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. 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. For those of you listening to this call on the phone, you can find our presentation on the RCI It's posted at the beginning of our conference call presentation that 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 afterwards. Please turn to Slide 3.
I also direct you to the explanation of non GAAP measurements that we use. And now I'm pleased to introduce Eric Langan, President and CEO of RCI Hospitality. Eric?
Thank you for joining us today. I'm here with our CFO, Bradley Hsieh. After the market closed today, we reported our Q1 results for the period ended December 31. The company and nightclubs generated their best performance since the pandemic began. We also continue to produce strong Bombshells results.
This enabled us to keep our teams employed, generate free cash flow, build cash and achieve operating and net profitability on a GAAP and non GAAP basis. Once again, we thank our loyal customers, dedicated team members and steadfast investors. Looking ahead, we are continuing to work on all fronts to grow free cash flow. Beginning with our Nightclub segment, we are evaluating a number of potential acquisitions and looking for that right fit. With Bombshells, we recently acquired a great site in the Dallas area and are conducting due diligence on 3 more locations.
We are also closely collaborating with our initial franchisee on their first location in San Antonio and talking to additional parties in search of potential franchisees We are awaiting results of appraisals as part of our effort to refinance the majority of our debt into a long term real estate backed loan Our outlook is more positive than on our last call. State and local governments seem to be a little more comfortable with letting people go back to restaurants. The holiday COVID wave is subsiding and vaccinations are increasing. We are happy to have opened our Chicago and other Illinois clubs this past weekend and are excited about reopening New York City on 12th. While there are occupancy and time restrictions at many locations, it is nice to have our teams back to work.
And here's Bradley to review the financials, and then I'll return to wrap up with a question and answer session.
Thanks, Eric, and good afternoon to those who tuned in on the call. We reported total revenues of $38,400,000 for the 1st fiscal That is up 33% sequentially from the prior quarter. GAAP EPS was 1 $0.07 and non GAAP EPS was 0.39 dollars The difference came from a gain on debt extinguishment and reversal of prior quarter's tax allowance. Weighted average shares outstanding went down 3% year over year. Looking at cash, we had $70,000,000 at December 31.
1st quarter net cash from operating activities was $6,300,000 And free cash flow was $5,700,000 Please turn to Page 5. The Nightclub segment continued to rebound sequentially with More locations open on a more consistent basis. Revenues totaled $25,200,000 That's down from a year ago, but More importantly, it is up 92% from the prior quarter. 24 clubs were opened through the Q1 and 26 by quarter end. To give you guys some color, Our biggest two clubs, which are in the South Florida market, were opened the entire quarter for the first time since the pandemic started.
Keep in mind, however, We still have clubs that are not operating at full capacity or normal operating hours. Even so, clubs that are open are doing well in this environment. On a year over year basis, same store sales were only off by 6.4%. As a result of all this, operating margin was at 33.7% And operating income totaled $8,500,000 Bombshell segment. Please turn to Page 6.
The Bombshell segment turned in another strong performance, and that's without the prior quarter's benefit of a strong sports lineup and warmer weather. Total sales of $13,000,000 were up 26% year over year and 12% on a same store sales basis. All ten locations We're open during the quarter and continue to be open today. To give you some color, all 10 performed well, in particular, our newer locations. Meal delivery services also added $380,000 in sales.
Operating margin was in line with expectations at 20.9%. As a result, operating profit totaled $2,700,000 up 73% year over year. Margin and income benefited from a higher level of sales and more consistent traffic throughout the day as we continue to follow indoor restrictions. We believe that we have built a lot of momentum in the business, and we expect Bombshells will continue to be a strong performer for us, particularly now as the weather starts to get warmer. Please turn to Page 7 for a review of the few remaining items in our Q1 statement of operations.
Cost of goods sold as a percentage of revenues stayed in the 16% of revenue range compared to the 14% range last year. This was due to the change in sales mix, mainly more food and less service revenues. Salaries and wages were 29.9% of revenues compared to 27.3%. This reflected the impact of fixed salaries compared to lower sales. SG and A as a percentage of revenues at 31 point and also lower variable expenses, partially offset by fixed costs.
