and we've done very, very well with that. April's things for our sales were negative. I'm open to the store. We took February, mid-February. I went into a store with another manager. We started working that one store, fixing the things, changing things with the concept. We took back the three stores in March, and about mid-April, we launched that across the uh all 11 stores uh as we prepared to open the store in roulette and make sure that it opened properly uh with it with the right party out of food and an atmosphere from the very get-go and uh we're seeing the results in it and you know i think you'll you'll see improved results again uh this quarter based on on what we've done in july so far and i think once football season starts it's going to get even better um my other thing is What's the update right now on the Dallas Club that burned down and you guys making progress with, like, rebuilding? The Fort Worth Club, we're still working to replat that property. We've had some issues with the city. That property was built in the 1970s originally. There's no sewer, no sewer regs there, so we're on a septic tank. Of course, the laws have changed on septic tanks, so we're working through those processes as well. So, I think it's going to be a while before we can start construction there, and once we start construction, it'll be nine months to build. We have started construction on the Baby Dolls West Fort Worth location on March 4. That construction is going. They just recently passed, I don't know what you actually call it, but it's basically the rough ends. So, all the plumbing and stuff that are all underground, all that has been done, and they've got permission to start filling that in and should be going, working almost to the vertical stuff here soon. I suspect that location will open around May 1st.

And then in terms of, like, the clubs that you do have, I remember you were getting, like, some stat about how, like, you know, a certain amount of clubs equal 80%, like some Pareto principle between the profitability. Do you guys have any clubs that you think you'll be, like, trimming off and selling real estate on?

We have a couple that we, you know, as you know, we got rid of Harlingen. We got rid of Edinburgh, El Paso location. We have a couple of locations that we're in negotiations with to possibly sell those locations. It doesn't mean every location is for sale for the people that are listening that want to buy every club that we own. We will know when a club is for sale. we're not we're not marketing uh you know we're just it's going to be a random club here there and we'll market it to a broker so that you'll absolutely know that it's for sale when when we make that final decision uh but uh it's not a lot just a couple small locations they're very small markets uh and we're focusing on our larger markets our acquisitions that we're working on are our larger market acquisitions uh that'll be very uh very free to force uh and we're taking getting very slow uh because right now we do believe that buying our own clubs is actually the best use for our money so yeah um then how much how much more payment how many more payments

do you have to do to add them uh i think we're down to 15 million or so 14 15 million so it's a million a month so 14 15 more months okay so you're good so basically you've been paying about You pay a million dollars to Adam, which at some point will stop, and that will be added back into profits. And then you've been accelerating debt payments of about, what, a half a million per month also?

So, like, literally the – Well, we pay down our line of credit, yeah. But our line of credit, I think after August, will be paid down to $100,000. So we will not be making additional payments on that anymore. So we're going to have to kind of look and see where we want to put the other money. I know that we have a property that's supposed to sell in September. If it closes, we'll pay down about $900,000 in bank debt and we'll probably pay a million dollars on the ADW, so that'll take one month off of that, plus save us, you know, the 12% interest over 15 months. So we'll get a nice savings off of that and still put a little, not a much, but a little bit of cash in the bank on our side as well. We are in negotiations on multiple other properties. I've been working with brokers. We're accepting cash offers. We're looking to lease some of the properties that haven't been able to sell in the last six months. Put a tenant in and see if we can sell them once we put the tenant in or just keep it and collect rents if the ROI is good enough. So those are things we're, you know, we've definitely been working on that non-income producing property. So I think that's a lot of value that we can unlock over the next 6 to 12 months. Hopefully, I mean, the interest rates and the oil prices and the uncertainty with the Iran war has definitely not helped commercial real estate sales. So that is part of the issue, I believe. Because, like I said, we have a lot of people looking. We're talking to a lot of groups on a bunch of our properties in multiple areas. And a lot of it is, you know, can they get the financing, kind of financing, you know, at the right prices and whatnot. So that's what we're up against. But I'm hoping those headwinds will die down here, especially as we move closer to the election and right up to the first of the year. I look very forward to hopefully seeing that settle down so we can move some more of these properties.

With the club sales, are they kind of pretty much in market? Or is there, like, a hotter area than the other, you know, geographically?

What do you mean the club sales?

You know, in terms of, you know, just the revenues that you guys are bringing in from the club side.

