Participants

Mark Moran; Investor Relations; Equity Animal

Eric Langan; Chairman of the Board, President, Chief Executive Officer; RCI Hospitality Holdings Inc.

Bradley Chhay; Chief Financial Officer; RCI Hospitality Holdings Inc.

Scott Buck; Analyst; H.C. Wainwright & Co.

Presentation

Mark Moran

Greetings and welcome to RCI Hospitality Holdings first-quarter 2025 earnings call. You can find the company's presentation on RCI's website. Go to the Investor Relations section and all the links will be at the top of the page.
Please turn with me 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 coming to you from Denver, Colorado. Eric Langan, President and CEO of RCI Hospitality; and CFO, Bradley Chhay are in Houston.
Please turn with me to slide 3. RCI is making this call exclusively on X Space. (Event Instructions) At this time, all participants are on a listen-only mode. A question-and-answer session will follow. This conference call is being recorded.
Please turn with me to slide 4. I want to remind everybody 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 RCI's non-GAAP financial measures.
Now, I am pleased to introduce Eric Langan, President and CEO of RCI Hospitality. Eric, take it away.

Eric Langan

Thanks, Mark. If everyone would please turn to slide 6. Thank you for joining us today. Let me run through some key takeaways. All comparisons are year over year unless otherwise noted.
In our Nightclubs segment, we generated increase in total sales and same-store sales, while GAAP and non-GAAP operating profits were approximately level with the year-ago quarter. In our Bombshells segment, total sales declined as expected with the sale closure of underperforming locations, but GAAP and non-GAAP operating profit and margins both improved. On a consolidated basis, net cash provided by operating activities and free cash flow nearly matched year-ago levels. And we continue to make notable progress with our back to the basics five-year cap allocation plan.
During the first quarter, we sold or closed four underperforming locations in the Bombshells segment, for a total of five since September of 2024. We also repurchased 66,000 shares for $3.2 million. And as of 12/31, we had 8,989,000 shares of common stock outstanding.
In January, we acquired the Flight Club, a premier gentlemen's club in the Detroit market. Purchase price was $8 million for the club and $3 million for the real estate. We estimate the club should generate about $2 million in annually adjusted EBITDA. We also opened the Bombshells in Denver, and as part of the effort to improve Bombshells, we have changed leadership and Rafael Pedraza is now promoted to our Director of Operations from assistant director of operations.
Now, here's Bradley to review our performance in more details.

Bradley Chhay

Thank you, Eric. Please turn to slide 7. All comparisons are year over year unless otherwise noted.
Fourth quarter sales totaled $71.5 million, that largely reflects the sale and closure of the non-performing locations in the Bombshells segment, partially offset by the increased sales in the Nightclubs segment. Other gains totaled $2.2 million. Net income attributed to RCIHH common shareholders was $9.0 million. EPS was a $1.01 GAAP and $0.80 non-GAAP. Net cash provided by operating activities was $13.3 million. Free cash flow was $12.1 million.
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And adjusted EBITDA was $15.7 million.
Please turn the slide 8. Nightclubs revenues increased $0.7 million or 1.1%. The key factors driving the first quarter revenues included a 3.7% increase in same-store sales and the addition of three new or reformatted clubs. This was partially offset by the absence of Baby Dolls Fort Worth.
Food, merchandise, and others increased 8.6%; alcoholic beverages, 3%; while service declined 3.7%. Other net gains totaled $0.8 million versus virtually nil from a year-ago quarter. The first quarter 2025 amount included a $1 million in additional cash proceeds from Baby Doll's Fort Worth insurance. Operating income was $20.9 million compared to $20.4 million. Margin was 33.8% of revenues versus 33.4%. Non-GAAP operating income was $20.6 million compared to $21 million. And non-GAAP margin was 33.4% of segment revenues versus 34.3%.
Please turn the slight 9. Bombshells' revenues declined $3.1 million or 24.7% due to the sale and closure of five underperforming locations and a 7.5% decline in same-store sales. This was partially offset by a full quarter of the Stafford, Texas location which opened in mid-November 2023. Other net gains totaled $1.3 million versus virtually nil from a year-ago quarter. The first-quarter 2025 amount reflected a gain for the Bombshells that was sold. Operating income increased $1.9 million with a margin of 20.6% of segment revenues versus 0.7%. Non-GAAP operating income increased $0.5 million with a margin of 6.7% of segment revenues versus 1.2%.
During the first quarter, there were no weather-related closures for Nightclubs and Bombshells. To date, however, in the second quarter, we've had 14 days for Nightclubs and 7 days for Bombshells.
Please turn to slide 10. Corporate expenses increased $1.7 million on a GAAP and non-GAAP basis. This was due to the establishment of insurance reserve.
Please turn to slide 11. We have some slides upcoming that discuss the free cash flow and adjusted EBITDA which are non-GAAP. In advance of that, we wanted to present the closest GAAP equivalents on this slide which are operating income, net cash provided by operations, and net income.
Please turn to slide 12. We ended the first quarter with cash and cash equivalents of $34.7 million. During the quarter, we used $3.2 million to buy back shares. As a percentage of revenues, free cash flow was 17% and adjusted EBITDA was 22%. Free cash flow was slightly lower than a year-ago quarter because maintenance CapEx was almost 30% higher.
Please turn to slide 13. Debt at December 31 declined $2.7 million for the September 30 reflecting scheduled paydowns. The weighted average interest rate was 6.65% compared to 6.61% in a year-ago quarter. Total occupancy costs were 8% versus 8.2% a year ago. Debt to trailing 12-month adjusted EBITDA was 3.32 times compared to 3.28 times in the preceding quarter. This metric will decline as sales grow from locations that have come online more recently and from those anticipated to open. Debt maturities also continue to remain reasonable and manageable.
Now here's Eric.