In the Nightclubs and Bombshell segments, we've Reduced advertising and marketing spend about $1,200,000 In the Corporate segment, we reduced audit and related legal fees about $800,000 Depreciation and amortization were 5.3 percent of revenues compared to 4.6% due to lower revenues. Interest expense was down 2.1% due to debt pay down prior to and during the Q1. There was a non operating gain of $4,900,000 pretax from debt extinguishment. This reflected the forgiveness of 10 of our 12 SBA loans during the quarter as was discussed on the last call. There was also a tax benefit of $384,000 This was caused primarily by the reversal of the tax valuation allowance in Q4 2020 and the impact of the loan forgiveness.
Please turn to Page 8. We ended the quarter with $17,000,000 of cash on hand, a 2 year high. During the Q1, free cash flow continued to rebound sequentially to $5,700,000 We have continued to stay free cash flow positive Since the pandemic began, as a percentage of revenues, free cash flow also improved sequentially from 12% to 14.8%. We use our free cash flow of revenue as a measure of how well we are doing converting revenue dollars to cash. Our debt declined $6,600,000 from our September 30 year end due to debt extinguishment and scheduled We are now at our lowest debt level in almost 2 years.
We continue to be current on all of our debt. Current liabilities are also in good shape. At $34,000,000 they are down about $3,000,000 from September 30 and only up about $600,000 from a year ago. Please turn to Page 9 for our debt pie chart. We saw decreases in all categories Since September 30, secured debt now consists of the 63.4% of debt secured by real estate, The 18.5% listed as seller financing that is secured by the respective clubs to which it applies the 6.2% secured by other assets and finally, the 1.4% represented by the Texas Comptroller settlement.
This is secured by business and assets of clubs related to the settlement. Now moving on to our unsecured debt and what that consists of. The 10.1% that is listed as unsecured, The 0.4% represented by our 2 remaining SBA loans as of December 31. Last week, Another one of these loans totaling $378,000 was also forgiven. Please turn to Page 10 to review our debt manageability.
As we reported on our last call, we moved and partially paid down a small non realty balloon during the In the Q2, we added about $2,170,000 in real estate bank debt, and Eric can elaborate more on that in a little bit. Now let me turn the call back over to Eric. Thank you.
All right. Thanks, Bradley. Turning to Slide 11. Last fall, we announced plans for Bombshells, the next 10. Our efforts to double the number of company owned locations over the next 3 years.
We believe the pandemic has created a unique and compelling opportunity, and we have proved the viability of the concept. Bombshells can easily self fund new units. We can access prime locations not previously available and in some cases, we can buy or lease them at significantly lower prices. We are pleased to announce we have acquired a great site at a great price in Arlington, Texas. Arlington is a suburb of Dallas that is the home to AT and T Stadium and the Dallas Cowboys And just blocks from the Texas Rangers also.
We paid $2,900,000 of which $726,000 in cash And a $2,175,000 bank debt at 3.99 percent fixed for 5 years with a 20 year amortization. This is the best rate on debt we have ever received. We also are conducting due diligence on 3 other sites, 1 in Texas and 2 in South Florida. In addition, we are actively working on Bombshells, the franchise. In late December, we announced our first franchisee, A well established local private group that includes franchise restaurants and their holdings.
Terms call for their opening of 3 locations in San Antonio and an option to open 3 more outside of the city. We are collaborating with them to ensure the success of their first location. News that we have signed our 1st franchisee has generated a lot of new leads. Many appear to be well qualified and we are in the process of filling these inquiries. Please turn to Page 12.
We have continued to talk to a lot of new investors. So I'd like to review our capital allocation strategy. Our goal is to drive shareholder value by increasing free cash flow per share at 10% to 15% On a compounded annual basis, our strategy is similar to those outlined in the book, The Outsiders. The author, William Thorndyke, studied companies The focus on generating cash flow per share and allocating that cash to generate more cash. We have been applying these strategies since fiscal 2016 With 3 different actions subject, of course, to whether there is other strategic rationale.
The first is mergers and acquisitions, Specifically, buying the right clubs in the right markets. We look to buy good solid cash flowing clubs at 3 to 4 times adjusted EBITDA Using seller financing when acquiring the real estate at market value, our goal is to generate annual cash on cash returns of at least 25% to 33%. Since we can't always buy clubs when we want, our second strategy is using cash to grow organically, Specifically, expanding Bombshells to develop critical mass and market awareness to sell franchises. Similar to acquiring gloves, we seek to Earn at least 25% to 33% cash on cash returns. The third is buying back shares, when the yield on our free cash flow per share is more than 10%.
