Greetings, and welcome to RCI Hospitality Holdings conference call and webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If you have a question or a comment, you would do so by entering star one on your touch-tone phone. Pressing star two will remove you from the queue. As a reminder, this conference is being recorded. It is now my pleasure to introduce Gary Fishman, who handles investor relations for RCI.
Thank you, John. For those of you listening on the phone, you can find our presentation on the RCI website. Click Company and Investor Information under the RCI logo. That will take you to the company and investor information page. Scroll down, and you'll find the necessary links. Please turn to page two. I wanna remind everybody of our safe harbor statement. It is posted at the beginning of our conference call presentation. It reminds you that you may hear or receive 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 afterward. Let's turn to page three. I also direct you to the explanation of non-GAAP measurements that we use.
I'd like to invite everyone listening in the New York City area to join us tonight at 6:00 P.M. to meet management at Rick's Cabaret New York, Manhattan's number one gentlemen's club. You can also tour his sister club, Hoops Cabaret and Sports Bar, next door. Rick's is located at 50 West 33rd Street between Fifth Avenue and Broadway, around the corner from the Empire State Building. If you haven't RSVP'd, ask for Eric Langan or me at the door. I'm pleased to introduce Eric Langan, President and CEO of RCI Hospitality.
Thank you, Gary. Thank you for joining us today. I'm here with our CFO, Bradley Chhay, and after the market close, we reported our first quarter results. We want to thank our teams for delivering another strong quarter. Nightclubs and Bombshells continued to perform well. All 12 recent club acquisitions and our new company-owned Bombshells in Arlington, Texas also contributed to results for part of the quarter. We didn't experience any noticeable impact until December from the Omicron virus. To date, it has cycled quickly through our markets. We are continuing to execute on all aspects of our growth plan for fiscal 2022. We expect to achieve further progress with our recent club acquisitions. Our first Bombshells franchisee should open in San Antonio this quarter or early in next quarter, and our Admire Me website should do a soft launch during the same timeframe.
We are actively pursuing new club acquisitions as well as Bombshells company-owned locations and new franchisees. Helping us implement our capital allocation strategy is our recently announced bank loan. Now here's Bradley to review the financials.
Thanks, Eric, and good afternoon to all those listening. All of our comparisons in this call will be to a year-ago first quarter, unless otherwise noted. We generated total revenues of $61.8 million. That is up 61% year-over-year and up 28% compared to the pre-pandemic first quarter in fiscal 2020. GAAP EPS totaled $1.12, with non-GAAP EPS at $1.10. In the year-ago quarter, we reported GAAP EPS of $1.07. That included a $4.9 million pre-tax gain equal to $0.55 per share from the debt extinguishment of our PPP loan. Excluding that and other standard items, non-GAAP EPS was $0.39 a year ago. Net cash from operating activities was $16.3 million, an increase of 159%.
Free cash flow totaled $15.3 million, which was up 169%. Net income increased 11.1% to $10.6 million. Now, on a non-GAAP basis, net income was up 193%, and adjusted EBITDA increased 107% to $18 million. Please turn to page five. Nightclubs segment revenues, the operating margin, and income from operations were all up significantly from the year ago quarter. Revenues grew 86% year over year to $46.8 million. Operating margin was 40.1% compared to 33.7%, and the income from operations increased 121% to $18.7 million. This includes the benefit of our recent addition of 11 clubs since the acquisition in mid-October and another club acquired in early November.
They contributed approximately 29% of the increase in revenues and approximately 17% of the increase in operating income. The segment also reflects strong performance from all of our other clubs, which were still heavily impacted by government-related COVID restrictions in the year-ago quarter. Same-store sales were up 31% compared to the year-ago quarter and up 8% compared to first quarter two years ago. Revenues and operating margin also benefited from a 107% year-over-year increase in high margin service revenue. This primarily reflected the success of our northern clubs as they continued to rebuild their VIP business. As we've explained, the acquisitions are a work in progress. Our plan is to continue to improve staffing, service, revenues, and margins as we move through the year. Now, if you would, please turn to page six.
Bombshells had another solid quarter with revenues of $14.8 million, operating margin of 19% and income from operations of $2.8 million. This compares to the first quarter 2021 revenues of $13 million, operating margin of 20.9%, and income from operations of $2.7 million. The 14% increase in revenues reflects the benefit of our new Bombshells in Arlington, Texas, since its opening to great success in early December. Arlington set a record for its first month of revenues for our new Bombshells and contributed approximately 45% of the revenue increase. The quarter also reflects strong performance from our 10 other Bombshells. Same-store sales were up 8% compared to a year ago quarter and up 21% compared to the first quarter two years ago.
Operating margin and income were affected by more than two months of pre-opening costs without any sales for Arlington. Overall, we believe we've done a great job at managing the impact of food and labor inflation. As a result, operating margins stayed within the target range of 18%-22%. Going forward, operating margins should benefit from full quarters of Bombshells Arlington without the effects of these pre-opening costs. Now please turn to page seven to review items in our first quarter consolidated statement of operations. Improvements in the margins of cost of goods sold, salaries and wages, and SG&A are all attributed to higher nightclub revenues and margins during the quarter, as well as some of our continuing COVID-era cost savings. As a result, GAAP operating margin was 25.7% compared to 17.1%.
