RCI Hospitality Holdings, Inc. Q1 FY2026 earnings call

• **Consolidated Financial Performance

  • Total consolidated revenue was $70.8 million, slightly down from $71.5 million YoY, with the decline driven by 5 fewer Bombshells locations, partially offset by new Nightclub openings
  • Pretax income decreased $14 million YoY, primarily due to $10.1 million in net non-cash charges this quarter compared to $3.2 million in net gains in the year-ago quarter
  • GAAP loss per share was $0.57, compared to $1.01 earnings per share YoY; non-GAAP profit per share was $0.74, compared to $0.80 YoY
  • Net operating cash flow was $7.8 million (down from $13.3 million YoY), free cash flow was $6.7 million (down from $12.1 million YoY), and adjusted EBITDA remained flat at $15.7 million (22% of revenue, up from 10% in Q4 2025 after the prior quarter's $9 million legal accrual)
  • Ended the quarter with $28.6 million in cash and cash equivalents, down $5.1 million from September 30; debt increased $20.6 million primarily from $22 million in seller financing for the ADW transaction, resulting in a 4.86x debt-to-trailing-12-month-adjusted-EBITDA ratio (4.16x excluding Q4 legal accrual)

• **5-Year Back to Basics Capital Allocation & Operational Strategy

  • Core strategy allocates ~40% of free cash flow to club acquisitions, and 60% to debt reduction, dividends, and share repurchases; target is 10-15% annual free cash flow per share growth
  • Operational focus on optimizing the core Nightclub portfolio: 70% of current operating income comes from 20% of clubs, creating significant margin improvement opportunity. Underperforming locations will be rebranded, reformatted, or divested, with sale proceeds used for share buybacks, higher-quality acquisitions, or debt reduction
  • Acquisition target goals: add an average of ~$6 million adjusted EBITDA annually, with acquisitions priced at 3-5x adjusted EBITDA for operating clubs, fair market value for real estate, and a 100% cash-on-cash return target over 3-5 years. Purchases will use cash, bank financing, or seller notes, with stock only used if valuation improves
  • For Bombshells, management is focusing on revitalizing existing locations to hit 15% operating margins and return to same-store sales growth, will complete the one remaining under-development location, and aims to sell the full chain once market conditions are favorable
  • Share repurchases will be flexible, increasing when stock is undervalued, with plans for modest dividend increases; over 5 years, the company targets more than $250 million in total free cash flow to repurchase a significant share count

• **Recent Operational Progress

  • Nightclub same-store sales have shown sequential improvement from 1Q 2026 to 2Q 2026, with work ongoing to expand margins at newly acquired/opened locations
  • A tested Bombshells revitalization concept (returning to sports bar roots with a focus on high-margin alcohol sales) delivered a 3.6% same-store sales increase at the Houston test location, making it the chain's best-performing same-store location, and the concept is now rolling out to other locations
  • Since the 5-year plan launched in Q1 2025, shares outstanding have been reduced by 14.6%, and the repurchase program authorization was recently increased by $20 million; more than 1 million shares have been repurchased year-to-date
  • The company is currently marketing $31.7 million in non-income-producing small clubs and real estate, with $16.2 million in associated collective debt; selling these assets will reduce debt, eliminate carrying costs, and free up capital for redeployment

1. Nightclub Segment: Total revenues were $62.3 million, an increase of $0.6 million year-over-year (YoY). Newly acquired/reopened clubs contributed $4.9 million, 52 same-store clubs contributed $56.9 million, and two small Texas clubs were closed during the quarter. By revenue category: service revenue increased 6.7% YoY, food/merchandise increased 1.8% YoY, and LBW decreased 4.6% YoY. GAAP operating income was $18.7 million (down from $20.9 million YoY), with a 30% operating margin (down from 33.8% YoY). Non-GAAP operating income was $19.5 million (down from $20.6 million YoY), with a 31.3% non-GAAP margin (down from 33.4% YoY). This segment contributed 88% of total company revenue in the quarter.

2. Bombshells Segment: Total revenues were $8.4 million, a decrease of $1.2 million YoY. Newly opened locations contributed $1.8 million, 9 same-store locations contributed $6.6 million, and the revenue decline reflects the absence of $1.2 million in revenue from 5 divested/closed underperforming locations from the year-ago quarter. GAAP operating loss was $139,000 (compared to $1.9 million operating income YoY). Non-GAAP operating loss was $110,000 (compared to $616,000 operating income YoY). This segment contributed 12% of total company revenue in the quarter.

