RCI Hospitality Holdings, Inc.

Greetings and welcome to RCI Hospitality Holdings second quarter 2025 earnings conference call. You can find the company's presentation on RCI's website. Go to the investor relations section and all the links are at the top of the page. Please turn with me to slide two of our presentation. I'm Mark Moran of Equity Animal, and I'll be hosting our call today. I'm coming to you from Washington, D.C. Eric Langen, President and CEO of RCI Hospitality, and CFO Bradley Shea are in Houston today. Please turn with me to slide three. RCI is making this call exclusively on X Spaces. To ask a question, you will need to join the space with a mobile device. To listen only, you can join the space on a personal computer. At this time, all participants are in a listen-only mode. A question and answer session will follow. This conference call is being recorded. Please turn with me to slide four. I want to remind everybody of our safe harbor statement. You may hear or see forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards. Please turn with me to slide five. I also direct you to the explanation of Rick's non-GAAP financial measures. Now, I'm pleased to introduce Eric Langen, President and CEO of RCI Hospitality. Eric, take it away.

Thank you, Mark. Please turn to slide six. Thanks for joining us today. Let me run through some key takeaways. All comparisons are year over year unless otherwise noted. As we previously announced, revenues reflect the sale divestiture of five underperforming bombshell segment locations and the effect of severe weather on company same store sales in January and February. This was offset by improving trends in March and contributions from new and rebranded locations. Profitability reflects the lower The lower same-store sales offset by lower cost sales of bombshells-related units and lower impact. In addition, during and subsequent to the second quarter, we continued to make progress with our back-to-basics five-year cap allocation plan. We acquired two upscale adult nightclubs, Flight Club in Detroit and Platinum West in South Carolina. Price multiples were in line with our capital allocation strategy. We were also working on another acquisition. We opened a bombshells in Denver and rebranded and reformatted the Chica's Locust in El Paso. This reduced our list of development projects. And we repurchased 56,875 common shares for $2.9 million, ending the quarter with approximately 8.8 million shares outstanding. Now here's Bradley to review our performance in more detail.

