RCI Hospitality Holdings, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Revenues were affected by the divestiture of underperforming Bombshells locations and severe weather, but improved in March and were boosted by new/rebranded locations.
• Profitability was impacted by lower same-store sales but offset by the sale of Bombshells-related units and reduced costs.
• Acquired two upscale adult nightclubs (Flight Club in Detroit and Platinum West in South Carolina) and worked on another acquisition. Opened a Bombshells in Denver and rebranded Chicas Locas in El Paso. Repurchased 56,875 common shares for $2.9 million.
• Progressed with the Back to Basics five-year capital allocation plan, including focus on club acquisitions, rebranding/formatting underperformers, and share repurchases.

Segment Performance

• Nightclub: Revenues totaled $57.5 million, a decrease of 3.1% year-over-year. Impairment and other charges were $2.0 million compared to $8.2 million in the prior year. Operating income was $14.6 million (margin 25.4% of revenues), while non-GAAP operating income was $17.1 million (margin 29.8% of segment revenues).
• Bombshells: Revenues were $8.2 million, a decrease of 35.6% year-over-year. Operating results were a loss of $227,000 versus an income of $699,000 in the prior year. Margin was negative 2.8% of segment revenues versus a positive 5.5% in the year ago quarter. On a non-GAAP basis, the segment was virtually breakeven with a loss of $67,000 versus income of $750,000.

Guidance

• Plan to allocate free cash flow with 40% to capital allocation (club acquisitions) and 60% to share buybacks, debt reduction, and dividends, aiming for 10%-15% annual free cash flow per share growth.
• Targets for fiscal '29: $400 million in revenue, $75 million in free cash flow, 7.5 million shares outstanding, and doubling free cash flow per share to approx. $10.
• Aim to generate over $250 million in free cash flow over five years and repurchase significant shares.
• Plan to complete 2 new Bombshells locations in development and regularly buy back stock, with modest annual dividend increases.

Risks

• Weather Impact: Severe weather in January-February affected same-store sales, though improved in March.
• Industry Uncertainties: Challenges in the adult entertainment industry, including fluctuations in consumer spending due to economic uncertainty and industry-specific trends (e.g., lower VIP spend, bottle service decline).
• Regulatory Concerns: Mention of potential regulatory changes related to pornography and human trafficking, though RCI emphasizes anti-human trafficking efforts and compliance with regulations.

Question and Answer

Q: About financing, what's the average rate of return for seller financing and bank financing?

A: Rates are both around 6% to 7% currently.

Q: Any difference in deal negotiations from a few years ago?

A: Previously, people used 2022 astronomically high numbers; now they're using averages/combinations as '24 was a bad year for the industry.

Q: Clarity on insurance accrual?

A: Accrual for the quarter was $1.3 million, annualized run rate was about $8.8 million, non-cash charge.

Q: Weather impact on EBITDA?

A: Estimated about $700,000 per week loss in sales over 8 weeks, translating to significant EBITDA impact.

Q: Thoughts on potential regulation of pornography?

A: RCI hasn't heard specific issues, emphasizes anti-human trafficking efforts and compliance with regulations