Eric Langan

Thank you, Bradley. Now please turn to slide 14. For those of you new to the company, let me review our capital allocation strategy. Under our plan, we will allocate 40% to club acquisitions. We will allocate 60% to share buybacks, dividends, and debt repayment. The goal is to grow free cash flow per share by 10% to 15% on an average annual basis.
If you please turn to slide 15. Operationally, this means focusing on our core Nightclubs business. Currently, we are evaluating every club in our portfolio. The goal is to increase same-store sales on a regular basis. Our Nightclubs plan also involves acquisitions. Our goal is to acquire an average of $6 million of adjusted EBITDA a year, focusing on the best clubs, buying base hits with occasional home runs. Our target metrics remain the same, 3 to 5 times adjusted EBITDA for the club business and fair market value for the real estate, targeting 100% cash-on-cash returns in three to five years. Purchases would be made with cash on hand, bank financing, and seller notes.
For Bombshells, our plan calls for improving the performance of existing locations. Our near-term target is 15% operating margins and return to same-store sales growth. Our plan also calls for finishing two other locations currently in development in Lubbock and Rowlett, Texas.
For the final part of our plan, we anticipate continuing to implement a program for regular buy backs. We also anticipate small dividend increases annually. Altogether, we expect to generate more than $250 million in free cash over the next five years and buy back a significant amount of stock. Given where our shares are trading and our view of what the business can do, we believe this is a great use of our capital.
Our fiscal '29 targets are calling for hitting $400 million in revenues, $75 million in free cash flow, and reducing share count to 7.5 million shares. This would result in a doubling of free cash flow from fiscal '24 to approximately $10 a share in '29.
Please turn to slide 16. With Bombshells Denver now open, we have six remaining developments. Chicas Locas El Paso is finished and reopening is planned for March 1. Interior construction at Bombshells Lubbock is underway, and we are targeting a mid-March opening. Completing final finish-outs at Rick's Cabaret Central City, and we are targeting an April opening. Framing and stucco are underway at Bombshells Rowlett, and we are targeting a May open. I would like to note that both Lubbock and Rowlett construction are being financed through bank loans. We are still awaiting construction permits for Baby Dolls Fort Worth West, and we are awaiting engineer review of our plans for the original Baby Dolls to be rebuilt.
At this point, I'd like to thank all of our loyal and dedicated teams for all their hard work and effort, and for all our shareholders who believe and make our success possible. Here's Mark.

Question and Answer Session

Mark Moran

Thank you very much, Eric and Bradley. (Event Instructions)
To start things off, we'd like to take questions from RICK's analyst, Scott Buck of H.C. Wainwright; and then some of our larger shareholders. Scott, please take it away.