During the pandemic, our plan is to acquire shares using the same formula, but only if cash on hand exceeds approximately $16,000,000 to provide us with significant reserves. That's $2,000,000 left when we said on our last call, but we are also much more comfortable with our current locations open. Under our buyback strategy, during the Q1, we purchased about 75,000 shares of our common stock at an average price of $24.03 For a total of about $1,800,000 Please turn to Page 13. To sum up our accomplishments to date, our business is recovering. We have continued to achieve sequential rebound in Nightclubs, produced strong year over year performance with Bombshells and generating a growing amount of cash, And we are increasingly optimistic as more clubs are reopening.
We are also executing on our capital allocation strategy on all fronts. We are planning discussions with a lot of club owners at our expo in May. We are developing the first of our new 10 of our next 10 Bombshells with more on the way and Bombshells is increasingly being recognized as a sports Restaurant our Sports Bar Restaurant Franchise Concept. I'd also like to let everybody know that I am very, very Proud and excited for our teams, especially our operations teams. Nightclubs did an unbelievable job in this quarter.
Thanks to Ed Anacar and Dean Reardon and all of our regional managers really stepping up, getting locations open And capitalizing on every opportunity to increase our business when we can and to control our costs. And I'd really like to say thanks to all of them for I know a lot of extra effort went into making all that happen. And with that, let's open the call to questions. Operator?
Thank you. Ladies and gentlemen, at this time, we'll be conducting a question and answer session. Our first question comes from the line of Greg Pendy with Sidoti. Please proceed with your question.
Hey,
Just on New York reopening on 12th, any is that all three locations in New York? And then Are there any restrictions that are notable that you're aware of that we should be thinking about just in terms of how much we can ramp up from the reopening?
Yes. We're opening with the same restrictions we opened with last time. Of course, last time, we're holding it for about 3 or 4 weeks. Hopefully, this time with the current track record and that will stay open. Still have to close it by midnight.
So we won't see full operations. I mean to give you an idea around the country, we have some places where we have occupancy restrictions, but we don't have our restrictions. Some places have our restrictions, but Not so much occupancy restrictions, that's just social distancing restrictions, some have both. I believe we're starting to see some of those restrictions lessen. I think we'll continue to see that as we get through March, April, and I'm hoping that by the end of May that the majority of the restrictions should be lifted.
It's hard to tell obviously because it's very political still and different politicians in different states have different People advising them on when to open and how to open and whatnot. And unfortunately, there's no straightforward science So everybody I think everybody just kinds of guessing and we will we just have to deal with that.
Got it. And then, last earnings call, When you mentioned the refinancing, I believe you put out maybe a $5,000,000 run rate once it took place. Rates have moved up a little. So maybe should we be thinking a little bit lower than that? Or are you guys still kind of comfortable with that number?
I mean, I think we're probably between 5% and 5.5%. We haven't locked yet, because we don't have appraisal. So we don't have the full packages To present to their Board yet, I'm guessing, I think the appraisal are due back by 12th or 16th, I can't remember. I can't remember off the top of my head here, but basically by the middle of February, we'll have all the appraisals in. They've been waiting for our queue.
They had to have this quarter's financials to show that we're getting better and better each quarter, Which of course we have, so that won't be an issue. So I believe that all things right now, we're probably looking at a Closing on the loan between mid May and the end of I mean, mid March and the end of March. And so therefore, we're just going to see what rates are doing at that time.
Okay, got it. And then I guess pre COVID, your expenses, SG and A, We're bracing, I believe, for some legal and audit expenses to roll off. But I guess throughout the pandemic, you did a good job rationalizing your expenses The lower revenue run rate, is there anything you think that could stick as we try and think like what is the normalized, sort of SG and A Run rate, can it be a little bit better than pre COVID or should we be thinking back to those levels?
I think we're going to be better than pre COVID. We're definitely not going to pick up all of the legal and accounting expenses that we had prior. I think that a lot of other things, we've really gotten big on negotiating national Contracts and lowering costs every way we can. We've cut marketing. I think our marketing was down about 1,200,000.