Thank you, Eric. Please turn to slide seven. All comparisons are year over year for the quarter unless otherwise noted. Total revenues were $65.9 million compared to $72.3 million. a difference of $6.4 million, primarily due to closures or divestitures of non-performing bombshells and the effect of bad weather, as Eric mentioned. 18 club and bombshells locations had to close one or two days each. And even if clubs and bombshells were able to open, they experienced slower business, particularly on weekends when temperatures were below zero or had heavy snow and ice, for example, in Dallas and Houston. But with warmer temperatures in March, sales began to improve. Impairments and other charges were $2.1 million compared to $8.2 million, a difference of $6.1 million. That was due to lower impairments in nightclubs. As a result, net income attributable to RCIHH common shareholders was $3.2 million compared to $0.8 million, a difference of $2.5 million. Gap EPS was $0.36 per share compared to $0.08 per share. Net cash provided for operating activities was $8.5 million compared to $10.8 million, a difference of $2.3 million. That was primarily due to a reduced operating margins due to lower sales. As a result, free cash flow was $6.9 million compared to $8.8 million. Adjusted EBITDA was $14.2 million compared to $17.2 million. and non-GAAP EPS was $0.65 compared to $0.90. Now please turn to slide eight. Nightclub revenues totaled $57.5 million, a difference of $1.8 million, or a negative 3.1% year over year. Key factors included a 3.5% decline in same-store sales and the absence of baby dolls for work due to a fire. This was partially offset by $1 million from flight club acquisition and four rebranded clubs not in same-store sales. Alcoholic beverage sales declined 5.3%. Service declined 2.9%. However, food, merchandise, and other increased 2.4%. Impairment and other charges totaled $2.0 million, with impairments spread across four clubs. This compares to impairments and other charges of $8.2 million in the year-ago quarter. Operating income was $14.6 million compared to $11 million. Margin was 25.4% of revenues versus 18.6%. Results primarily reflected the impairment decline offset by sales decline. Non-GAAP operating income was $17.1 million compared to $19.8 million. Margin was 29.8% of segment revenues versus 33.4%. Non-GAAP results primarily reflected the sales decline. Now please turn to slide nine. Bombshell's revenue totaled $8.2 million, a difference of $4.5 million, or 35.6% year-over-year. The key factors here included sale and investiture of five underperforming locations in the fourth quarter of 24 and the first quarter of 2025, which impacted revenues by $3.7 million, a 13.4% decline in same-source sales, and bad weather. This was offset by two locations not in same-source sales, consisting of a full quarter of Stafford, Texas location, and a partial quarter of the New Denver location. Operating results were a loss of $227,000 versus an income of $699,000. 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 break-even with a loss of $67,000 versus income of $750,000 or negative 0.8% of segment revenues versus positive 5.9%. These results primarily reflect that the sales declined from open locations and bombshells Denver pre-opening costs, most of which were offset by the sell and divestiture of non-performing locations. Please turn to slide 10. Gap expenses totaled $5.5 million, a decline of $1.3 million. Non-gap expenses totaled $5.4 million, a decline of about $0.9 million. Expense margin was 8.4% of revenues versus 9.4% GAAP and 8.2% versus 8.8% non-GAAP. This decline primarily reflects lower overhead from fewer locations. Please turn to slide 11. We have slides in the upcoming deck that discuss free cash flow and adjusted EBITDA. which are non-GAAP. In advance of that, we wanted to present the closest GAAP equivalents, which are operating income, net cash provided by operations, and income. Please turn to slide 12. We ended the first quarter with cash and cash equivalents of $32.7 million. During the quarter, we used $6 million as part of the flight club acquisition and $2.9 million to buy back shares. As a percentage of revenues, free cash flow was 11% and adjusted EBITDA was 22%. Both primarily reflected lower margins. Please turn to slide 13. Our debt at March 31st increased $5.9 million from December 31st. The increase primarily reflects financing related to the Flight Club acquisition and the construction of Bombshells Rowlett and Lubbock, offset by scheduled paydowns. The weighted average interest rate was 6.7% compared to 6.6% in a year-ago quarter. Total occupancy cost was 8.5% of revenue compared to 8% a year ago, reflecting lower second quarter revenues, not higher costs. Debt to trailing 12-month adjusted EBITDA was 3.56 times compared to 3.32 times in the preceding quarter, reflecting the higher debt at March 31st and lower second quarter EBITDA. Debt to traveling 12-month adjusted EBITDA should decline as sales rebound with warmer weather and growth from locations that have come online more recently and from those anticipated to open. Debt maturities continue to remain reasonable and manageable. Now here's Eric.

Thank you, Bradley. Please turn to slide 14 to review our capital allocation strategy. Our plan calls for allocating our free cash flow in the following manner, 40% to club acquisitions and 60% to share buybacks, debt reduction and dividends with the goal of growing free cash flow per share at 10 to 15% annually. Please turn to slide 15. Operationally, we are focused on our core nightclub business, reviewing every club to increase same store sales on a regular basis, We'll rebrand, reformat, or divest our underperformers. Our nightclub's plan also involves acquisitions. Our goal is to acquire an average of $6 million of adjusted EBITDA per year, focusing on the best clubs, buying base hits with an occasional home run. Our target matrix remains the same, three to five times adjusted EBITDA for the club and fair market value for the real estate, targeting 100% cash-on-cash returns in three to five years. Purchases would be made with cash on hand, bank financing, or seller notes. We would also consider using stock if our valuation improves. For bombshells, we're working to improve existing locations, targeting 15% operating margins, and return to same store sales growth. We also plan to complete two new locations in development. The final part of our plan is regularly buying back our stock, flexing up if we consider the price to be particularly undervalued. We also anticipate modest annual dividend increases. Over the five years, we aim to generate more than 250 million in free cash flow and repurchase a significant amount of shares. By fiscal 29, our targets are $400 million in revenue, $75 million in free cash flow, 7.5 million shares outstanding, and the end result would be doubling free cash flow per share to approximately $10 from last year's. Please turn to slide 16. To give you an idea of the progress we've made on the share buyback, 10 years ago, we had about 10.3 million shares outstanding. As of last Friday, we had about 8.8 million shares, which is about a 15% drop. Please turn to slide 17. With Bombshells Denver and Chica's Locas now open, we have five remaining developments. Three are very close to completion. We are targeting Bombshells Lubbock for the opening later this month or early June and Rick's Cabaret Central City for early next month as well. And Bombshells Rowlett sometime this summer. We are still awaiting construction permits for Baby Dolls West Fort Worth, and we are awaiting engineering review and zoning plans for the Baby Dolls Fort Worth that was burnt in the fire. We have also sold our Aurora, Colorado property, which we were going to use for bombshells and listed the other properties for sale in Austin and Huntsville. As we continue to make progress with favoritelead.com, our social media fan site for adult nightclub entertainers and staff, we are out of beta now and we have added a few more clubs and entertainers since our news release last month. I'd like to thank all of our loyal and dedicated team members for all their hard work and efforts and all of our shareholders who believe and make our success possible. Now here's Mark.