Scott Buck

Hey. Good afternoon, guys. Thanks for taking my questions. Bradley, I want to ask about the $1.7 million, to establish the self-insurance reserve. That is non-cash or is that a cash expense? And should we think of that as one-time in nature?

Eric Langan

Yeah. I can answer that, Scott. I think it's a one-time. It was kind of a catch-up deal, since we decided to self-insure, starting October, due to the outrageous cost of insurance and until we get our captive set up, we're in the process of setting that up. So once the captives set up, we will see how that all plays out. But right now, we have to follow the GAAP rules on accounting for this insurance potential liability. Unfortunately, it's just going to non-cash so it goes into a reserve account. And the balance just sits there. And then if we get claims or have to pay defense cost, they will be -- for this time period, it will come out of those reserves.

Scott Buck

Okay. And you guys did not add that back into your adjusted EBITDA number, right? So I think that adjusted EBITDA is a little north of $17 million?

Eric Langan

Yes, we did not add that back in.

Scott Buck

Okay.

Eric Langan

Because the rules don't allow for that.

Scott Buck

Okay. I appreciate that. And Eric, the club you acquired in Detroit, can you talk about whether or not there's any opportunity there to maybe improve the EBITDA margins there? I know you said $2 million this year. But I'm curious if that could move a little higher over time.

Eric Langan

I mean it could. It's too early to tell. I mean we've only had it for a few weeks. I don't know if you're familiar with the Detroit weather and how it's been for the last few weeks, but we've got -- Old Man Winter is giving us a very, very cold welcoming into Detroit with extremely cold temperatures and lots of snow. So it's really hard to tell. But yeah, I mean, we believe that we will definitely build to do much better as we get rolling in that market and get out of this unseasonably cold weather.

Scott Buck

Great. I appreciate that. And then on the Bombshells that closed, are there any residual cash outlays that you guys are responsible for on those -- was it five locations that you shut down?

Eric Langan

Not at this point. We do have a landlord that's suing us. But we believe that our defenses will be fine there. The parent company did not guarantee the lease in any form or fashion. And they're trying to tie the parent company in. But we don't believe that's going to be feasible for them to do under Texas law, contract law.
Also, I want to make sure you understand that the $1.7 million insurance reserve is the access insurance that we put on the corporate. The actual number for reserve is $4.1 million. And it was basically divided by segment based on previous year's insurance and a prorated share of the access. The $1.7 million is basically what we call a makeup. It's a kind of a makeup deal for how they do these actuarial tables. It's insane math, I mean, I've studied and I kind of get it, but it's extremely complicated, I call it trigonometry.
I mean it was pretty insane as we were trying to go through all this and figure out how to do it. Because we've never guessed our insurance cost in the past. We've always had it. But this is kind of a guess of, in the worst case scenario, what would our maximum liability for the quarter be, is how we had to kind of look at this. And we had to take all these historic deals and take the best quarters and worst quarters over a five-year period, combine it all in together, and really, like I said, it became very complicated. But this is what the people that do these actuarials came up with. And so that's how we looked at it.

Scott Buck

I appreciate the clarification there. And then last one for me, if you could just kind of speak broadly to the operating environment, especially on the club side, what you're seeing and what is kind of in store here, the first part of 2025?

Eric Langan

Sure. If you look at the December quarter, we saw our two largest contributors were actually down a little and a lot of our mid-sized clubs were up. So I think we'll -- I don't understand that other than that we've really gotten very good at going from quality of customer to quantity of customers so we're putting -- trying to really push more people through the door. Some of our VIP spend is back but obviously, our service revenues declined 3.7% on year over year. So it's not where we'd like it, but we were able to make some costs or some pricing changes and make up some of that in food merchandise and other revenue sources by increasing that to 8.6% and raising overall club -- Nightclubs revenues 3.7%.
So I'm very confident that we have the pricing powers that we need if we do need to increase prices to keep our margins in line and keep our same-store sales growth as close to 3% as possible which is our goal as part of our five-year plan over the next five years to keep that same-store sales growth as steady at 3% as we can as well as increasing with new acquisitions and this monitoring and controlling costs.
If you look right now, we have about somewhere between $23 million and $28 million in non-income producing assets that we're going to start trying to lease or sale or somehow make those assets produce income for us or give us our cash back so that we can take it and put it in other places. So that's going to be a big component of, I think, the next 9 months, 12 months, trying to get those properties fixed as well.
I think we're in early -- if you go back and look at when we originally adopted the capital allocation strategy in 2015, I think we're in early 2017 where we've divested some properties. We have a couple of clubs that we're looking to sell as part of that $23 million to $28 million in assets, as well as other -- just plain raw properties that we've bought in the past. So we'll keep pushing on that, working on that. And that will play into our factors of getting to our growth rates as we get into 2026.