Oh, club revenues. You know, no, it's pretty spread around the country. I mean, you know, one area gets hot, another area slows down a little bit. A lot of it's been sports-based in the last few months. that we've seen with the World Cup and, of course, with the Knicks in the NBA Finals and winning the NBA Finals, you know, that's definitely affected New York and helped New York. But it also, you know, the games helped the bombshells. They helped, you know, the clubs in Miami. There's people coming to watch the games and watch the New York Knicks. So, you know, it probably didn't help us in Chicago because those fans probably aren't Knicks fans, but there's enough big fans in other parts of the country, I think, that did very well for us. And then, of course, the World Cup. I mean, you know, the most matches were in Dallas right next to the bombshells in Arlington and two of our clubs in that area, which did very well during those World Cup games. We had games in Houston. We had games in Miami. We had games in New York that all helped contribute to those regional areas. But they helped everywhere because people came out to watch the games as well. So, you know, it's hard to say that, you know, anything helped one particular area more than the next. I think that overall, you know, we've had very strong results. And like I said, we're looking very forward to football this year. We're putting a lot of promotion and sports stuff in, you know, fancy draft parties as well as, you know, come watch the games and game-watching parties and bottle specials during the games to get people to bring larger parties out, which we did very, very well with during World Cup. So we're going to take the success that we created there and multiply that and push that right into the football season. And then, you know, by October we're going to be picking up basketball as well and hockey kicks in, baseball will heat up here as the pennant races start. So sports should be very, very good for us, I think, September, October, November, and probably all the way into February.

Have you noticed anything different with the service side of the clubs? You know, obviously it seems like it's picking up. Does that seem like it bottomed a little while ago when your guys are, like, in some sort of going back to normal?

Yeah, I mean, I think just, you know, service revenue declined there for a while. I don't know, you know, there's a lot of macro stuff going on. But I think, you know, we are focusing on it. We are, you know, working on keeping people in our VIP rooms, right? I mean, that's where our service revenue is created is our VIP rooms. So we've got to keep the pressure on the floor, keep more people in the building until people want to pay to move up, right? You know, if you're the only person on a 737, you don't care if you're sitting in first class or not, right, because there's nobody next to you. But if all of a sudden every seat in the back is full and the front is empty, can we move up there? You know, that's what we have to do with clubs. And I think our guys are doing a fantastic job of creating that pressure by, you know, putting more and more people through the door and really focusing on just overall customer service right now.

Now, this is kind of like a strange question, but maybe. When it comes to, like, service revenue, is there, like, an age range of, like, the ideal client that are spending the bigger dollars? You know, because I can't see it being, like, 21, 22-year-old kids. To me, it would seem like some guy that's, like, in his 30s to 50s, because they're the guys with the money that can...

It strictly depends on the club. I mean, you know, in the format of that club. I mean, there's a lot of 20-something tech guys out there that are making good money, right, and getting their first job, and there's a lot of crypto guys out there that are in their 20s. And these influencers, right, I mean, these media influencers on social media, they make a lot of money, and they will come in and blow some money sometimes. So, you know, and then we've got, you know, the real estate tycoon who can come in and, you know, whips out his, you know, platinum credit card and says, you know, everything's on me, you know. So, I mean, it's, I don't think the age groups are as tight as they were. I know that we have done a better job, I think, of social media marketing and bringing in, working with some influencers and whatnot to really bringing in more of that younger crowd that we haven't necessarily had in the past. So we're doing everything we do to put butts in seats, basically.

And then my last question is, are there a significant amount of women that have been showing up to the clubs like with their husbands or just it's a thing for girls to go to?

That's been for 10 years now. Yeah, that hasn't really adjusted much. On weekends, not as many during the week, but on weekends, absolutely, especially Saturdays. Saturdays, we should have a couple's night, I think. But, you know, we do too much other business on Saturdays with bachelor parties, everything else to kind of really focus on that crowd. But we do focus on the customer service for that crowd, for sure.

All right, thanks, guys. Please raise your hand, and I'll call you to speak. Deal with the technical issues that people have been texting and messaging about. The immediate replay and recording will be posted right after on X basis, as well as a posting of the transcript of this call for technical issues. So on behalf of Travis, Albert, and Eric, the company, and have a great night. Please visit one of our clubs or sports.