RCI Hospitality Holdings, Inc. (RICK) Q3 2026 Earnings Report, Transcript and Summary

Good afternoon, greetings, and welcome to RCI Hospitality Holdings Third Quarter Conference Call. My name is Bradley Chhay. You can find the company's presentation on RCI's website. Go to Investor Relations section. All the links are at the top of the page. Please turn to Slide 2 of our presentation. RCI is making this call exclusively on X Spaces. [Operator Instructions] This conference is also being recorded. Please turn to Page 3. 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 to Page 4. I also direct you to the explanation of RICK's non-GAAP financial measures. Please turn to Slide 5. Our speakers today are Travis Reese, Interim President and CEO; and Albert Molina, Interim CFO. Now I'm pleased to introduce Travis. [Audio gap]

Thank you, Travis. Turning to Slide 7. I'll start with a review of our consolidated results. All comparisons are year-over-year for the quarter, unless otherwise noted. Total revenues were $73.9 million compared to $71.1 million, a 4% increase. Impairments and other charges net were insignificant compared to $2.3 million. Net income attributable to RCIHH shareholders was $6.4 million compared to $4.1 million, a 57% increase. GAAP EPS was $0.83, an 80% increase and non-GAAP was $0.90 per share, a 17% increase. Net cash provided by operating activities and free cash flow were $2.5 million and $2.7 million lower, respectively. This primarily reflected payments of more outstanding payables compared to prior year quarter. On a sequential quarter basis, both net cash provided by operating activities and free cash flow were 14% and 26% higher, respectively. Adjusted EBITDA was $16.9 million, an increase of 10% year-over-year and 9% sequentially. Moving to Slide 8. I will now cover our results by segment, Nightclubs first. Revenues increased by 1% to a record $63 million. Four newly acquired opened and reformatted clubs generated $4 million and the 52 clubs in same-store sales produced $58.5 million. These more than offset $1.2 million in sales from 4 clubs closed subsequent to the year-ago quarter. By revenue type, service increased by 7.6%, food, merchandise and other declined by 1.4% and alcoholic beverages declined by 4.2%. Operating income was $19.6 million compared to $17.9 million with margin at 31.2% of segment revenues compared to 28.6%. Non-GAAP operating income, which excludes impairment and other net charges, was $20.2 million compared to $20.8 million with margin at 32.1% of segment revenues compared to 33.3%. On Slide 9 are the results for the Bombshells segment. Revenues increased by 25.4% to $10.8 million. Three new locations generated $2.6 million and the 9 location same-store sales produced $8.2 million. By revenue type, alcoholic beverages increased by 33.6% and food and other increased by 16.6%. Profitability improved substantially as we increased higher-margin beverage sales and improved operating leverage across the segment. Operating income was $759,000 compared to $67,000 with margin at 7% of segment revenues compared to 0.8%. Non-GAAP operating income was $801,000 compared to $80,000 with margin at 7.4% of segment revenues compared to 0.9%. Moving to Slide 10, you will see the summary of our corporate expenses. GAAP operating expenses declined by 19.7% or $1.8 million and 16.3% or $1.4 million on a non-GAAP basis. Both the GAAP and non-GAAP declines reflected a year-over-year reduction in insurance expense. Please turn to Slide 11. We have slides coming up 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 net income. Slide 12, please. We ended the quarter with cash and cash equivalents of $26.4 million, down by less than $0.5 million from March 31. Our strong cash generation during the quarter enabled us to make debt paydowns of $8.6 million as well as buy back $1 million worth of shares. Free cash flow margin was 14%, improving for the second consecutive quarter and adjusted EBITDA margin was 22%, improving for the third consecutive quarter. Please turn to Slide 13. As I mentioned, debt declined from March 31, reflecting paydowns across all categories. The weighted average interest rate was 7.05%, which would be considered to be a very good rate for commercial real estate these days. Total occupancy cost of 8.3% declined sequentially. Debt to trailing 12-month adjusted EBITDA was 4.3x. Excluding the fourth quarter legal accrual, debt-to-EBITDA was 3.7x. Both are down from the second quarter. Debt maturities continue to remain reasonable and manageable, particularly with our plans to sell nonincome-producing properties. Now back to Travis.