Scott Buck

Great. Well, I appreciate the time, guys. Thank you very much.

Eric Langan

Yeah. Thank you.

Mark Moran

Thanks so much for the questions, Scott. Next up we have Orchid Wealth. Please take it away.

Hey guys. I see that we have 56 clubs right now. Does Detroit make it 57?

Eric Langan

I believe so. But I don't know if we're counting El Paso in the 56 or not.

Okay. And then --

Eric Langan

So we might have 50 -- it might be 58 when El Paso opens on March 1 to get a better understanding of that. We probably got so many clubs I can't keep track of them.

Okay. Yeah.

Eric Langan

I actually have to go to the -- I have to actually go to the accounting office exactly how many clubs are open and made money this -- generate revenue this quarter. So I think those are revenue generating.

And then with El Paso reopening what are you thinking about sales from these locations? I know you've got four clubs and three Bombshells that are going to come online including Detroit. What are you thinking that that total sales would be once all of those are incorporated onto the existing number?

Eric Langan

I don't know. We've reformatted El Paso. I know the old El Paso club used to generate about $600,000 EBITDA. I'm hoping with the new format and upgrades in the liquor, that we can actually generate more income than that. But I just don't know at this point.

Okay.

Eric Langan

We don't have the liquor license there yet, do we? No, El Paso doesn't have liquor yet. I'm sorry, that's our (inaudible). So we don't have liquor yet, but we're trying to get the liquor license there. So probably very similar numbers to what we're doing for around $600,000 EBITDA out of El Paso.

Obviously, we don't know anything about Central City because that's brand new, but --

Eric Langan

Yeah, that'll be brand new. But I mean, I think it's -- I'm hoping it's $1 million to $2 million EBITDA a year out there. I think that'll be ideal. There's a lot of moving factors in that one. Let's get it open and then we'll --

Okay. And then --

Eric Langan

Whether we open the whole club, whether we open four days a week or seven days a week, there's a lot of factors going on in that one at this point until summer. I'll have a really good idea on the August call where that location --

And then the Baby Dolls Fort Worth?

Eric Langan

We're shooting for October 1 to try to get our -- around October 1 to complete that construction and get it open on the West side. And then we're shooting for January on the location where we had the fire at. But both of those are up in the air because we're still in permitting. I know once we get the permits, we can build them in about six months, but we've got to get the permits in place and get everything rolling on both of those --

And then just to go back because obviously, the rebuild because of the fire, how much was that contributing before the fire? Because obviously, if you get it back online --

Eric Langan

We had it up to about $4 million in revenues. And margins, it's probably about $1.5 million would be my guess, about 35% margins on $4 million for that location.
Now the good news is we didn't lose all of that because a lot of that customer base went to the club that we own across the street. We've kind of reformatted the club across the street. So we've been able to recoup from -- I haven't looked, but I'm going to guess we recouped about 40% of that. So we really only lost about $1 million, not $1.5 million, say 30%, they say we've -- a third of it we recouped. So we're probably up about $0.5 million at the other location. We probably lost about $1 million at that location.
The big hit for us, of course, was the late night change in Dallas that made us reform at XTC Cabaret. That's been the biggest hit. If you look at all the numbers, if we still had XTC, we would be in way, way better condition than we are right now or shape right now as far as EBITD, free cash flow. Everything would be up probably between $2 million, $2.5 million on EBITDA and $1 million-plus on free cash flow.

So the way it's looking right now is we've got about 60 locations right now and with all said and done a year from now, we're looking at 70 -- I'm trying to think how many more. We'd have 7 more, so 67 clubs?

Eric Langan

Six more.

Six more.

