RICK

Consolidated Financial Results

• Total consolidated third quarter revenue was $73.9 million, a 4% increase year-over-year, while net income attributable to shareholders rose 57% to $6.4 million
• Adjusted EBITDA increased 10% year-over-year to $16.9 million, with adjusted EBITDA margin improving to 23% for the third consecutive quarter of margin growth
• Net debt was reduced by $8.6 million during the quarter, and the company repurchased $1 million of its own shares
• Ended the quarter with $26.4 million in cash and cash equivalents, with a stable debt maturity profile
• Weighted average interest rate on outstanding debt is 7.05%, which management characterizes as favorable for current commercial real estate markets
• Total occupancy cost declined sequentially to 8.3% of revenue

Strategic & Operational Updates

• Management paused large-scale share repurchases to accelerate debt paydown, with $16 million of debt paid down over the past six months
• Reoriented the Bombshells concept back to its original core of a fun, late-night sports bar atmosphere with food, reversing a post-COVID shift toward full restaurant operations. Changes include adding a new club operations-focused leadership team, shifting the revenue mix to 62-64% higher-margin beverages (from 50% prior) while growing absolute food revenue, and restoring late-night operating hours that had been cut under previous restaurant-focused management
• New Bombshells concept changes launched company-wide in mid-April 2024, and have already delivered improving profitability that management expects to continue into coming quarters
• The company is actively working to sell non-income producing properties to unlock value and further reduce debt; it is also open to leasing unsold properties to secure rental income if sales do not close quickly
• Management is prioritizing acquisitions in larger markets that will be accretive to earnings, and is preparing the balance sheet for expected acquisitions in the next 3-6 months
• Construction is underway on the new Babydolls West Fort Worth location, which is on track to open around May 1 of next year
• Rebuilding of the Dallas club that burned down is delayed by permitting and regulatory issues with local government, and construction will not start for some time

• Management expects to pay down an additional $8 million of debt in the current quarter, bringing total debt reduction to almost $25 million over a 9-month period, which will improve the company's debt-to-EBITDA ratio
• Management targets a return to active share repurchases around the start of October 2024, after completing planned debt paydown
• Management expects Bombshells profitability to continue improving in the fourth quarter, with further upside once the US football season begins
• Management expects the Babydolls West Fort Worth location to open around May 1 of next year
• Management expects to unlock value from non-core non-income producing property sales within the next 6-12 months, once current commercial real estate financing headwinds ease

Nightclubs Segment: Revenue increased 1% year-over-year to a record $63 million, representing 85.25% of total consolidated revenue. Newly acquired and renovated clubs contributed $4 million in revenue, while 52 same-store clubs generated $58.2 million in revenue, offsetting $1.2 million in lost revenue from four closed clubs. GAAP operating income was $19.6 million (up from $17.9 million year-over-year), with an operating margin of 31.2% (up from 28.6% year-over-year). Non-GAAP operating income was $20.2 million (down from $20.8 million year-over-year), with a margin of 32.1% (down from 33.3% year-over-year). By revenue type, service revenue increased 7.6%, while food/merchandise declined 1.4% and alcoholic beverages declined 4.2%.

Bombshells Segment: Revenue increased 25.4% year-over-year to $10.8 million, representing 14.75% of total consolidated revenue. Three new locations contributed $2.6 million in revenue, while nine same-store locations generated $8.2 million in revenue. By revenue type, alcoholic beverage revenue increased 33.6% and food revenue increased 16.6%. Profitability improved substantially: GAAP operating income rose to $759,000 from $67,000 year-over-year, with operating margin increasing to 7% from 0.8% year-over-year. Non-GAAP operating income rose to $801,000 from $80,000 year-over-year, with margin increasing to 7.4% from 0.9% year-over-year.

Corporate: GAAP operating expenses declined 19.7% ($1.8 million) year-over-year, and non-GAAP operating expenses declined $1.4 million year-over-year, driven by lower insurance costs.

• Legal charges have been brought against RCI, three of its New York clubs, and involved individuals; the company has pled not guilty to all charges and is defending itself, but the outcome of the litigation creates uncertainty
• Current high interest rates and macroeconomic uncertainty related to geopolitical conflict (the Iran war) and pre-election policy uncertainty have created headwinds for commercial real estate sales, slowing the company's planned disposal of non-income producing properties
• Rebuilding of the fire-damaged Dallas club is delayed by local regulatory and permitting issues, pushing out the timeline for reopening and recovering lost revenue from the location
• The Q&A session was disrupted by widespread technical issues that left many participants unable to hear portions of the call

Q: The investor asks when RCI will resume larger stock buybacks after the current accelerated debt paydown period, given that current share prices are very favorable for repurchases. / A: Management paused buybacks to reduce the company's previously elevated debt-to-EBITDA ratio and prepare the balance sheet for upcoming acquisitions. The company has paid down $16 million of debt in the last six months and expects to pay down ~$25 million total over nine months, including a planned $1 million additional paydown from a property sale in November. Management targets resuming buybacks around the start of October 2024.

Q: The investor asks what operational changes drove the Bombshells segment's major profitability improvement after the concept's shift away from restaurant operations. / A: Management reoriented Bombshells back to its original 15-year-old core concept as a fun, late-night sports bar with great food rather than a full-service restaurant. The company brought in a new club operations-focused leadership team, shifted the revenue mix to higher-margin beverages while growing absolute food sales, and restored profitable late-night operating hours that had been cut. These changes rolled out company-wide in mid-April 2024 and have already delivered visible improving results.

Q: The investor asks how many underperforming small clubs RCI plans to sell to streamline its portfolio and focus on larger markets. / A: Management is only planning to sell a small number of underperforming clubs in very small markets, and is currently in negotiations for a couple of potential sales. The company is not actively marketing most locations for sale, and any sales will be openly announced when finalized. All future acquisitions the company pursues will be in larger markets and expected to be accretive to earnings.

Q: The investor asks what challenges are delaying non-core property sales, and what the company's alternative plan is for these assets. / A: Current high interest rates, macroeconomic uncertainty from geopolitical conflict and the upcoming US election have made it harder for buyers to secure financing for commercial real estate purchases. If properties cannot sell quickly, RCI will lease them to tenants to generate ongoing rental income, either holding the properties long-term if returns are attractive or selling them later with an occupied tenant in place.