[Technical Difficulty]

Thank you, Travis and Albert. Eric Langan, RCI's Founder and Head of M&A will also be on the Q&A. [Operator Instructions] Please understand we cannot discuss the legal situation in New York other than to reiterate the company's statement that RCI, the individuals involved and the 3 clubs have pled not guilty to all of the charges and are taking all necessary actions to defend themselves. Furthermore, I've also been told that we've experienced some technical issues, so a transcript will be posted shortly as soon as we're able to, to reflect what was said on this call. So I'll start taking questions. I'm going to go ahead and bring in Orchard Wealth.

He still shows as listener. Bradley, you have to promote him to speaker, please.

He's on mute. Orchard Wealth, can you hit unmute? You're speaker now.

He's still shown as a listener on my screen, guys. So I don't know maybe you can promote him again.

I'm going to go ahead and remove him from speaker and bring him back. Orchard Wealth, you can hear me, go ahead, you're a speaker now.

Promote somebody else to see if that work as he is still showing listener on my screen still. So let's see if somebody else can be moved to speaker.

Maxwell Ellis, I'm going to go ahead and pull you up.

Can you hear me?

Yes, we can hear you.

It seems like the call that you guys just did, I've spoken to multiple people. It seems like every 6 seconds, you could hear something and then every 2 or 3 seconds, it would go completely blank. So literally half the call that you guys just did, nobody heard anything. My main concern for right now is how long before you guys are paying down debt at the accelerated rate before you can begin buybacks again? Because at this current rate and the prices, it's just...

I agree with you. The prices are extremely favorable for stock buybacks right now. However, I was -- got very uncomfortable with a 4.17 debt-to-EBITDA ratio. So I wanted to get that knocked down. We also had some very timely payments to be able to pay down a few things to prepare for making some acquisitions here, hopefully, in the next 3 to 6 months. So we wanted to kind of line those things out right. And so we decided to take a small break from buying back stock. As you see, we bought through April. We slowed down in May, and we basically -- May and June basically just mainly paid debt. The real story, I mean, I know we say 3 months here, but if you look in the last 6 months, we paid down $16 million worth of debt. And through the debt schedule, you see we plan to pay another $8 million this quarter. So we paid down almost $24 million in this brief period of time. We've got a property sale that should happen in September that will probably pay another $1 million. So our 3-month total should be a reduction of debt of almost $25 million, which should put our ratio -- we just refinanced 2 things that we're going to see coming up in the next quarter where we moved some maturity dates and changed some terms, paid off some 12% money to lower our -- some of our debt service ratios. And we look forward to hopefully -- I'm hoping we're back in the market around the 1st of October as we start into the next fiscal year.

Okay. And then it seems like you've had a big turnaround in Bombshells, especially within -- I guess, it seems like you guys have flipped from being a restaurant back to being a bar that sells food. What have you specifically done that's been catching on? Because it seems like you started with that one that you were managing and it's kind of increasing across the footprint.

Yes. I'm getting a bunch of messages that people are still not hearing this call. I have not missed a single word of the call, and I'm in Colorado on a basic WiFi connection on my cell phone. So I don't know. But to give you an idea of what we've done is we went back to our core. We started the concept almost 15 years ago in Dallas, Texas. And the idea was to make a fun bar-type atmosphere with sports and girls and great food with no nudity that we could take and expand around the country. I think after COVID, everybody had to become restaurants. And I think that too much of that got into our culture. So what we've really done is massively changed the culture of Bombshells. I brought in a new Director of Operations for Bombshells, who was a club guy. He's been in the club business since he was 18 years old. He understands fun. He understands creating the party, not joining the party. And we've kept enough of the food guys to keep the food at a quality level and just slowly transform the concept back to what it was supposed to be and what it should have probably always been. We were doing some major expansions in '21 and '23 with these 2 large acquisitions, $88 million acquisition, a $66.5 million acquisition. And so I think a lot of our focus was on that club growth. And we just kind of -- the Bombshells kind of slid into a rut. We kept telling you need to change this, and you need to do that. And of course, the team that we had at the time was very good at restaurant business, but just not the club side. To give you an example of what we've done is we've taken stores that were around 50-50 food and beverage to 62% to 64% beverage and still -- and increasing revenue at the same time. So it's not like we're getting rid of the food business or losing the food business. We're actually generating more food business as well, but we're also making it a fun place to be again and a fun place to be late night. So come in at 10:30, 11:30, 12:30 at night and fill those hours back up, which as a restaurant, there was almost no business during those hours. Those hours have slipped off to -- they were -- the group was actually -- the previous management was actually trying to tell us that we should close at midnight. And so we -- because restaurants -- that's when we really got the concept of let's go fix this thing, let's go turn it back into the bar. Let's take it back to the original core of the concept, and we've done very, very well with that. April same-store sales were negative. I don't know this store -- we took over February, mid-February, I went into a store with another manager. We started working that one store, fixing the things, changing things of the concept. We took that to 3 stores in March. And about mid-April, we launched that across the -- all 11 stores as we prepare to open the store in Rowlett and make sure that it opened properly with the right party attitude and atmosphere from the very get-go. And we're seeing the results in it. And I think you'll see improved results again this quarter based on what we've done in July so far. And I think once football season starts, it's going to get even better.