Interest expense also declined as a percentage of revenue, although the dollar expense was slightly higher due to debt associated with the acquisition of the 12 clubs in October and November. Non-operating gains were significantly lower than a year-ago quarter, which benefited from the debt forgiveness. Please turn to page eight. On December 30, we acquired Scarlett's Cabaret Miami real estate for $7 million of cash. This left us with a cash balance of $80 million as of December 31. With the $19 million bank loan that we closed in January, we ended the month of January with approximately $32 million in cash. Now, if we exclude the purchase of the Scarlett's property, we would have had a cash balance of approximately $39 million.
The Scarlett's property was not part of the January bank loan, so at some point we will finance it and get a good portion of our cash out. Free cash flow from our first quarter increased by 169% compared to a year ago. This was primarily due to the strong increase in net cash from operating activities, partially offset by a small increase in maintenance CapEx. Adjusted EBITDA increased 107%. Now, as a percentage of revenue, free cash flow increased to 25% from 15% in the year ago quarter. Adjusted EBITDA increased to 29% from 23%. Now if you would, please turn to page nine to review our debt and debt manageability. Debt net of loan costs was $162 million as of December 31, an increase of $37 million.
This increase primarily reflected previously reported debt used to finance the October 2021 club acquisitions. We continue to reduce our weighted average interest rate. Our first quarter rate was 6.26%, 51 basis points lower than a year ago. This was primarily due to the refinancing and pay down of higher rate debt. Our rate is almost 100 basis points down from five years ago. Our periodic refinancing, like the one we did in September, enables us to convert higher rate seller financing and other unsecured financing used in club acquisitions into lower rate commercial real estate bank debt. Our refinancings also enables us to smooth out our debt maturity schedule. Now as you can see, our amortization average is about $7 million a year for the next five years, which is very manageable with our cash flow.
Occupancy costs were 6.9% of revenues. This is well within our range of 6%-9% that we've averaged when sales weren't dramatically impacted by COVID. Please turn to page 10 to look at our 12/30 debt pie chart. 12/31, sorry. Our secured debt now consists of 62.5% of debt secured by real estate. This will be a little higher in the second quarter of 2022 as a result of the January refinancing. 21.6% listed as seller financing. This is secured by our respective clubs to which it applies. Lastly, 4.9% secured by other assets. Our unsecured debt consists of 10.8% of our debt, which is comparable to our 6/30/2021 balance sheet.
As I mentioned on our last call, we have reached the end of our SBA loan through forgiveness and are left with a small amount of repayment. We are nearing the end of our Texas Comptroller settlement as well. Now let me turn the call back over to Eric. Thank you.
Thanks, Bradley. Please turn to slide 11. We're continuing to talk to new investors. This is a result of our meetings through the ICR and Sidoti conferences in January, the Noble Capital Markets initiation coverage. I'd like to review our capital allocation strategy. Our goal is to drive shareholder value by increasing free cash flow per share 10%-15% on a compounded annual basis. Our strategy is similar to those outlined in the book, The Outsiders by William Thorndike. He studied companies that focused on generating cash per share and allocating that cash effectively to generate more cash. We have been applying those strategies since fiscal 2016, with three different actions, subject of course, to whether there is strategic rationale to do otherwise. One is mergers and acquisitions, specifically buying the right clubs in the right markets.
We like to buy good, solid cash flowing clubs at a 3x-5x adjusted EBITDA, using seller financing and acquire the real estate at market value. Another strategy is using cash to grow organically, specifically expanding Bombshells to develop critical mass, market awareness, and sell franchises. Our goal in both M&A and organic growth is to generate annual cash-on-cash returns of at least 25%-33%. The third action is buying back shares when the yield of our free cash flow per share is more than 10%. Please turn to slide 12. Regarding nightclubs, we are making important progress with the clubs we acquired in the first quarter. As I mentioned on the last call, this is a COVID rebuilding effort, and as this materialized, we expect to see improving revenue and margin run rates.
We anticipate reopening our rebuilt and rebranded club in Louisiana this quarter and our remodeled and rebranded club in San Antonio next quarter. Step by step, AdmireMe is coming to fruition. The mobile-friendly site is scheduled for a soft launch later this quarter or early next. We are continuing to talk with club owners about acquiring their businesses. As part of our recent investor presentation, we said our current target is to buy clubs that can add about $20 million in adjusted EBITDA in fiscal 2023. Regarding Bombshells, our new company-owned location in Arlington is doing very well. As Bradley mentioned, it set a record in December for the first-month revenues for our new Bombshells.
We are under contract to purchase land for two new Bombshells, one in Sapphire Bay in the Dallas market, and another in Stafford in the Houston market. We couldn't get a necessary specific use permit for another location in the Dallas area that we were looking at, and so we're looking at other sites. We continue to talk to brokers in the North, South, and West Florida, as well as the Phoenix market for more company-owned locations. Our first franchisee store should be open in San Antonio by the end of this quarter or the first part of next, and we continue to talk to other potential franchisees. Regarding capital management, as Bradley mentioned, we acquired Scarlett's property for $7 million in cash. This is something we've had planned to do.
Our $18.7 million bank loan provides us with more resources to implement our capital allocation strategy, and we still have two excess properties under contract for sale. This ends the formal presentation. A big thank you to all our teams, nightclubs, Bombshells and corporate for all your hard work and dedication. With that, we'll open the line for questions.
Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please indicate so by pressing star one. Pressing star two will remove you from the queue should your question be answered. Lastly, while posing your questions, please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we hold for questions. The first question is coming from Joe Gomes from Noble Capital. Your line is live.
Good evening. Can you hear me?
Yes.
Great. Excellent quarter, guys. Just a quick question first here on the acquired nightclubs. You know, looks as if I'm doing the math real quick on the back of the envelope, that for the weeks that you had acquired them, they were generating a little over $6 million of revenue. Is that kind of where you were expecting, better, worse? You know, maybe just give us a little more color or detail about how the integration of the acquired clubs is progressing.