3. Corporate Expenses: Total GAAP expenses were $7.4 million (down from $8.8 million YoY), equal to 10.4% of total revenue (down from 12.3% YoY). Lower insurance costs offset higher accounting/professional fees from delayed annual report filings. Non-GAAP expenses were $7 million (down from $8.4 million YoY), equal to 9.9% of total revenue (down from 11.8% YoY).

• Management maintained the 5-year targets set at the launch of the Back to Basics plan: by fiscal 2029 year-end, targets are $400 million in total revenue, $75 million in annual free cash flow, and 7.5 million shares outstanding, which is expected to double free cash flow per share to ~$10 from fiscal 2024 levels
• Target annual free cash flow per share growth of 10-15% is maintained, as is the target of adding ~$6 million of adjusted EBITDA annually via acquisitions
• Management expects to file the Q1 2026 10-Q extension request to get an additional 5 days of filing time, with a goal of becoming current on filings as quickly as possible to give investors clear visibility into current operating performance
• Management expects adjusted EBITDA to increase in coming quarters as the non-cash legal reserve charges from prior quarters will no longer impact the metric, even as cash payments for ongoing legal costs continue

• Ongoing legal costs related to the New York regulatory case create uncertainty around future cash outlays, though management notes sufficient reserves have been set aside for the next 12 months
• Delayed SEC filings carry a risk of further NASDAQ compliance issues if the upcoming Q1 2026 10-Q cannot be filed within the granted extension period
• Changing consumer alcohol consumption trends (including reduced alcohol intake among younger consumers) could impact segment margins and revenue if new product offerings do not offset the shift
• Non-income-producing assets carry ongoing carrying costs (interest, property taxes, insurance, maintenance) that pressure current margins until they can be sold
• GAAP accounting rules create non-cash charges that can materially impact reported net income even when operating cash flow remains strong, as seen with the $9.9 million non-operating non-cash charge in the quarter

Q: Are there additional unreserved legal expenses expected for the ongoing New York case, and how should investors interpret current cash and EBITDA trends? / A: Management cannot guarantee no unexpected costs, but has set aside sufficient reserves to cover expected expenses for the next 12 months, with reserves exceeding initial attorney estimates. Prior period EBITDA was reduced by non-cash reserve accruals; going forward cash will be paid out for expenses but EBITDA will no longer include these large non-cash charges, so management focuses on actual cash generation to gauge performance. As of quarter-end, the company still held $28 million in cash after making required payments, and core club operations continue generating strong cash flow. /

Q: After paying debt and transaction fees from the sale of the $31.7 million in non-core assets, how much excess cash will be available for share buybacks, and what is the main benefit of the sales? / A: After an expected 10% sales discount, 5% transaction fees, and paying off $16 million in associated debt, management estimates $10-$11 million in remaining proceeds, half of which will go toward paying down the 12% ADW seller financing debt, leaving ~$5-$6 million in excess cash for buybacks if all assets are sold. The primary long-term benefit is eliminating ongoing carrying costs (interest, property taxes, maintenance) for non-income-producing assets, plus material permanent debt reduction, which creates a multiplier benefit for margins and free cash flow. /

Q: Is it correct that the GAAP accounting rule for the ADW transaction valuation adjustment only creates one-way non-cash charges, with no offsetting gain if the stock price rises? / A: This is correct per GAAP rules, which management describes as non-cash "voodoo accounting" that does not reflect actual operating performance. The company follows GAAP requirements as mandated, but focuses on actual cash generation, real estate ownership, and share repurchase progress rather than non-cash accounting hits, and will not change strategy based on these non-cash charges. /

Q: How is the trend of reduced alcohol consumption among younger consumers impacting RCI's margins and revenue across both segments? / A: Management has added mocktails and lower-alcohol cocktails to adapt to this trend, which has so far helped rather than hurt revenue across both Nightclubs and Bombshells. While some new non-alcoholic products have slightly higher costs, management expects the overall impact on margins to be neutral, and notes that a large portion of customers still consume alcohol at RCI locations. Management will continue monitoring trends and adjusting offerings to maintain cash flow. /