My other thing is, what's the update right now on the Dallas club that burned down and you guys making progress with like rebuilding?

The Fort Worth club, we're still working to replat that property. We've had some issues with the city. That property was built in the 1970s originally. There's sewer -- no sewerage there. So we're on a septic tank. Of course, the laws have changed on septic tanks. So we're working through those processes as well. So I think it's going to be a while before we can start construction there. And once we start construction, it will be 9 months to build. We have started construction on the Baby Dolls West Fort Worth location on Mark IV. That construction is going. They just recently passed -- I don't know what you actually call it, but it's basically the rough-ins. So all of the plumbing and stuff that are all underground, all of that has been done, and they've got permission to start filling that in and should be going -- working on most of the vertical stuff here soon. I suspect that location will open around May 1.

Okay. And then in terms of like the clubs that you do have, I remember you were giving like some stat about how like a certain amount of clubs equal 80%, like some Pareto principle between the profitability. Do you guys have any clubs that you think you'll be like trimming off and selling real estate on?

We have a couple that we -- as you know, we got rid of Harlingen. We got rid of Edinburg, El Paso location. We have a couple of locations that we're in negotiations with, to possibly sell those locations. That doesn't mean every location is for sale for the people that are listening that want to buy every club that we own. We will know when a club is for sale. We're not marketing. We're just -- it's going to be a random club here or there, and we'll market it through a broker so that you'll absolutely know that it's for sale when we make that final decision. But it's not a lot. It's just a couple of small locations. They're in very small markets, and we're focusing on our larger markets. Our acquisitions that we're working on are larger market acquisitions that will be very accretive for us. And we're taking it very slow because right now, we do believe that buying our own clubs is absolutely the best use for our money. So...

Yes. And then how much more -- how many more payments do you have to do to Adam?

I think we're down to $15 million or so, $14 million, $15 million. So it was $1 million a month, so 14, 15 more months.

Okay. So you guys are making -- so basically, you've been paying about -- you pay $1 million to Adam, which at some point will stop and that will be added back into profits. And then you've been accelerating debt payments of about, what, $0.5 million per month also. So like literally this quarter...

Well, we paid down our line of credit, yes. But our line of credit, I think, after August will be paid down to $100,000. So we will not be making additional payments on that anymore. So we're going to have to kind of look and see where we want to put the other money. I know that we have a property that's supposed to sell in September. If it closes, we'll pay down about $900,000 in bank debt, and we'll probably pay $1 million on the ADW. So that will take 1 month off of that, plus save us the 12% interest over 15 months. So we'll get a nice savings off of that and still put a little -- not much, but a little bit of cash in the bank on our side as well. We are in negotiations on multiple other properties. I've been working with brokers. We're accepting cash offers. We're looking to lease some of the properties that haven't been able to sell in the last 6 months, put a tenant in them, see if we can sell them once we put the tenant in or just keep it and collect rents if the ROI is good enough. So those are things we're -- we've definitely been working on that non-income-producing property. So I think that's a lot of value that we can unlock over the next 6 to 12 months. Hopefully, I mean, look, interest rates and the oil prices and the uncertainty with the Iran war is definitely not helping commercial real estate sales. So that is part of the issue, I believe. Because like I said, we have a lot of people looking -- we're talking to a lot of groups on a bunch of our properties in multiple areas. And a lot of it is can they get the financing, find the financing at the right prices and whatnot. So that's what we're up against. But I'm hoping those headwinds will die down here, especially as we move closer to the election and right after the first of the year. I look very forward to hopefully seeing that settle down so we can move some more of these properties.