Sure. I mean, we knew it was gonna be a challenge. They were short-staffed. They weren't open full hours yet when we took over in October 18. We knew there was gonna be some issues there. As we brought some people in from around the country from our other clubs, we were able to fill some spaces, get some stuff going, start building momentum. We did have an issue with some of the existing staff that you know were very corporate, and they were not used to that, so we had some turnover in existing staff as well. That added to the you know compounded the problem. By late December going into early January, we had COVID hit certain locations throughout the country.
We've been dealing with that. As of now, I'm very excited about, you know, going forward. The numbers are getting better and better at the locations. Some of the locations are exceeding the 2019 numbers, and some are still, you know, at about 60%. We'll continue to push and grow on those locations, get the right things in. We had some remodeling, the CapEx done, so we're waiting. Most of that is done now. We suspect that the majority, if not 100% of that will be done by March 1. There'll only be one major project left that we haven't started yet, and we're still working on approvals through the landlord.
It's one of the rental properties, but we want to change that property to a Rick's Cabaret and remodel and make it look more like our New York City store frontage in downtown Denver. Hopefully that will get done here as well in the next few months. It's right across the street from the convention center, so it should be a really great look and definitely help increase that property revenues and income. Overall, I'm, you know, we're very excited about the growth potential still at the existing clubs that we just purchased. I think that as far as our schedule's going, we're on schedule.
We think it could take somewhere between March and May to get these locations back to, you know, 100%-110%, which is where we wanna see them at. Other than that, you know, everything else has been great with those locations.
Okay. Thanks for the color. Obviously, you know, awesome contribution this quarter from the service revenues, you know, partly as you mentioned, the northern clubs, you know, getting back the VIP business. You know, do you think there's much more upside in that, or is that kind of, you know, played out in terms of the people are back to the full extent, we won't see that type of growth going forward?
Well, I think we're gonna see more growth than that. You're gonna see it return more to the mean. You know, service revenue used to be over 40% of our revenues. I think we're still down in the 20s right now. I think there's considerable bandwidth there. A lot of it's gonna have to do with weather, as the weather gets nicer. I think March, April, May is gonna be one of our strongest periods. I know March is part of the second quarter and April, May will be part of the third quarter, but I still think those three months as a whole are gonna be very strong for the company, and we're gonna get a very good sense of what we're gonna be looking like on a go-forward basis as, at some of our prime time.
I think that hopefully this last wave of COVID Omicron will be kind of gone. Hopefully there's nothing new that comes out. It seems to be weakening, so it should just hopefully go away as they're saying. That's gonna give us a very, very strong. We got a great sports lineup, you know, coming with March Madness coming up and some of the other events. Baseball will be started back up in April, which will be good, great for us. Basketball season will be coming, you know, to a prime spot. I'm just, you know, I think it's a very exciting time for us during those three months, and hopefully the weather gets a little better.
You know, this big storm last week all across the Northeast, freezing down all the way into Texas and some freezing rain and snow actually in the Dallas market again, gonna coincide. Last year, it hit us in the second and third week of February, which is our prime time. This time, it hit in our first week of February. I'm hoping that'll kind of blow past, and we'll get a nice six-week run as we run into, you know, the last six weeks of this quarter, the last two weeks of February and then the four weeks in March. Maybe even a nice seven-week run. This quarter is still good. January was still a very solid quarter for us. I was thinking we would come in closer to $22 million.
We're a little over $20 million in sales for January, so that will be, you know, still better than we did in October. This quarter is still ahead of last quarter on a going forward run rate for first quarter, second quarter. We'll just have to see, like I said, how these next 9 weeks play out, hopefully very strong for us.
Right. Speaking of sporting events, I know when you get a, you know, some of, you know, a Super Bowl in a location, it can really have a nice upkick, and I know the Formula 1 race is coming into Miami in April. Outside of that, are there any other big one-time events like that that you see that will be coming this year towards where any of your club locations are?
I mean, I think there's some big like Bitcoin and NFT conferences that are coming to some of our areas. We're in the process of accepting Bitcoin at our locations, some of our locations, which I think will help dramatically, starting in Miami with the big Bitcoin conference coming up there in April. We're hoping to have that in place by then. You know, we're working on some other cool things like a helicopter landing pad at Tootsie's in Miami because we've had several requests from some big VIPs. They wanna land their helicopter at the club. We're like, "Well, we can work that out, I think." We're in the process of doing stuff like that. I mean, that location's just phenomenal right now.
The numbers it's doing are, I mean, we're still running record numbers that we've, you know, we never even dreamed of pre-COVID, that we could do the volume that that club is doing now. The race is gonna be incredible for us, I think. It brings a lot of big money in to the area. Formula 1 is very expensive. We know from Austin, which our clubs are still 60-70 miles from the track, and we still get business in Austin, Texas, when Formula 1's there. This, I think, I'm not 100% sure of the track, but I know it's just blocks. The track's literally blocks from Tootsie's there. It should be a really big draw for us as well.
Good. One more, if I may, and then I'll get back in queue. I was just, you know, you're talking about a soft launch of the AdmireMe site in the second quarter, maybe early third quarter. What kind of metrics are you looking for in the soft launch?
I wanna get 1,000 girls or creators on the site. That is our initial goal, to put 1,000 new creators on the site from our clubs and our partners' clubs. So combined, there's about 70-some clubs around the country that are gonna be involved in the initial launch. Hopefully, we'll add other clubs as time goes on through our acquisitions, through their expansion, and through maybe partnerships with other club owners as well to continue to build the site. I think our first metric has to be hitting the goal of 1,000 creators. At 1,000 creators, I think that it has enough momentum on its own that we can just let it build on its own from there.