Thank you very much, Eric and Bradley. If you'd like to ask a question, please raise your hand in the X space. When you finish, mute your microphone to eliminate any background noise. We have a limited number of speaker spaces today, so after your question, we may move you to the back of the audience to free up space. Now, first, we have Orchid Wealth. Please take it away. Hey, Orchid Wealth.

You're still on mute. Hey, guys. Just a couple quick questions about financing. You know, obviously, with the market being where it is today, you'll probably encounter a lot of possible sellers. If you guys use seller financing, what do you feel like is the average rate of return that you're going to have to pay these sellers? And if you have to resort to using bank financing, what's that rate?

No, they're both pretty close to the same, about 6% to 7% right now in the current market.

Okay, so you guys are essentially paying what people pay on a 30-year fixed mortgage. That's kind of crazy.

That's going right.

Yeah, no, no, that's fantastic. The other part being is, you know, any, you know, obviously from a year or two years ago when you guys weren't making acquisitions, You know, have you noticed any difference in the people that you're speaking to about, you know, making deals or you're negotiating with or talking with about how they're approaching it differently from a few years ago or a year ago?

Well, you know, a few years ago, everybody was trying to use 2022 numbers, which were just astronomically high. And, you know, 24 has been a really bad year for the industry. People are, I mean, we're down, but I mean, I've talked to other people, we've seen other numbers are down higher percentages than us. Even so, there's you've got that. So now they're trying to do some type of average or combination because they don't want to use the low numbers from 24. But we're coming up with solutions to some of these. Deals, as you've seen with our South Carolina acquisition, we've got finished and we've got the Detroit. acquisition completed. And we've got several more we're working on right now. It's just a matter of coming to terms that make sense for us. We're not in a hurry to get anything done unless the terms are right. Then we'll move very rapidly.

You know, as a side note, what do you think the average range is of the owners that are out there? I mean, are we dealing with people in their 50s, 60s, 70s, you know, people that are close? You know, I'm trying to get an idea of like, you know, when you're looking at the clubs that are out there, You know, obviously, if they're talking to you about selling their their children or their relatives don't want to take over the business. So is there an age group you're typically dealing with?

I mean, the majority of the guys from their late 60s to 80s to low 80s that we've been talking with so far. You know, there's there's some guys in their 40s we're talking to right now as well. They're trying to decide if they want to stay in this business or they want to go do something else. which we've had a few buyouts of guys like that in the past. They get married. They have kids. They decide that the adult entertainment business is not something they want to stay in. So we see that sometimes. But I would say the majority are between the ages of probably 65 and 80. Okay. All right.

Thank you, guys.

Thank you. Thanks so much. Next up, we have Aaron. Aaron, please take it away.

Looks like you're still on mute. OK.

Next up, we'll bring Adam Widen up. Adam, once you're connected, please take it away.

And you're still on mute, Adam. Hey Adam, you're still on unmute. And I will text you right now.

While we're waiting for Adam to unmute, I will pull up Jason. So Jason, once you're connected then.

You are good to go. Adam, you're unmuted if you want to proceed.

I still show I'm muted on my end. Both him and Jason are still muted.

Jason or Adam, whoever unmutes first can have the next question.

I'm unmuted. Thank you, Mark.

There we go.

Thank you, Mark. I just wanted to ask Eric about the new acquisition in Detroit with the new Flight Club and what rebranding and new improvements you have made to the Flight Club and how the Detroit market is treating you guys.

