Prepared remarks
Good afternoon, greetings, and welcome to RCI Hospitality Holdings Third Quarter Conference Call. My name is Bradley Chhay. You can find the company's presentation on RCI's website. Go to the Investor Relations section. All the links are at the top of the page. Please turn to Slide 2 of our presentation. RCI is making this call exclusively on X Spaces. 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 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 4. I also direct you to the explanation of RCI's non-GAAP financial measures. Please turn to Slide 5. Our speakers today are Travis Reese, Interim President and CEO; and Albert Molina, Interim CFO. Now I'm pleased to introduce Travis.
Thank you, Travis. Turning to Slide 7. I'll start with a review of our consolidated 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 RCIHH shareholders was $6.4 million compared to $4.1 million, a 57% increase. GAAP EPS was $0.83, 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. This primarily reflected payments of more outstanding payables compared to the prior year quarter. On a sequential quarter basis, both net cash provided by 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. Revenues increased by 1% to a record $63 million. Four newly acquired, opened and reformatted clubs generated $4 million and the 52 clubs in same-store sales produced $58.5 million. These more than offset $1.2 million in sales from four clubs closed subsequent to the year-ago quarter. By 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%. On Slide 9 are the results for the Bombshells segment. Revenues increased by 25.4% to $10.8 million. Three new locations generated $2.6 million and the nine location 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 across the segment. Operating income was $759,000 compared to $67,000 with margin at 7% of segment revenues compared to 0.8%. Non-GAAP 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. GAAP operating expenses declined by 19.7% or $1.8 million and 16.3% or $1.4 million on a non-GAAP basis. Both the GAAP and non-GAAP 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 $0.5 million from March 31. Our strong cash generation during the quarter enabled us to make debt paydowns of $8.6 million as well as buy back $1 million worth of shares. Free cash flow margin was 14%, improving for the second consecutive quarter and adjusted EBITDA margin was 22%, improving for the third consecutive quarter. Please turn to Slide 13. As I mentioned, debt declined from March 31, reflecting 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 4.3x. Excluding the fourth quarter legal accrual, debt-to-EBITDA was 3.7x. 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.
Technical difficulty.
Thank you, Travis and Albert. Eric Langan, RCI's Founder and Head of M&A, will also be on the Q&A. 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. I have 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, and I'm going to go ahead and bring in Orchard Wealth.
He still shows as a listener. Bradley, you have to promote him to speaker, please.
He's on mute. Orchard Wealth, can you hit unmute? You're a speaker now.
He's still shown as a listener on my screen, guys. So I don't know, maybe you can promote him again.
I'm going to go ahead and remove him from speaker and bring him back. Orchard Wealth, you can hear me, go ahead, you're a speaker now.
Promote somebody else to see if that works as he is still showing listener on my screen. So let's see if somebody else can be moved to speaker.
Maxwell Ellis, I'm going to go ahead and pull you up.
Questions and answers
Can you hear me?
Yes, we can hear you.
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 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...
I agree with you. The prices are extremely favorable for stock buybacks right now. However, I got very uncomfortable with a 4.17 debt-to-EBITDA 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 line those things out right. We decided to take a small break from buying back stock. As you see, we bought through April. We slowed down in May, and in May and June we mainly paid debt. The real story is, if you look in the last six months, we paid down $16 million worth of debt. Through the debt schedule, you see we plan to pay another $8 million this quarter. So we paid down almost $24 million in this brief period of time. We've got a property sale that should happen in September that will probably pay another $1 million. So our three-month total should be a reduction of debt of almost $25 million, which should improve our ratio. We just refinanced two things that we're going to see coming up in the next quarter where we moved some maturity dates and changed some terms, paid off some 12% money to lower some of our debt service. We look forward to hopefully being back in the market around the 1st of October as we start into the next fiscal year.
Okay. And then it seems like you've had a big turnaround in Bombshells, especially 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 started with that one that you were managing and it's kind of increasing across the footprint.
Yes. 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. To give you an idea of what we've done: we went back to our core. We started the concept almost 15 years ago in Dallas, Texas. The idea was to make a fun bar-type atmosphere with sports and girls and great food with no nudity that we could take and expand around the country. After COVID, everybody had to become restaurants, and too much of that got into our culture. What we've really done is massively changed the culture of Bombshells. I brought in a new Director of Operations for Bombshells, who was a club guy. He's been in the club business since he was 18 years old. He understands fun, creating the party, not joining the party. We've kept enough of the food staff to keep the food at a quality level and slowly transform the concept back to what it was supposed to be. We were doing some major expansions in 2021 and 2023 with two large acquisitions, an $88 million acquisition and a $66.5 million acquisition. A lot of our focus was on that club growth, and Bombshells slid into a rut. We kept telling the team changes were needed. The prior team was very good at the restaurant business, but not the club side. For example, we've taken stores that were around 50/50 food and beverage to 62% to 64% beverage while increasing revenue at the same time. It's not like we're getting rid of the food business; we're actually generating more food business as well, but also making it a fun place to be again and a fun place to be late night. Come in at 10:30, 11:30, 12:30 at night and fill those hours back up, which as a restaurant there was almost no business during those hours. Those hours had slipped away; the previous management was actually suggesting we should close at midnight. We fixed the concept and turned it back into a bar. April same-store sales were negative; we took over in mid-February and started working one store, then three stores in March. About mid-April, we launched changes across all 11 stores as we prepared to open the Rowlett store correctly with the right party attitude and atmosphere from day one. We're seeing the results. I think you'll see improved results this quarter based on July so far, and once football season starts, it's going to get even better.