With the club sales, are they kind of pretty much in line? Or is there like a hotter area than the other geographically.

What do you mean the club sales?

In terms of just the revenues that you guys are bringing in from the club side of the business.

Club revenues. No, it's pretty spread around the country. I mean, one area gets hot, another area slows down a little bit. A lot of it has been sports-based in the last few months that we've seen with the World Cup. And of course, with the Knicks in the NBA finals and winning the NBA finals, that's definitely affected New York and helped New York. But it also -- the games helped the Bombshells. They helped the clubs in Miami as people come in to watch the games and watch the New York Knicks. So it probably didn't help us in Chicago because those fans probably aren't Knicks fans, but there's enough Knick fans in other parts of the country, I think, that it did very well for us. And then, of course, the World Cup, I mean, the most matches were in Dallas, right next to the Bombshells in Arlington and 2 of our clubs in that area, which did very well during those World Cup games. We had games in Houston. We had games in Miami. We had games in New York that all helped contribute to those regional areas. But they helped everywhere because people came out to watch the games as well. So it's hard to say that anything helped one particular area more than the next. I think that overall, we had very strong results. And as I said, we're looking very forward to football this year. We're putting a lot of promotion and sports stuff in fantasy draft parties as well as come watch the games and game watching parties and bottle specials during the games to get people to bring larger parties out, which we did very, very well with during World Cup. So we're going to take the success that we created there and multiply that and push that right into the football season. And then by October, we're going to be picking up basketball as well and hockey kicks in. Baseball will heat up here as the pennant races start. So sports should be very, very good for us, I think, September, October, November and probably all the way into February. So...

Have you noticed anything different with the service side of the clubs? Is that -- obviously, it seems like it's picking up. Does that seem like it bottomed a little while ago when you guys are like in some sort of going back to normal?

Yes. I mean I think the service revenue declined there for a while. I don't know -- there's a lot of macro stuff going on. But I think we are focusing on it. We are working on keeping people in our VIP rooms, right? I mean that's where our service revenues is created is when people go to our VIP rooms. So we've got to keep the pressure on the floor, keep more people in the building so people want to pay to move up, right? If you're the only person on a 737, you don't care if you're sitting in first class or not, right, because there's nobody next to you. But if all of a sudden, every seat in the back is full and the front is empty, let's -- can we move up there? That's what we have to do with clubs. And I think our guys are doing a fantastic job of creating that pressure by putting more and more people through the door and really focusing on just overall customer service right now.

And this is kind of like a strange question, but maybe not. When it comes to like service revenue, what -- is there like an age range of like the ideal client that are spending the bigger dollars because I can't see it being like 21-, 22-year-old kids. To me, it would seem like some guy that's like in his 30s to 50s because they're the guys with the money that can drop it.

It strictly depends on the club. I mean, in the format of that club. I mean there's a lot of 20-something tech guys out there that are making good money, right, and getting their first job, and there's a lot of crypto guys out there that are in their 20s and these influencers, right? I mean, these media influencers on social media, they make a lot of money, and they will come in and blow some money sometimes. So it's -- and then we've got the real estate tycoon who can come in and whips out his platinum credit card and says, "Everything is on me." So I mean it's -- I don't think the age groups are as tight as they were. I know that we have really done a better job, I think, of social media marketing and bringing in -- working with some influencers and whatnot to really bringing in more of that younger crowd that we haven't necessarily had in the past. So we're doing everything we do to put butts in seats basically.

And then my last question is, are there a significant amount of women that have been showing up to the clubs as like with their husbands or just it's a thing for girls to go to because...

That's been for 10 years now. Yes, that hasn't really adjusted much. On weekends -- not as many during the week, but on weekends, absolutely, especially Saturdays. Saturdays, we should have a couples night, I think. But we do too much other business on Saturdays with bachelor parties, everything else to kind of really focus on that crowd. But we do focus on the customer service for that crowd for certain.

[Operator Instructions] Just to deal with the technical issues that people have been texting and messaging about, the immediate replay and recording will be posted right afterwards on X Spaces as well as a posting of the transcript of this call. Sorry for the technical issues. So on behalf of Travis, Albert and Eric, the company and our subsidiaries, thank you, and have a great night. Please visit one of our clubs or sports bars and have a great time. Thank you.