Eric Langan

Denver, plus six. Denver's open now. So Denver was not open in this quarter, but it is open. It opened in January, it'll be open this quarter --

Any news on any buys or things you're still working on? Obviously --

Eric Langan

We have clubs out there that we're looking at, lots of opportunities. You'll see that we actually adjusted the capital allocation strategy from a 50/50 with debt and acquisitions on one side and stock buybacks and dividends on the other. We moved the debt to the stock buyback and dividend side. We raised that to 60% which basically works out about $13 million in stock buyback, $2.5 million in dividends, $14.5 million or $14.8 million in debt reduction or debt payoff. And leaving us close to $25 million in cash on the other side of that -- I'm sorry, $20 million in cash on the other side of that equation to go to the cash portion of acquisitions.

Okay. But I'm assuming if something comes along, it'l better to make an exception.

Eric Langan

I mean, we'll always follow strategic rationale should one arise. But for the next five years, our plan will be -- and any strategic rationale that I think we do, as far as I can see in the foreseeable future, will relate directly to allocation of the capital per the capital allocation strategy. In other words, we would change percentages here. We'd buy less stock because we have better acquisition or the stock price gets really cheap and we do less acquisition cash and much more stock buyback. I think those are the only two real factors that we're going to be juggling any kind of money around. I don't have any intentions of building anything new at this point. I'm not even looking. I mean I have people call me all the time. I'm like, no, we're not building anything. Would you be interested in this? Is it open? Is it raking money? No, I would probably not be interested.
I just don't think we're going to take any -- We are very risk-off until all of this construction is done, all of our stuff is open. And we really tightened this, our capital strategy, to the max. All of our expenses, all of our non-income producing assets need to be -- basically, get all the ducks in a row before we we go out and say, okay, maybe we can risk building a club over here or buying this club and reconcepting it or something if we think we have a really good concept that can go into a license that's not producing. But until this time, I don't think we -- for at least the next nine months, the rest of this fiscal year '25, I think we'll stick directly with the plan. We have enough on our plate. We don't need to add anything else. What we need to do now is just button up all the hatches and make everything perfect.
And then on the last point --

The idea being is over the course of the year, you got $23 million to $28 million's worth of non-performing assets that you'll be repositioning that could be used for any of these other items we discussed.

Eric Langan

Absolutely. It'll just go to -- I mean, obviously, it'll become capital that'll go into our cash and then we'll allocate it accordingly.

All right. Great. Thanks, guys.

Mark Moran

Fantastic. Thank you so much for that. Next up, we have D&D Realty. Please take it away.

Hi. Thank you for having me on and taking my question. So you just mentioned that you're looking at selling some clubs. How many of those clubs -- I guess I have two questions. One is how many clubs are you currently looking to divest? And then the second question is, you guys have, I guess, now 88 properties that you own. What is your feeling? Have you done an analysis on how much your real estate is actually worth? I know, your property and equipment, you carry it at about $280 million. But what do you think the fair market value is for all your real estate? Thanks.

Eric Langan

I think you're including property and equipment in the $280 million.

Yeah. But I'm just wondering --

Eric Langan

A lot of that is equipment and not necessarily real estate. I think our real estate, I just don't know really. I mean, the praise values have all been all over the place. We haven't really had appraisals. I think the last appraisal we got were in 2021 on a few properties that we put into the new refi. The original refi was done in '17, I think, so we haven't done any new appraisals on those properties. If I had to guess, real estate is probably in the $250 million to $280 million range, just real estate without all the equipment and everything else. But it's just hard to tell, like I said, cause I just haven't laid it all out.

And then how many clubs are you looking to divest also?

Eric Langan

There's two clubs both in the same area. So it's just a market we want to get out of and we've got -- with a broker who sells adult clubs, who's meeting with people or keeping it pretty on the down-low as far as that they're for sale. So it's kind of only -- we're not going to publicly advertise all these clubs are for sale. We will sell them through a broker who has a lot of contacts with people already in the adult entertainment business who are looking at those two locations with us right now.

Thanks.

Mark Moran

Yeah. Fantastic. Thank you for that question. On behalf of Eric, Bradley, and the company, as well as our subsidiaries, thank you and good night.
Please visit one of our clubs or restaurants to celebrate Valentine's Day, Saint Patrick's Day, or just to have fun and have a great time. Take care and have a good one.