My other question is, what's the update right now on the Dallas club that burned down and progress with rebuilding?
The Fort Worth club is still being replatted. We've had some issues with the city. That property was built in the 1970s originally and is on a septic tank. Laws have changed on septic tanks, so we're working through those processes. It will be a while before we can start construction there. Once we start construction, it will be nine months to build. We have started construction on the Baby Dolls West Fort Worth location on Mark IV. That construction is ongoing. They recently passed the rough-ins for plumbing and underground work and have permission to proceed with vertical construction soon. I expect that location will open around May 1.
Okay. And then in terms of the clubs that you do have, I remember you mentioned something about a few clubs driving most profitability. Do you have any clubs that you think you'll be trimming off and selling real estate on?
We have a couple we've already exited; as you know, we got rid of Harlingen and Edinburg, and the El Paso location. We have a couple of locations where we're in negotiations to possibly sell. That doesn't mean every location is for sale. When a club is for sale, we'll market it through a broker so you'll know. It's not a large number — just a couple of small locations in very small markets. We're focusing on our larger markets. The acquisitions we're working on are larger market acquisitions that will be accretive. We're taking it slowly because right now we believe buying our own clubs is the best use of our money.
Yes. And then how many more payments do you have to make to Adam?
I think we're down to $14 million to $15 million, so at $1 million a month, that's about 14 to 15 more months.
Okay. So you guys are making about $1 million payments 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 $0.5 million per month also. So like literally this quarter...
We paid down our line of credit. After August, I think the line will be paid down to about $100,000, so we won't be making additional payments on that. We'll evaluate where to allocate excess cash. We have a property that is supposed to sell in September; if it closes, we'll pay down about $900,000 in bank debt and probably pay $1 million on the ADW, which will take one month off that payment schedule and save us the 12% interest over 15 months. That will produce meaningful savings and still leave some cash on hand. We're in negotiations on multiple other properties. We're working with brokers, accepting cash offers, looking to lease some properties that haven't sold in the last six months, put a tenant in, and then either sell them once leased or keep them and collect rent if the ROI is attractive. There's a lot of value to unlock over the next six to 12 months. That said, interest rates, oil prices and global uncertainty — such as the situation in Iran — are not helping commercial real estate sales. Many potential buyers are struggling to get financing at attractive terms. We're hopeful those headwinds will subside as we move closer to the election and after the start of the year so we can sell more properties.
With the club sales, are they pretty much in line geographically, or is there a hotter area than others?
What do you mean by 'club sales'?
I mean just the revenues that you guys are bringing in from the club side of the business.
Club revenues are pretty spread around the country. One area will get hot while another slows down. Recently we've seen sports events drive a lot of traffic — the World Cup and the NBA finals helped various markets. For example, New York benefited from Knicks success, and Dallas benefited from World Cup matches nearby in Arlington. We also benefited in Houston, Miami and other cities where matches were held. Overall, sports helped everywhere because people came out to watch the games. We're pushing what worked during the World Cup into football season with promotions, fantasy draft parties, game-watch events and bottle specials to attract larger parties. We expect sports to be very good for us from September through February as football, basketball and hockey ramp up and baseball heats up during pennant races.
Have you noticed anything different with the service side of the clubs? Service revenue seems to be picking up. Does that seem like it bottomed out a while ago and is returning to normal?
Yes. Service revenue did decline for a while, but we're focusing on it. Service revenue is created when people go to our VIP rooms, so we must keep pressure on the floor and keep more people in the building so people want to move up. If the venue is empty, no one pays to move up; when the front fills and the back is full, people will pay for VIP. Our teams are creating that pressure by increasing foot traffic and focusing on overall customer service.
This might be a strange question, but regarding service revenue, is there an age range for the ideal client spending bigger dollars? I can't see it being mostly 21-22-year-olds. It seems like guys in their 30s to 50s have the funds to spend.
It depends on the club format. There are many 20-somethings making good money — tech workers, influencers, and some who do very well in social media — who will spend. There are also older patrons such as real estate professionals who will spend heavily. We have done a better job with social media marketing and working with influencers to bring in a younger crowd. Ultimately, it varies by market and location.
And then my last question: are there a significant number of women showing up to the clubs either with husbands or as a group? Is it becoming a trend for women to go to the clubs?
Yes. That's been the case for about 10 years now. On weekends, especially Saturdays, we see many women attend — sometimes with partners, sometimes as groups. Weekday traffic has fewer women, but weekends are strong. We also balance other business on Saturdays, like bachelor parties, which affects how we program those nights. We do focus on customer service for that crowd.
Just to address the technical issues that people have been texting and messaging about, the immediate replay and recording will be posted right afterwards on X Spaces as well as a posting of the transcript of this call. Sorry for the technical issues. So on behalf of Travis, Albert and Eric, the company and our subsidiaries, thank you, and have a great night. Please visit one of our clubs or sports bars and have a great time. Thank you.