You know, we can convert to a more of a promotion mode where we're really trying to bring in more customers and guests for those creators. Of course, we'll need more creators, and then we'll need more customers and, you know, just the chicken and egg effect and just balance and build. Try not to let either get ahead of themselves, where we have too many customers and not enough creators or too many creators and not enough customers. I think that's the delicate balance for us. I think we'll have a really good handle on that, how that's looking by the May call is what that's my personal thoughts on that.
Okay, great. Thanks. Thanks for all that, Eric. Appreciate it again.
Yeah.
Great quarter. I'll let someone else ask some questions. Thank you.
All right. Thank you.
Once again, if there are any remaining questions or comments, please press star one on your touch tone phone. The next question is coming from Anthony Lebiedzinski from Sidoti. Anthony, your line is live.
Thank you, and good afternoon, and thank you for taking the questions. Certainly a very impressive start to the fiscal year, even with some headwinds with Omicron. Eric, is there any way you can perhaps take a shot at estimating what the impact of Omicron was as far as sales for the quarter?
For the quarter is difficult, but I would say it probably affected us around 10% in December. In January, probably about the same. I don't think we'll see any effect in February from it. I think February, I think it's kind of ran its course in our markets for the most part, at least our major markets. Texas is kind of done now. I mean, it wiped out our corporate office. I mean, we were very skeleton staff getting this Q finished up, and we were actually a little worried about it at a couple of points. Like, are we gonna be able to get all this work done?
Because, you know, every other day, somebody else was, "Oh, I'm positive I can't come in now." So, you know, Bradley did a great job of getting that all handled and taken care of and went through the COVID himself. So he knows. I mean, they all was just. Luckily, it was very short. Most of them, you know, were sick.
two to three weeks.
You know, yeah, out for two to three weeks total with all the precautionary hold times. That's with all the precautionary hold times. They weren't really sick for more than about five days or so. You know, we did the 10-day hold before the change. You know, most of this was before they changed it to a five-day. We're making them 10 days, get negative tests, all that type of stuff before we let people back in our offices because we couldn't afford to keep losing people, especially the key people that were there. You know, we had people coming in at night to avoid each other, whatever we had to do to get this closeout done for the quarter and get the Q out on time.
Gotcha. Okay. Well, I'm glad that everyone is healthy now, it sounds like in the corporate office, and you guys were able to finish up the 10-Q and so on. Looking forward here, as far as the segment operating margin, obviously, you know, the Bombshells did take into account some of the pre-opening expenses for the new Arlington location. Is it safe to assume that sequentially you should see better operating margins there? If you wanna just comment on nightclubs as to how we should think about the segment, the op margin there.
Yeah. I mean, the nightclubs are. I think we're kind of maxing on the nightclubs. I would think, but then again, I don't know. As the service revenue continues to grow, and Tootsie's is doing the numbers it's doing, if the Denver market really picks up for us as you know, the guys are saying they expect it to between March, you know, for the month of March, we could see a little bit better there. As far as the Bombshells, I think we're gonna stay in the 18%-22%, and maybe, you know, occasionally we're gonna have some big events that blow us up to that 24%-26% margin rate. But if we stay 18%-22%, I'm gonna be very, very happy with Bombshells segment in that range.
That is, that's a very, very good healthy range for Bombshells. It's been our targeted for many years. That was the target to get to, and if we can stay in that range, I'm not gonna be unhappy. Obviously, I love you know, the new locations running 30%+ is nice. That helps expand the margin for the couple of the underperforming, you know, very older locations that we did before we really had the demographic markets figured out the way we do today. And as we add more of those locations, those first two locations or so, three locations that were underperforming will have less and less weight on the brand as well.
I don't see any issues with that, you know, staying in the 18%-22% at this point. We've been able to pass on costs. I've talked to you know, to some of the guys, management there. Our labor issues that we were having, we're kind of through those for the most part. I mean, obviously everyone is having you know, some short-term effect, but it was really tough when Omicron came through. We were you know, already short, and then all of a sudden you're missing people. You know, you're missing cooks, you're missing management, you're missing bartenders. I think that all had a little bit of effect, some in December and some of that effect we'll see in January.
I think March will more than make up for what January did. I mean, our March is going to be much, much stronger, I think, than our December was. We already know that January beat October. It's really, you know, we'll see how February does against November, and then we'll have a really good idea of where we're going. That will give us our, you know, April through September kind of run rates, and we'll kind of get an idea, I think, how close we'll be to between $260 and $280 in total revenues, which is our goal.
As we add, you know, I think new projects and new clubs through acquisition, as we get through the later part of that year, you know, we'll have to see how all that plays into the numbers as well.
Got you. Okay. That's great to hear. The general corporate expense was a bit higher than what we estimated here. Just wondering if there were any notable. I don't know if it's non-recurring, but any sort of items. Obviously, as you were integrating the acquisitions, just wondering if there was anything meaningful to call out there. Just how should we think about the quarterly run rate for corporate expenses going forward?
Yeah, that quarter, especially our first quarter, is always impacted by the year-end audit, which requires a lot of internal control work, a lot of year-end SOX work. You couple that with the due diligence work as well as any third-party work for the acquisitions of the 12 clubs, you know, so you're gonna see it ramp up a little bit higher there. On a normalized rate, I'm saying about $4.5 million for that segment on a normalized run rate.