It's been great for us. We really like the market up there. You know, we got our typical welcome where everybody told every entertainer and customer all the crazy things that we were going to do, which we have never done before. So we had a little rough start in the beginning because a lot of the entertainers were afraid to come to work because they thought, I mean, some of the stories that come up this time were really good. But that lasts about two weeks and we get the word gets out and, you know, we get our customers in, especially as we start seeing some of our VFP guests from other states come to town and know that it's an RCI club and come in. So we got over that pretty quickly. Of course, we had some great ice storms and some weather that It was very unwelcoming in Detroit as well during the first takeover, but it's going very, very well now. We've done some minor upgrades. The club is in really good shape, so we upgraded the POS systems. We changed some of their systems and how they treat it and find entertainers, how they did some... did some stuff that, you know, we just don't, we don't, we don't operate that way. So we had to fix those things and get that into play. Since then, it's been very, very good for us. We're right on course with the numbers we predicted.

Good to hear. Good to hear. What do you think was the biggest operational change that you guys had to do from the previous owners down there?

Just treating the way they treat guests. I mean, they wanted everyone to be a VIP. You know, if you weren't spending $200 or $300 when you walked in the door, you weren't treated very well, I don't think. That's kind of our take. of it. And so we wanted to make it a place where the average guy can come in and have a good time. And if you want to be a VIP, there's plenty of space in the club for VIPs as well. And so we kind of created that all-around encompassing club like we do in the majority of our markets. I think that was the biggest change we made.

Okay, nice. And then one last question with The adult entertainment business being very popular on the infamous 8 Mile Road, are you guys looking at any other adult entertainment clubs on 8 Mile, or are you guys just going to stay more in the suburbs of Metro Detroit?

I mean, we've looked in Detroit. We've looked at about four or five clubs up there. We were actually on a hunt. In fact, I posted on my ex and posted some pictures of some of the clubs and some of the flight, you know, taking the flight up there and some of those things. We've talked with other owners. We haven't been able to come to terms with any of them that we agree to at this point, but we're always open. I mean, we're always looking for sure.

Okay. Thank you for your time, Eric and Mark.

Thank you, guys.

Thank you.

Thanks very much for your question, Jason. Next up, we have Adam Wyden. Adam, feel free. Can you guys hear me? We can. Perfect. Okay.

Three questions. First question is on the insurance accrual. You guys created your captive and I know you had like a five and some million dollar charge in the quarter, the previous quarter. Can you sort of give us some clarity on how much, you know, sort of the insurance accrual you had in the quarter on your EBITDA that quote unquote, wouldn't have been cash that's sort of burdening your EBITDA?

You know, the accrual for this quarter is $1.3 million, Adam. But we look at it on an annualized basis. Our first quarter annualized run rate was about $9.X million. And given the actualization of run rates and whatnot, it's reduced to about $8.8 million. So we won't know until any of these claims come in, any invoices and things like that. But it is a non-cash, you're correct. It is a non-cash, just a purely accrual charge. So about $1.3 million.

Right, but you took a big charge in the first quarter, so we wouldn't expect basically huge accruals going forward. Is that right? Correct.

I just told you I think the annualized is 8.8. So from that, you guys can speculate what the next two quarters could be based upon our current trends. Now, if we have massive claims coming through or invoices or new lawsuits come in, that can change it. But it just depends on what falls off and what gets added by the actuary.

Got it. And we had a big charge in the first quarter, right? We had like a five some odd million dollar charge in the first quarter?

That's correct.

Got it. Okay, that makes sense. Can you, I know a lot of restaurants have been complaining about weather and you said, well, you know, weather was bad and we couldn't get in because of snow. I mean, is there any way to sort of quantify like how much EBITDA we lost in the first quarter because of weather and like if you, I mean, I know it's hard, but I'm saying like, do you have a sense of sort of like you know, sort of what the burden was a little bit, like based on if you, like, let's say you'd close the location instead of having the people open, like, do you sort of have a sense of like what you think, whether hurt you on comps or, or EBITDA a little bit?