Basically, we've eliminated billboards, we've eliminated radio advertising and really moved more towards social media. I think that trend will continue with us, and I think that will help keep our costs down, at least for a while. I mean, at some point, As competition opens and continues and new places coming start reopening again, We will have to evaluate as we go. But for the time being, at least, I think the next 12 to 18 months, I think we're going to be in a very great location, very great spot. And hopefully, we can keep that between the 30% 32%, This is where I think it's at the low end of over the last few years.
Great.
And then just one final one. You put out the bar for 10 new Bombshell locations in 36 months, if you can find the right location. And then you gave us a little bit color on the Dallas site. What is your hurdle rate? I know you guys look at real estate pretty closely.
We're under I'm under the assumption that there's a lot of Places that might be attractively priced, but is location making it a little bit scarce out there? Kind of what are you seeing in the environment as you kind of Look at the real estate for these 10 locations.
What we're seeing is the Prime A locations that we are wanting aren't for sale, they're for lease, Especially in the Florida market. In Florida, we are working on one lease now. We've just turned in an LOI on another property. They've accepted the concept. We're waiting for them now To counter our offer, so hopefully that one may move a little quicker.
And then we have the other property, We're waiting the developer bought 33.8 acres. We're buying 2 acres out of that site and we're just waiting for them to replat the land right now. That should be completed hopefully in the next 3 or 4 weeks and we'll we've already got the bank financing lined up for that property. So we will get that property closed, get our plans turned into the city, get our billing permits and get started on that one as well. So basically, we'll have right now with what we're looking at, 2 leased locations and 3 owned locations where we'll own the property.
The other property in Dallas, we have Variance hearing coming up in the next couple of weeks. In Florida, we have a variance hearing in March. So everything is moving forward. At average, it will get quicker as we start getting building permits and building plans. We'll start having a better idea of opening dates.
Unfortunately, we can't control that process right now, especially with COVID in these cities and how quickly they move to get our building permits issued. But once these building permits are issued, then it becomes more in our control through our general contractor to get everything moving pretty quickly.
Great. That's very helpful. Thanks a lot, guys. Yes.
Our next question comes from the line of Adam Wyden with ADW Capital. Please proceed with your question.
Hey, guys. Can you hear me?
Yes, sir. How are you?
I'm doing well. I'm enjoying sunny Florida. It's the weather is beautiful, and I've been fortunate enough to drive by Tootsies and Scarlet's and it looks like standing room only. And clearly, getting New York back open It's critical, although I never really underwrote that. But I wanted to kind of build on Greg's question.
He was a little coy, but When we talk about kind of where you were on free cash flow, right, coming out of 20, call it calendar 2019 or 1st Q 2020 pre COVID, you guys were running, call it, dollars 60,000,000 of EBITDA and call it $40,000,000 of free cash, right? And Bombshells was not doing whatever it was doing. I haven't looked at it, 21% operating margin on Gene, I know you did 30, and I don't know if you're allocating corporate against that. But I mean, when I just kind of do back of the envelope math, and Bombshells got hit a little bit this quarter, I think, because of closures and all the rest off and on. But when I kind of think about the business now, I say, okay, Bombshells, Without the franchises, without the new locations, which you'll have, I think you'll do about $60,000,000 of sales and 30% margin.
That's 18 of EBITDA that didn't exist before in the old paradigm. So if I just kind of take the 60 you were doing before, add 5 For kind of the legal and accounting, all the garbage from the SEC that isn't being duplicated and maybe you give yourself credit for the marketing and the billboards, but I don't think that even does that. So I get to like a number that looks more like 65 plus 18 is 83. And then when I kind of do a 10% stack And I mean, when you look at Australia and what they're doing in terms of restaurants, if you do, call it, 100 and 50 of sales in the nightclubs, You have a 10% stack comp. I think I'm doing the math roughly.
That's another $15,000,000 in sales and that's all to the bottom line. I mean, that's 90% margin. So you're looking at a business that's doing close to $100 of EBITDA. And when you adjust for the refinance, I don't have my model open, but I think my back of the envelope math is that's like about $8 a share of free cash, about $70,000,000 right, because you've got the depreciation shield, you've got the corporate tax rate, All the rest. And so I guess my question to you is like, am I doing my math wrong?
I mean, is it conceivable that you're doing $100,000,000 of EBITDA and call it 60, 70 of free cash. And more importantly, right, like that does not give yourself credit for the allocation of the capital, right? And That's the second part of the stool or third part of the stool, right? You are franchising new Bombshells. You are opening up new Bombshells.