Got it. Okay.
For the quarter.
Thank you, and best of luck.
Yep. Thank you.
Once again, if there are any remaining questions or comments, please indicate so by pressing star one on your touch tone phone. The next question is coming from Adam Wyden from ADW Capital. Your line is live.
Hey, Eric. Congratulations.
Hey
on a great quarter. This is my favorite time of the year. I only get to do this four times a year, so I won't let all of our listeners, you know, not get a show. You know, look, obviously, you know, you've made some real progress in terms of, you know, improving your cost of capital relative to what it was. Now, that was a very low bar. You were trading at, you know, at one point, you know, I don't know, some stupid number.
I mean, I remember that there were people shorting the stock during COVID, and it was $8 a share, and we were like, "This thing's gonna do $10 a share free cash flow." I mean, you know, look, you obviously are trading still at a big discount to the rest of the restaurant and hospitality space. You know, I think it might be helpful, you know, for the new people to kind of talk about, you know, the, your history with Bombshells and kind of the fact that you had to tinker with it a little bit and perhaps give people a sense of the cadence in terms of your store opening schedule beyond 2022. I mean, when I look at the business today, you know, I say, "Well, you know, you've got 12 locations.
You know, they're doing $6 million-$7 million. You know, that's, you know, call it $75 million-$80 million. You know, you say 22% margins. You know, when you give credit for the real estate, right, you're booking real estate through that, it's really more like 30% margins because you've got, like, 7% of sales on real estate. So you basically got a business that's, like, $25 million of EBIT, you know, or whatever, between $20 million and $25 million of EBIT. I mean, if that was floated publicly, that would be worth more than the entire market cap. Now, of course, that's a subscale public company. But I mean, that's worth $1 billion. My question is, you know, you basically built this really amazing brand in Bombshells.
It took you some tinkering to fix it. You know, can you walk people through, you know, kind of, you know, what you think the unit cadence is, you know, over the kind of the intermediate term and, you know?
Yeah
... what you think that could be? Because, you know, obviously the strip clubs are hard for some people to invest in and, you know, we can agree to disagree on that. I mean, I think it'd be interesting for people to really understand the long-term growth potential of the restaurant opportunity.
Well, the idea is for 2023 to open a store every two months, and by the end of 2023, be to the point where we're actually opening a store every eight weeks, and possibly even every six weeks. That by the end of 2024, going into 2025, if our franchising picks up the way we think it's going to, we're talking with people now. We're getting more and more questions. We're getting more solid interest from qualified people. We've always had the interest. It's just getting qualified people interested. We're seeing that now, so we're talking with them. I would like to see in 2025 us, you know, being able to open 12 or 16 locations a year by 2025 with two separate opening teams.
You get two separate opening teams that could do a unit every six weeks or every eight weeks. Really, you do probably, like, a unit every 14 weeks between the opening teams.
Okay. Let's just do some math for a second. For all the
eight, 10, 12. Maybe we have to have three opening teams. I don't know.
Let's do some math for all the idiots that are shorting the stock after hours because these guys are. I mean, I don't know. Maybe they don't have COVID anymore because COVID's over. Maybe they're doing drugs or Bitcoins or something. This is the back-of-the-envelope math I'm doing. You tell me and the rest of the viewers if I'm on some other stuff. You know, okay, you got six stores in 2023, right? You're talking calendar 2023, correct?
Yes, calendar, yes.
All right. You know, the newer stores are running higher AUVs because you've got the geographies, right? You know, all these new stores, I mean, some of your new stores are doing close to $10 million. But let's say that you know make the math simple and say six stores gets you $40 million of sales fully ramped, you know, and maybe it's more than that. At a 30% operating margin with the real estate income, that's $12 million of EBITDA organic, right? Just from Bombshells, fully funded off of organic, right?
Right.
Then when you think about the following year, if you do, you know, one every six weeks, that's 50% growth. That'd be another $18 million of EBITDA the following year. You think you can grow. Your Bombshells cadence can basically grow 50% every year. $12 million, $18 million
For a couple of years. I don't know if we can do it every year, but for the next two to three, possibly, yes. That's the plan.
Yeah. Okay, what I'm saying is you've got a business that's, you know, 20 million EBITDA that could be 32 million the following year and 50 million the year after that. I mean, this is gonna be a meaningful part of the operation. Now, that precludes, you know, you growing on the nightclub side. I mean, it is your intent, I guess, in the near term to build a $50 million EBITDA business out of Bombshells and I think that's what.
We think that's where Bombshells has to be to be taken seriously. $50 million is to us the magic number. That's when we have the option to decide if Bombshells could be a standalone entity or if Bombshells, you know, continues to fit into RCI the current setup is or you know even looking at you know an acquirer that would be willing to pay us you know the big money for this fast growth restaurant chain. There's a lot of options that open up to us when we hit that number.
We know Hooters is up for sale, and they've got that stupid wings concept, and they're putzing around, and who knows if they're going anywhere. I mean, you know, Hooters is on the down. I mean, could this be 100 locations at seven? I mean, the math I'm doing is if we can get to 100 locations at some point at $7 million a box, right, which isn't that crazy if you think about Buffalo Wild Wings and whatnot, you know, you're talking about $700 million at a 30% operating margin, including real estate. That's $200 million.
I mean, even if you're 6.5, you're close. I mean, you know, if it's 6.5 a box, so you need a couple extra. You need a few extra stores. I mean, yeah, I think that's not an issue. 100 Bombshells. Now that we're looking in Florida, we're looking in Arizona, I don't think 100 locations is difficult at all.
