RCI HOSPITALITY HOLDINGS, INC. Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Nightclub: Generated increase in total sales and same-store sales; operating profits were approximately level with the year-ago quarter.
• Bombshells: Total sales declined as expected with closure of underperforming locations, but GAAP and non-GAAP operating profit and margins both improved; sold/closed four underperforming locations since September 2024.
• Acquisitions: Acquired Flight Club, a premier gentleman's club in the Detroit market, for $8 million (club) and $3 million (real estate); estimates the club to generate about $2 million in annually adjusted EBITDA.
• Capital Allocation: 40% allocated to club acquisitions, 60% to share buybacks, dividends, and debt repayment; goal to grow free cash flow per share by 10%-15% annually; fiscal '29 targets include $400 million in revenues, $75 million in free cash flow, and reducing share count to 7.5 million shares.
• Bombshells Developments: Opened Bombshells in Denver; Chicas Locas, El Paso reopening March 1; Bombshells Lubbock interior underway targeting mid-March; Rick’s Cabaret Central City targeting April; Bombshells Rowlett framing/stucco targeting May.

Segment Performance

• Nightclub: Revenues increased $0.7 million or 1.1%. Key factors include 3.7% increase in same-store sales and addition of three new/reformatted clubs. Operating income was $20.9 million compared to $20.4 million, with a margin of 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%.
• Bombshells: Revenues declined $3.1 million or 24.7% due to selling/closure of underperforming locations and 7.5% decline in same-store sales. However, 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%. On a consolidated basis, net cash provided by operating activities and free cash flow nearly matched year-ago levels.

Guidance

• Fiscal '29 targets call for hitting $400 million in revenues, $75 million in free cash flow, and reducing share count to 7.5 million shares.
• Anticipate generating more than $250 million in free cash over the next five years for share buybacks.
• Target 100% cash-on-cash returns in 3 to 5 years for club acquisitions; acquisitions to focus on best clubs with target metrics of 3 times to 5 times adjusted EBITDA for the club business and fair market for real estate.

Risks

• Landlord lawsuits related to Bombshells closures; however, defenses are believed to be strong.
• Weather impacts in Q2 with 14 days closure for Nightclubs and 7 days for Bombshells.
• High maintenance CapEx in the first quarter led to slightly lower free cash flow compared to year-ago quarter.

Question and Answer

• Q: About the $1.7 million self-insurance reserve, is it a cash expense or one-time in nature? A: It is a one-time expense. It was a catch-up deal due to transitioning to self-insurance, and it is non-cash for GAAP purposes as it goes into a reserve account.
• Q: What is the potential for EBITDA from the Detroit Flight Club? A: Too early to tell due to unseasonably cold weather, but expected to improve as the market gets rolling.
• Q: Are there residual cash outlays for the closed Bombshells locations? A: Not at this point; there is a landlord lawsuit, but defenses are believed to be fine.
• Q: Number of clubs after acquiring the Detroit Flight Club? A: Unclear exactly, but Detroit was added to the portfolio.
• Q: Sales expectations for El Paso reopening? A: Hoping for similar EBITDA to previous $600k, but liquor license is pending.
• Q: Repositioning of non-performing assets? A: There is $23 million to $28 million in non-income producing assets to be leased/sold to generate cash for other uses.