RCI Hospitality Holdings, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Key Takeaways: Nightclub revenues nearly level despite economic uncertainty; Bombshells revenue and margin increased sequentially; consolidated profitability benefited from absence of impairment charges; progress on capital allocation plan with acquisitions of upscale nightclubs, opening of Rick's Cabaret and Steakhouse, and share buybacks.
• Capital Allocation: Acquired 2 upscale nightclubs, opened Rick's Cabaret and Steakhouse, purchased over 75,000 shares of common stock, and opened a Bombshells location in Lubbock. Followed a back to the basics capital allocation plan with focus on club acquisitions and share buybacks.
• Segment Focus: For nightclubs, reviewing every club to increase same-store sales, rebranding/divesting underperformers, and targeting acquisition of clubs with 3-5x adjusted EBITDA. For Bombshells, working to improve performance at existing locations, targeting 15% operating margins, and completing remaining under-development location.

Segment Performance

• Nightclubs: Revenues totaled $62.3 million, down less than 1% year-over-year. Key factors included a 3.7% decline in same-store sales and absence of Baby Dolls Fort Worth due to a fire, partially offset by $2.6 million from newly acquired or rebranded nightclubs. Operating income was $17.8 million with a margin of 28.5% of revenues. Revenue contribution: Nightclubs were a significant segment with revenues at $62.3 million out of total revenues of $71.1 million, so approximately 87.6% of total revenues.
• Bombshells: Revenues totaled $8.6 million, down $4.5 million year-over-year due to the sale and divestiture of 5 underperforming locations and a 13.5% decline in same-store sales. Operating income was $87,000 with a margin of 1% of segment revenues. Revenue contribution: Bombshells contributed approximately 12.1% of total revenues.

Guidance

• Capital Allocation Strategy: Allocate 40% of free cash to club acquisitions and 60% to share buybacks, debt reduction, and dividends to grow free cash flow per share annually at 10%-15%.
• Nightclub Goals: Acquire an average of about $6 million of adjusted EBITDA per year, targeting 3-5x adjusted EBITDA for clubs and fair market value for real estate, with 100% cash-on-cash returns in 3-5 years.
• Long-Term Targets: Aim to generate more than $250 million in free cash flow and repurchase significant shares over 5 years, with targets of $400 million in revenue, $75 million in free cash flow, and 7.5 million shares outstanding by fiscal '29.

Risks

• Self-Insurance Reserves: Uncertainty in self-insurance reserves as it's a constantly changing number based on actuarials and claim settlements. The reserve number could become large over time due to statute of limitations and other factors.
• Economic Uncertainty: Impact on customer base due to economic factors like tariffs and tax bill affecting nightclub revenues.

Question and Answer

• **Q: How much in real estate do you guys have that you think you could be selling off that's nonperforming or just holding in general?

A: Eric mentioned estimated value of real estate is about $28 million, with some contracts in negotiation and expecting closings by first quarter fiscal '26 if economy picks up.

• **Q: How much should we basically be modeling that you guys are going to be setting aside for this particular self-insurance going forward?

A: Eric stated there's no exact number as it's based on actuarials and changing with claim settlements, and they're working on a captive insurance to better manage it.

• **Q: When you guys go out and bid on these assets, who are you competing with? Are you seeing an uptick in activity due to tax policy?

A: Eric said there are competitors like LBOs and other operators, but RCI is seen as acquirer of choice due to cash and track record; tax policy may lead to some capital improvements but money is still on the sidelines.

• **Q: How should we think about the total sort of weight on EBITDA this year relative to what you would expect it to be going forward with self-insurance?

A: Bradley explained the charges are real on GAAP and non-GAAP basis, and it's hard to predict run rate as it's based on actuarials and worst-case scenarios; captive insurance will help normalize it.