100 locations is a $200 million EBITDA business.
Yeah.
Well, right, 'cause we're doing 20 on 12 or 10, right?
Right.
20-25. If we get to 100, that means it's a $200 million profit business.
Yeah. It's gonna be very significant.
Let me ask you a question.
That's why I said I can't, we can't ignore those points.
Well, you know, the interesting thing is, you know, you look at Bitcoin. Bitcoin went from $0.03 - $1,000, everyone thought it was high, and it went to $50,000, right? I don't know if you've ever studied, you know, Restoration Hardware and what Gary Friedman did. Have you thought about doing, you know, a massive tender offer? I mean, 'cause you're generating so much cash flow now. Have you thought about, you know, maybe, you know, doing like a big share repurchase or something? I mean, because, I mean, look, I don't like to quote Donald Trump, but, you know, he wanted to go to Washington, he wanted to drain the swamp.
I mean, we got a swamp here, and we gotta drain it, 'cause there's all these guys sloshing around. I mean, if we're not gonna get our cost of capital, and we're gonna grow like this, have you thought about doing something more aggressive on the capital allocation front? I mean, this is absolutely insane, this math.
I mean, you know, we were getting prepared. The stock was down in the 60s, you know, down to 67 again. We were prepared to start buying stock again. In the last few days, it ran up over $10 a share. I mean, we're watching it. When it gets into our buy range, we will be buying stock. It just hasn't hit our buy range of 65 because it's not saying that's our. At that point, we're going to buy stock because it just makes sense, even though we have enough cash on hand now again to do the deals that we're working on. The cash we're generating on a weekly basis, we don't need to just continue to build it up.
We have enough in the war chest to do the things we have on our plate right now, at least through May or June. As we develop and get farther into some of the acquisitions, that could change, but that's where we're at today. We're generating cash. You know, our cash balances keep going up. This quarter, I think the second quarter, the cash flow will be a little less. We're gonna pay significant income taxes this quarter where we had a nice credit in the last quarter so we didn't have to pay as much in taxes. Maybe our $18 million cash flow this quarter ends up only being $16 million on the same revenue.
We could also do $2 million more in revenue, $3 million more in revenue and bring it right back up. We're gonna watch as that goes.
It's kind of not your seasonally strongest, which kind of brings me to your second question. You know, if you think about $240 million of sales in the fourth quarter, and then you obviously had pre-opening costs and some other stuff that was burdening the margins, as you said. You know, when I think about this business, I say, okay, you did $72 million of EBITDA effectively annualized in that quarter, right? Now, you didn't have a full quarter from Lowrie. Obviously, you didn't get the synergies. Obviously, you had pre-opening costs. So maybe, you know, you back that out and maybe you get back up to $75 million-$80 million, right? Plus or minus.
When you layer on the next $40 million in sales from the return in New York, Lowrie getting fixed, and you know, kind of, you know, continuing getting to where you want to be in terms of, you know, you're looking at, you know, another, at least, I mean, on the nightclubs, you're getting huge incremental margins, right? You know, Bombshells less, but most of the return on growth is going to be from nightclubs anyway. When you think about the extra $40 million on clubs, right, because Bombshells are basically where they are. They've been running hard the whole way. You say another $40 million, you know, if that's, you know, I don't know, it could be as much as 80% incremental, but let's just be conservative and say 60%. That's another $25 million of EBITDA.
I mean, this business will be, you know, in excess, assuming no additional M&A, we're going to be well in excess of $100 million of EBITDA exiting calendar 2022. I mean, I would think by middle of this year, we're well in excess of $100 million of run rate EBITDA, right? I mean, that's kind of how I'm at it.
On a forward, and we're going to be close to that. I think right now we're looking at probably, you know, I was thinking we were going to be close to 82. I think we got hit for $2 million in this quarter. I think we're going to get hit $2 million January, February, March, or just, well, January really is when we got hit. About $2 million in December, about $2 million in January. You know, call it 60% or 80% incremental margin, so that's like $1 million in EBITDA in each of those. So we're missing about $2 million. We were at 82, so maybe we're at 80, maybe we're at 78. So we're somewhere between 78 and 82 right now on a run rate type basis.
I just really don't know for sure until we can see what March does. We need to see what a real clean month. We shouldn't have much weather effects. We should have, you know, we've got the March Madness going. We've got the, you know, the spring fever type stuff going. That's when we're going to really see, I think, the demand for our product or and for the clubs and just people going out more. The Omicron scare will be over, and, you know, hopefully the whole COVID scare is over, and we can get back to more normalized operations.
Also on the Lowrie front, I mean, you had a huge amount of employee turnover. I mean, there's gonna be a huge jump up on utilizations and turnover.
Oh, I think in December. I mean, I think by March, yes. By March, you know, like our Denver markets are-
Yeah, I'm gonna ask. What I'm saying is.
St. Louis, for sure.
I'm saying, look, by the middle of the year, I don't care about January, February, right? Because you're rolling out Omicron.
By the end of May. I'm thinking by the end of May. I said March, April, May is gonna be huge for us because then that's when we're gonna be able to see. By May, we're gonna know exactly, you know, what I think it's gonna look like for the next 12 months. We're gonna get a really good feel of, okay, hey, look, we're at 80. Oh, no, we're at 110. I mean, we're gonna know that, I think, in the next three months. That's when we're gonna see that come to fruition.
Well, you know me, I'm pretty consistent. I've been pretty good at modeling. I think my guess is by the end of May or early June, you'll be in excess of 100 of EBITDA. That's where I'm at. I think you'll be 100-110.