You are going to you are buying more nightclubs. I mean, Conceivably in 2022, if you guys get 100 on organic and you guys buy in another 25 EBITDA, this could easily be a business that Is, call it, 125, 150 of EBITDA. And I mean, look, that to me is a real public company. I mean, it feels like we're on the precipice of being a real public company. And do the math, 150 of EBITDA, all your debt is property level debt.
I mean, if you I mean, I look at Del Frisco's and all these other look at Chipotle, 40 times EBITDA. I If you even trade at a modest multiple of 10 times, that's $1,500,000,000 company. I mean, Several multiples of where we're trading and that's on 2022 numbers. I mean, what am I missing? I mean, why are people shorting the stock here?
I know you've had a run, but I mean, look, at the end of the day, you can't anchor to stock price, you got to anchor to numbers. I mean, am I doing my math wrong? I mean, are we about to become a multibillion dollar company?
I mean, I think we're on the cusp of that ledge there, so to speak. We are I think as we open everything up and we're fully open and we have no restrictions, which I'm hoping to see Hopefully, June or July 1, we get July, August, September, maybe our first real quarter Everything open, everything and being able to operate, what I call pre COVID normal, maybe we'll still have masks on, but I think We'll at least be over 25% 50% occupancies. We will be open till 4 in the morning like we're supposed to be or 6 in the morning like we're supposed to be. We'll do the things that we do. I mean, I think we're probably on a Run rate of $50,000,000 to $55,000,000 a quarter should be $200,000,000 $220,000,000 in revenues.
So you can do the math on the margins from there, which is basically what you've done. If you're ahead of us, you're not far ahead of us. And if we see the increase in other locations like we are seeing in Texas, Like we're seeing in Florida right now, you might be being conservative. It's just really it's hard to know for sure. Yes, I'm as optimistic as you are, if that's what you're asking me.
Well, I look at The Street number in Bloomberg, and I get it, there's 1 analyst here. But why is there only 1 analyst? Why if this thing is a $100,000,000 EBITDA company, why don't we have Dana Telsey from Telsey Advisory Group? Why don't we have Who's who have consumers? I mean, people say nightclubs and no one wants
Because we're not looking to raise money, Adam. They don't want to do our we're not giving banking business, they don't want Report is on us.
Well, that's fine and I appreciate that. We shouldn't raise any money. I mean, a $46 a share or whatever it is, we shouldn't be raising money, especially if we're going to do $8 a share of free cash We should be buying back shares. I mean, the irony is that And we have been. Yes, this is $160 stock.
So I guess my question to you is like Here you are sweating in the desert, delivering God's work and people are spinning in your face and you got 600,000 shares short, Right. Like how do you see us converging to the right cost of capital? Because when I see us at the right cost of capital and we're trading at a yield Substantially lower than what we're buying, then the flywheel accelerates. I mean, there are big assets out there. I mean, everybody who follows this industry knows that Tony Lowery at VCGH, he went he took and did it private in 'eight.
There's another guy I found out about in Canada, who's huge. There's another guy that we've talked about in Minnesota. I mean, there are some big players out there and the reality is, is that private equity isn't buying them and you have the right cost of capital on a base of 150. Let's say you get to 100, 100 and 50 of EBITDA, right, and you're trading at the right multiple, I mean, you can be buying companies That are doing 20, 30, 40, 50 of EBITDA and then this becomes a real company. I mean, I see a path to 100 of 1,000,000 of dollars of EBITDA.
I think the only thing that is getting in our way right now is cost of capital. And I'm just curious how you're thinking about that.
I mean, I think we're on the verge of where the casinos We're in the final phase, right? I call it the acceptance phase. We're pushing into that phase right now, but we're still at the very beginning of it. If you look at what do they say, the first 10% takes the longest time, then the next 40% happens in about half of that time. And then that last 50% happens overnight.
So right now, we're on the verge of, I think, Reach right towards the end of that 10% and hope we go from 10% to that 50% acceptance level much, much quicker. Well, we just got to keep performing. We just got to keep performing. Adam, that's the name of the game. We got to keep performing.
