RCI HOSPITALITY HOLDINGS, INC. Q2 FY2024 earnings call

Management Statement and Operational Highlights

• Capital Allocation Strategy: Focus on mergers and acquisitions, organic growth, and stock buybacks when free cash flow yield >10%. Reassessing underperforming assets and rebranding BYOB clubs.
• Project Developments: Received liquor license for XTC Dallas renamed Dallas Show Club. Liquor license for Harlingen BYOB conversion to Chicas Locas expected to open this quarter. Plans to open Rick's Cabaret Steakhouse in Central City this quarter.
• Performance Reviews: Evaluating non-income and underperforming assets, rebranding clubs, and focusing on sports bar concept for Bombshells, with efforts to return to core focus and improve margins.

Segment Performance

• Nightclubs Segment: Second quarter revenues increased $2.4 million year-over-year. Acquisitions contributed $7.4 million, offsetting declines from same-store sales ($2.9 million) and clubs in transition ($2.1 million). Alcoholic beverages grew 16.9%, food 10.8%, other 4.3%, while service declined 8.3%. Non-GAAP operating income was $19.8 million (33.4% of revenues). The Duncan Barch acquisition has seen revenues grow 23.9% from the year ago third quarter, with operating margin expanding 394 basis points.
• Bombshells Segment: Revenues declined $1.5 million year-over-year, with $2.7 million decline in same-store sales offset by $1.2 million from acquired/new locations. Operating income was $0.7 million (5.5% of revenues). Sequentially, revenues were level, and margins improved after mid-February efforts to refocus on sports bar.

Guidance

• Management aims to be up sequentially on the quarter with strong sports lineup in May and June, leveraging NHL and NBA playoffs. Focus on opening clubs and steakhouse in Central City, rebranding underperforming BYOB locations.
• Expectations for Bombshells to return to $60 million revenue with 15% margins, annualizing to $9 million operating income, with a 6-month process to achieve this.

Risks

• Uncertainty with casino operations in Central City, including long timelines and large investigation costs from gaming authorities.
• Litigation in Dallas regarding club closures at 2:00 AM, creating uncertainty and potential revenue impact.
• Economic uncertainty affecting consumer spending on alcohol and food, impacting same-store sales and margins.

Question and Answer

Q: Color on other charges in income statement this quarter?

A: We had $8 million worth of impairment charge.

Q: Update on M&A?

A: 2 LOIs, one in negotiation due to indemnification clauses, looking at other acquisitions.

Q: Trends in second quarter?

A: Strong sports lineup, especially NHL and NBA playoffs, driving revenues with fans traveling between markets.

Q: Central City timing and revenue contribution?

A: Uncertainty with casino, focus on club and steakhouse opening in Central City, potential $100k+ per week revenue, with casino operations 18-24 months away.

Q: Competition and outperformance?

A: Outperforming competition in top markets, adjusting to economic changes and cost containment measures.

Q: Buybacks and cash position?

A: Plan to buy back shares, adhering to SEC safe harbor, aiming for under 9 million shares outstanding, with recent $20 million cash infusion from bank loan.