Yeah, I think it's about, I mean, I don't, there's no way to know for sure, but I can tell you that I believe that it was over about an eight week period and it was about 700,000 a week in sales declines. And I'll tell you where I get that from is we were doing 4.9 to 5.1 million dollars during those first eight weeks, January and February, when we're having weather and close downs. And by March, we were doing 5.7 to 5.9 million dollars per week. So if you figure a true average should have been 5.7 to 5.9, and it was 4.9 to 5.1, it's about 700 a week over about an eight-week period. So if you did that, it's about $5.6 million in sales. And you take that to a margin of about $3 million probably in EBITDA. Maybe more because we still had the cost, right? We still had the cost. We didn't have any of the revenue. We still had the cost. So it was considerable. And I think we'll have a real good idea of it as we come out of this quarter because I don't suspect too much weather in April, May, or June to affect us much at this point. So the only thing we have this year is we have – Easter was in April this year instead of March, and this Mother's Day weekend was a little off for us, but not too bad, but a little off. But I think we're going to come in pretty close to about $5.7 million a week average this quarter is what I'm hoping, unless we get some pickup at the end of May and in June. So we'll see how that goes.

Okay. And then I got two more questions. On the M&A pipeline, you talked about another club. can you talk a little bit about what you think has contributed to EBITDA so far between Detroit and then this other one in South Carolina and the other one that you're working on now and sort of what the pipeline is? Because it looks like you're

looking like you're averaging a good amount more than six million of ebitda right now well i mean you well south carolina didn't contribute anything we didn't close until april but it will contribute this quarter uh and detroit didn't contribute much last quarter because we closed in january but january and february had really bad weather uh we were still taking over so there was some there was some operating costs that we increased as we first went up there before we got the revenues back up uh but it is is doing very very well for us and it will contribute uh uh probably on par with uh with the two million dollar run rate that uh that we estimated when we when we purchased it so it's going to be in good shape uh so i think this quarter april may june will be a much better quarter for us to gauge everything on uh we also just recently closed the bombshells we fired uh david simmons uh the director of operations for the restaurant division we promoted someone else from within uh they've they've really started working on changing those things and changing costs we've lowered costs considerably uh we're making some other cost changes We've got the Denver location open. We've got Lubbock opening hopefully on May 29th. If not by June 5th, I think we'll be open for sure. So bombshells is going to go through some significant changes in this quarter. And I think we'll get a much better idea of bombshells as well. Plus bombshells was drastically affected by weather. You know, we had the Houston Rockets in the playoffs this year, so that helped a little bit. So hopefully NBA basketball continues to do well for us through the NBA playoffs. And we've got Astros baseball back up. So I think we'll be in a much better idea to see You know where bombshells is going by June 30th. That's kind of been and I think I kind of told you that once before in a conversation we had where I said, you know, it's going to take till the end of June for bombshells to really, you know, for me to figure out, you know, the change we've made, if they're, if they're effective, if they're, if they're, if we're doing any good with them and to get these other two locations open. So that so that any, any and all drag for bombshells is gone.

But we're not building outside of it. Like you said, you sold Aurora and you sold Huntsville.

We have not sold Huntsville. We sold Aurora. We have the Huntsville property listed. We have the Austin property listed where we were going to build bombshells locations. Both those properties are being listed for sale or lease right now. Uh, so we're working on all that. Uh, the Grange is closed. It's been for sale. Uh, we've got people looking at it, but, uh, you know, this is a, it's a tough restaurant environment right now. So I think it will take a little bit, maybe by the end of the summer, I suspect that we'll, uh, we'll see some movement on those.

Right. But you, it's, it sounds like, you know, you've gotten rid of all the bad bombshells by and large. You've got the final two that you're open, which you're opening because you've, you know, sort of, very far along. And then I guess it sounds like your focus is trying to get it to come positively and, you know, figuring out whether it makes sense to divest it or what, what to do with it. Right.