We got to keep putting out these numbers. We got to keep generating some of the cash because No matter what, at the end of the day, no matter what everybody thinks or what everybody says about the business or the company, The cash can't be denied. And if we're generating that type of cash and we're putting that cash back to work at 25% to 33% returns, Then our 10% to 15% annual growth rate is going to be dwarfed, right? We're just going to slaughter
it as we move forward.
If you look at your You're doing much better on an ROIC basis than 25 to 30. I mean, look, if you just start doing good Bombshells at leased locations, Your return on invested capital is 60%. And remember, if you do a franchise bombshell, you're not out of any capital, that's infinite return on invested So when I look at your metrics
I agree, that's why we've moved in those directions.
Yes. No, when I look at the metrics of your kind of Incremental capital opportunities are fucking incredible. So I mean, look, I am so excited about what you have built. You should really be proud and I'm not Patty you on the back and you shouldn't be patting on your back, but it's just it feels like the performance is so good, it shouldn't be ignored anymore. So look, I am happy to be the largest I think you are building a multibillion dollar company.
And look, I really look forward To seeing the growth and look, obviously, you don't want to go out and raise capital and we live that and we're not going to do that again. But I would say, on the margin, I think more exposure through additional research analysts and all the rest. I mean, look, I think This is an opportunity that is still very much misunderstood by the public markets. And I will say that the sooner you get your cost of capital in line, the sooner we start Enjoying the vicious cycle that is the public capital markets. I mean, the only reason why a company like this would be public is to have access to capital and you've never had access So I look, call me a blind optimist, but I believe that if you turn over enough rocks and you get in front of the right sell side guys and buy side guys, You will get that cost of capital and this will not just be a $1,000,000,000 company, it will be a multi $1,000,000,000 company.
From your mouth to God's ears, I hope so. We're pushing for it. We just got our cheapest loan ever at 3.99%. Once we get our appraisals back, we'll close this loan with Centennial on our refi, which will Free up $4,900,000 in cash, saving us over $1,800,000 in interest expense a year. I mean, That's just bigger, bigger than when we did it when we did our $80,000,000 loan and had the savings in 2017 that really started this run.
It's just everything is coming together. Everything just reinforces the previous move and then the next move. And so It's actually getting easier and easier to make the maneuvers we need to make, to find the properties we need, Close the transactions. We've got our prototype store down. So there's they're getting easier to build and cheaper to build for us.
And I think as we continue to move forward, the returns are going to be better and better.
Great. Well, look, You know, I'm very, very pleased with the performance and I look forward to fighting the good fight.
Eric, this is Gary. I received a question via email. Somebody was asking Among people that have franchise multiunit franchise operators, what parts of the country Are they interested in it? Is it the southern area or is it all over?
I mean, we've talked to people from all over The country right now is just finding the right qualified people is our biggest concern right now. So I mean, we're not it hasn't been very it's been geographically, it's been very scattered as to where people are calling about.
Our next question comes from the line of Peter Cyrus, a private investor. Please proceed with your question.
Hey, Eric. How are you?
Hey, pretty good. Come a long way since the first day I met you in your office and got yelled out for 3 hours for being 30 minutes late. I've never been late to a Friday appointment since in New York City, I'll tell you that.
And I and with all the soccer girls around the new club, the that's So funny. I wanted to ask and I'd just say I'm glad the stock is over 160. Thank you, Adam. I wanted to ask about the club business. With all the clubs that have been closed for such a long period of time, Are you seeing really motivated sellers at lower prices than you've seen before or not?
Not really. The big guys are surviving In their way, they know what their business is worth. They know what their license is worth. A lot of the big guys own their real estate, so they're not in those situations. We have seen We have gotten calls from, I would call, small to midsized clubs where they're very behind on their rent and their landlord is trying to throw them out, stuff like that.
And we've been talking with them and Trying to figure out if something makes sense. But we're looking for right now, I mean, we're still being a little picky. We are playing for the fences. We want to do the big type acquisitions like, regardless in Miami, Rick's in Chicago, Rick's in Pittsburgh, the Boston type transactions, those are the transactions we're looking for. Those are the clubs we love.
Those are the clubs we know just I call them ATM machines. All we do is plug them in and just collect our cash. So, those
are the kinds we're looking for.
Okay. So it's not the small places That you could pick up on the cheap. It's the big places that start to generate cash quickly.
Those are the ones we're looking for. And the owners that are just tired of it, right? You're tired of the hassle, you're tired of the Calls at 3 o'clock in the morning, you're tired of, those type of things. Those owners are 60, 70 years old. The problem is they love the cash flow.