Well, I've done everything I can do to beat your numbers every time, and even when I thought they were crazy, and we keep doing them. I hope you're right, and I, you know, it's definitely a high possibility or probability that that's where we'll be at, and we're definitely gonna keep working for that.
Okay, let me shift gears. We did Bombshells. We talked about that. That was helpful. We talked about The Bridge on the sales. Okay, can you talk about that $20 million of inorganic M&A? You know, obviously, you know, obviously Lowrie, you know, was kind of a shot across the bow, right? I mean, for those of you that haven't been on this call, you know, you buying Lowrie was basically, I mean, you know, I wouldn't say it was as crazy as, you know, David Tepper buying Jon Corzine's house after Jon Corzine blew up all his money in the Hamptons. I mean, buying Lowrie, I mean, you know, you had a lawsuit with him in 2008. You bought the VCGH stock. I mean, this was really a coup for you.
This is an asset you've been at for 15 years. I mean, you got Lowrie. It's got a great metropolitan market. You're gonna get the 20 EBITDA on that. You know, other large owners obviously see that a sophisticated owner was willing to sell to you. I mean, how do you think about these large multi-club, multi-MSO acquisitions, and how do you think about. You know, because now you're at scale, right? I mean, you know, as you said, the last time you had your hurrah in 2008, where you actually had some equity cap, you know, you were only about 20 of EBITDA. Now you're a far more diversified business geographically. You know, you're at $100 million of EBITDA pro forma for Lowrie.
I mean, how do you think about, you know, taking on, you know, taking on another Lowrie a year, you know, just one big deal or two big deals?
I mean, we'd love to do it. I mean, we're talking with some guys out there that have the ability to bring us not 12 clubs, but you know, four clubs, six clubs, three clubs, you know, deals that we're working on right now. We may have to close you know, two deals to bring in the same type of EBITDA as we did with the Lowrie transaction. But they're out there, and we're working them. There's some pretty decent one-offs that we're working on right now as well that bring in-
Right. Yeah, no, I remember you were working on Boston at the time.
... $2 million, $3 million, $4 million, $5 million in a single acquisition.
Right. Boston was a big club. I mean, that fizzled, but that was a $4 million-$6 million EBITDA deal. I mean, you know, are there-
I think that would've been a very, very big one for us. You know, it was just, you know, COVID just killed that deal is what happened. The owners got desperate, and then they sold the real estate, and we're not interested in the club without the real estate, you know.
You shouldn't be. You think you could do, you know, I mean, look at, I mean, you can do the math on Tootsie's and Scarlett's. I mean, those assets right now, you know, I don't know what Tootsie's is. Tootsie's could be 20 EBITDA. I mean, you know, 25. I mean, those are big, I mean, those are unique assets, right? I don't know if
Could hear.
I mean, could there be another Tootsie's in the United States that's not in Vegas? I mean, are there other clubs out there?
I recently found out a club that's another Scarlett's at least. You know, another Rick's New York that we're talking with the owners on. Gonna go take a look at it, and I was very surprised. I didn't know. You know, the problem with the private clubs, you don't know what their numbers are until you get under NDA, and they actually really give them to you. You get tax returns, and you go through and go, "Wow, you guys are doing that, those kind of numbers." I had no idea.
I mean, yeah.
Those are the things we're finding right now. You know, I'll stay on the call to all the owners out there that might be listening. We're very interested in larger acquisitions. It takes us just as much energy and effort to buy one club as it takes to buy 12 clubs. I mean, our team is-
I’ll send a message to all the club owners themselves, which is, I can personally attest to the fact that Eric Langan is a super talented capital allocator. Any club owner should look at Troy Lowrie and look really hard because the stock’s still trading at a very low multiple. There is gonna be a time, hopefully in the next, you know, two to five years, where we’re gonna trade at a multiple indicative of our ability to allocate capital and grow. You know, look, the reality is that a business of this scale, you know. I mean, look, you know, the guys at Noble put out an interesting report. I mean, there’s 2,200 clubs in the United States. We only own 49, so we’re 2% penetrated. I mean, it’s just math, right?
You know, there are another 98% clubs. You telling me there isn't another Tootsie's out there? There's gotta be. Look-
Yeah.
You know, it's an incredible opportunity. I mean, you know, because of ESG and private equity and this and that, you know, we are the only game in town, and I am convinced that at some point we are going to trade at a multiple instructive of our ability to allocate capital and grow. Look, I encourage you to keep hitting these investor days and getting in front of people and keep doing the great work, and we'll go from there. Oh, like, last thing. Can you talk a little bit about the financial metrics of AdmireMe? I mean, if you get a. I almost forgot about this.
If you have 1,000 people, have you guys done any work on, you know, if the average girl is $10 a month, you know, like, have you thought about kind of penciling the paper? I know you guys get like, you know, some revenue share of the subscriptions, but-
I mean, I think.
Can you kind of give a-
The average girls are you know gonna be a much lower number. I think because of the fact that you can come see the girls, and the girls are gonna be working through the clubs to increase their presence on the internet through the clubs and bring subscribers in. I mean, I think the average girl you know maybe it's $200, maybe it's $2,000. I don't know. If it's $200, and I get 1,000 girls on there, all of a sudden you know I'm doing my $200,000 a month or $2.4 million a year to kick off.
If I can get that done in the first 60-90 days, and that's my ramp up, that's where I'm starting out on my ramp up, and the next thing you know, I have 10,000 girls on there, you know, I think that's. It's gonna be a very, very powerful and significant site for us. Plus, it's going to increase our brick-and-mortar, I think, frequency because, you know, a lot of guys are intimidated. We have a lot of really pretty girls that work for us, and you know, guys get intimidated. But they can find them on the internet. They can chat with them, you know, message back and forth, maybe get a little more comfortable, and then be able to come into the club.