Exactly. I mean, you know, if we can get a good offer for it, we would divest it. I mean, we're not, you know, we, we, the offers, when we put it up for sale, the first time we got ridiculously crazy, uh, People wanted us to give them $80 million of their assets for no money down and pay us $20 million for 50% of them and basically have no liability on their side. Keep all the liability on us, but give them 100% operational control. And we can't do that. I mean, that's... That's not fiduciary. I mean, at least if I did that, I couldn't even walk away, right? I'd be stuck with whatever they decided. At least this way, we can close and sell our properties. There's a lot. We have a lot of options still. This is the first quarter we've ever really lost money at Bombshell since its inception. uh over 14 years ago uh and the majority of that loss was was basically the uh the startup cost for opening denver so uh i'm i'm i'm i'm very optimistic on a go-forward basis that we can get the bombshells to a point where uh they level out uh you know the the whole industry and I think even Twin Peaks reported negative same-store sales for the first time this last quarter. So it's a tougher market out there in the restaurant side of the business. It's actually – we're seeing a little bit in the club side as well where some of the drinking is – the number of people through the clubs have been pretty steady. Our head counts have been good, just the amount of spend has been down a little bit based on the regional managers and that that I've been talking with. So I'm optimistic that as we get into the summer, as these tariff wars settle down and and things start turn to normal they get the new you know if the republicans pass a new tax bill and they get some certainty for the next three or four years uh three three and a half years i guess uh i think the economy could could uh could do very well and that happens that'll be great for us i mean gas i would think gas prices and all the inflation things that they're looking at like uh

like gas prices and milk prices and all this stuff. I mean, I would think that all of those things should be a tailwind for you guys. Not to mention, don't the comps get a lot easier for you guys over the next couple quarters? I mean, you didn't start comping positively in nightclubs, I think, until...

calendar fourth quarter last year yeah fourth quarter and first quarter and then we were down again so we're flat for we're up three and we're down three so we're flat for six months basically right for 2025 uh but i i think that was mainly weather related uh on the club side some of us vip spend as well but we were making it up we were doing very well Like I said, we're putting more people through the doors, and that's working really well for us now. As you see, our food and merchandise sales are up, but people just aren't drinking as much. They're just not spending as much. And what they're not drinking is the high-dollar bottles, the high-dollar bottle sales, the liquor sales. They're drinking by the glass instead of by the drink, buying by the drink instead of by the bottle. So bottle service is down. VIP spend is down, as you've seen our service revenues down. almost 3%. So I think that's really what we've got to watch and focus on. We do have the Knicks in the playoffs, and New York is doing very, very well. The club's been doing great up there. People are Really coming out there, you know, I think they're sold out the Madison Square Garden for the watch parties, even when they were playing in Boston. So that was great for the clubs that were a block away from the garden there. So that's been really good for us. You know, Miami's done off a little bit. So hopefully, you know, as we get into the summer months, we can get a little stronger in Miami. Like I said, the headcounts are good. We just got to get the spend up. I think a lot of that is uncertainty, right? You've got to remember, a very large portion of our customer base, especially the high-dollar spend, are small business entrepreneurs who make considerable amounts of money. But if their money is uncertain, then they won't spend as much as they normally would. They'll get a little more reserved in their spending. And so as the uncertainty goes away, I believe that we'll see our numbers come back up.

Okay. Thank you.

Thanks so much for the questions, Adam. Next up we we have man hands 9. Please take it away.

Thank you for taking my. question and i really appreciate this venue to uh talk with you um with the new administration um making a lot of noise and headlines um as part of their um project 2025 pornography was listed as being they had wanted it to say that it should be outlawed and i wondered if you have heard anything about this um if there's anything that you'd want to add about that

No, you haven't heard anything. We haven't had any issues. I don't think we're technically in the pornography business. We're not really making videos and whatnot. Our biggest protractors are always human trafficking, and we are very avid anti-human trafficking advocates. We're a founding member of COAST, Club Owners Against Sex Trafficking, and We have done everything we can do and continue to do everything we can do in our powers to fight sex trafficking and human trafficking in all forms, as well as our training program has received a congressional honor, and we're going to continue to work with that program. I think if you look at any real studies that less than 0.1% of all human trafficking is through adult nightclubs or even has any ties to any adult nightclubs. While there are people out there that are against our industry that would try to skew those facts, I think those facts are pretty much given when you get into real studies, real scientific studies that have real data. So I'm not too worried about that. But anything like that.

Thanks for taking my question.

Yeah, thank you.

Fantastic. Thank you very much for the question. And thank you, Eric and Bradley, on behalf of the company and our subsidiaries. Thank you. And good night. Please visit one of our clubs or restaurants to have a great time.