In fact, I was talking with a guy last night. He goes, "Man, I'm really shy." I said, "Well, you want me to go get that girl and talk to, you know, want me to go talk to her for you, have her come over to the table?" "No. Don't bring her over here." I'm like, "Okay." So, you know, he wanted to, you know. He. But, I mean, he says, "If I could get to know her first, I wanna know more about her first." I said, "Well, that's what AdmireMe is all about, is you'll be able to do that." So it kind of gave me a little bit of a, you know, insight to seeing it work, you know.
I think it's gonna work very, very well. We just gotta get it up and get it running, and we're very close. The credit card processing should go to live on the site here in the next week or so. Everything's approved. We're just working out all the APIs and all the security with the security company and all that right now. That should all be up and operating here in the next, say, you know, week to two weeks. Probably we'll do some quick testing of it and do a very soft launch within two weeks of that, I think. By the 10th of March or 15th of March, we'll definitely have basically a beta site running, where we're allowing customers in.
It'll be password protected. It'll be invite only, where the girls we're loading onto the site can invite their customers in. They'll be the first ones on the site. Once that's running smoothly, we'll open it to the general public.
Good stuff, Eric. Keep fighting the good fight, and we appreciate the hard work.
Yep. Thank you, Adam.
Are there any final questions? This is the last chance for questions. Once again, that's star one if you have a question or a comment.
John, this is Gary. We got a couple questions that have been emailed while we're waiting to see whether anybody else has any questions. Eric, what's the significance of the $7 million acquisition of Scarlett's Cabaret Miami property? That's a question from Jonathan Hollander of Chesapeake Advisory.
Sure. That's 8% cap rate based on the rent at the time of closing. The rent goes up by CPI every year, so we just had a 6% increase in January. That would have gone into effect in January. If you just consider a 3% CPI over the next 10 years, it becomes a 10.74% cap rate on what the rents would be. You know, we own the property, so now we control our destiny at that location forever. You know, there was 30 years left on the lease, so we weren't in a real risk. Originally, they wanted $9.5 million for that property. We told them we'll wait, we'll stick with the lease.
Last year, they came down to 8%. This year, they came down to 7%, and we couldn't turn down 7% at, you know, with an 8% cap rate and almost 11% return over the next 10 years on that property. We couldn't turn it down. We had to buy it. We believe the property appraised for about $7.8 million or $7.9 million. So it's worth probably about 10% more than we paid in cash. The main reason we discount so quickly is we literally closed that deal in two days, and then escrowed part of the money till we got, you know, actual title clearance. So it worked out very well. That deal is completely closed now. We have full title insurance and everything else.
It's a significant pickup for us and it, you know, feeds very well into what we pay for the real estate normally.
Great. Thanks. One last one from Antonis Protopapas in his family office. For our high margin service revenue, is there a story behind that pop or just the reopening? What was the driver mostly? Cover charges, executive rooms, et c.
It was mainly New York being back open full-time, and customers coming back in. We saw that through October and November. By, you know, probably the second week of December as Omicron hit New York very hard, especially in our staff, and that we started to see that decline a little bit again through about the second week of January. Since the second week of January, we're now starting to see that revenue back into the club again in New York. Minnesota did very well through November and December. They had a slowdown at the end of December, early January, similar to Texas, where the virus hit those markets. Those markets are now recovering.
We have had some weather issues this first week of February, but I'm very optimistic, you know. We have a bottle reservation system that we use, and I've looked at some of the numbers there. Those numbers are getting better for reservations going through the end of February. I think we're gonna see that service revenue bounce, you know, back and get back on course to where it was through October, November, and actually in March, I think we're gonna see all that exceed. I think service revenues will grow to over 30% of revenues again in a short period of time.
Then, uh-
Especially if Denver comes online. Yeah.
Yeah. We just got another question in, from Steve Martin. Has the competitive landscape changed in New York City post-COVID?
gotten better for us. You know, two major 10,000 sq ft clubs didn't reopen. The executive club on 49th and the Scores on 28th Street did not reopen. That's 20,000 sq ft of adult space that basically went away in New York City. That's probably good because I think you know half of our hedge fund managers and stuff all moved to Florida. Tootsie's is doing very well in New York, New York Smith and a few customers. It's nice when they come back to visit, when they come back to work in the city. They're here for you know typically three to four days, and we're seeing them for two to three days at the club. It's working out very well for us in that regard.
That's what I think we need to see, as the weather gets better and the ice and snow we get past that in the next few weeks. I know the groundhog saw his shadow, so we're supposed to see a little more winter here. I think by March, we're gonna be in great shape.
Great. Thanks, Eric. John, it looks like we have no more questioners, and we're almost hitting an hour, so why don't I wrap up?
Got it.
Thank you, Eric and Bradley. For those of you who joined us late, you can meet management tonight at Rick's Cabaret New York, starting at 6:00 P.M. at 50 West 33rd between Fifth and Broadway. If you have an RSVP, just ask for Eric or me at the door. We'd like to welcome Noble Capital Markets, which is now following RCI, along with Sidoti & Company. We'll be at Noble Small Cap Conference in Hollywood, Florida, April 19-21. On behalf of Eric, Bradley, the company, and our subsidiaries, thank you and good night. Stay safe, stay healthy, and as always, please visit one of our clubs or restaurants.
Thank you.
Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.