They're not so much in love with the business anymore. And those are the transactions we're looking for. And we're trying to convince them that if they take paper, they basically create an annuity for themselves. They can collect payments from us for 5 years, 10 years, 20 years. We can structure a deal however they want.
They can defer their taxes. They can there's just a lot of options that we offer them as a publicly traded company. What's crazy is we're starting to get a lot of requests for equity. Hey, let's do a stock for stock deal. Give me some stock And take my club because stock or stock deals aren't taxable, they can sell the stock and Yes, but I'm just not comfortable even at $46, $48 I think the stock is still cheap.
I just don't see with what we're seeing in our numbers with what is open, I mean, without getting too much detail, but I mean, Tushy's is incredible right now, 50% occupancies and killing numbers from previous years. It's like how do you and Scarlet, I mean, Scarlet in Miami, oh my God, I can't even have 70% year over year numbers. With 50% occupancy, give me let me open it up and pack it out again and let me see what I can do.
And that's why
I said, when Adam starts talking about, hey, you're going to do this or you're going to do that, it's not crazy if New York opens to those type of screens. Chicago is opening as we the problem is we don't know in Chicago, we don't know in New York because we're not open at night. We're only we're closing at 10 o'clock, we're closing at 11 We're closing at 12 at night. When we're open our normal hours, I think those clubs are going to do unbelievable numbers.
One second, I want to
go back to what Adam was talking about cost of capital. Are you ruling out an acquisition That would include some equity?
We're not ruling it out. No. We're definitely not ruling that out. What we would value that what we would value our paper at in that acquisition would have to be negotiated. Okay.
So in other words, if you took paper and you're going to roll your club in or whatever and you said, look, I know your stock is trading for $46 a day, but I'll give you some of the upside because I'm going to roll in an acquisition. I'll take stock at $54 a share or $56 And we'll just have to price the whole deal in. I don't know what the number is at this point, because we're not that far along on any of these transactions yet. But there will be And we are getting people are asking for equity now. So we will look at it.
We will consider it. But it's just it's got to make sense. We're not going to not going to make the mistakes of 2,008. We're not going to make those mistakes again. We're going to make sure that everything will have leak up, lock up And leak out agreement will have, I mean, if we give up equity, it's going to be a very tight controlled way that they're going to orderly put that stock The market at some day in the future, because for us, it's about long term shareholder value, and we're not going to do anything that would possibly jeopardize that.
Great. Well, thanks and congratulations for managing through this pandemic the way you have.
Thank you. Our team has been unbelievable. I really appreciate them all. You've been great.
Our next question comes from the line of Alex Hartman, a Private Investor. Please proceed with your question. Hey, Eric. This is Alex.
I had a few quick two questions around the capital allocation strategy. 1, I mean, First off, I mean, it's been a while since I've ever had to think about this, but I mean, finally that the stock price is up there and above your free cash flow 10% level. I was wondering on the bottom side, I mean, have you guys looked at possibly you pretty much are assuming a 10% to 15% growth rate. Have you thought about bumping that threshold up to like a assuming a 5% growth rate over 5 years as your Threshold for buybacks instead of just using current free cash flow. And then on the top side, do you guys have like a hard and fast like we're definitely not going to do equity deals Below a certain threshold, maybe like the cost of after tax debt or something like that?
For sure. I mean, if we can brought I mean, we just brought money at 3.99%. Our cash flow yield on our equity is nowhere near 3.99 percent yet. So I mean, we're not we definitely have cheaper capital than equity at this point. Even with the big loan, if it's 5%, 5.5%, the after tax yield on that is still pretty low.
The stock would have to be Another $20 higher to even be anywhere near that. And that's kind of basing 2019 numbers, I think going into we're going to get through 2021, but I think we're going to exit 2021 At a much, much higher free cash flow run rate than we were in 2019. That's a definite. We have more Bombshells open. I think the clubs are going to be performing better and the Bombshells are performing better.
A lot of places are not reopening. I mean, it's sad, but COVID put a lot of businesses out. We also have the benefit of the tax deductibility of meals and entertainment now at 100%. So that's going to make a big difference in spending as we go forward for the next 2 years. There's just a lot of pluses That make me say, I'm going to hold this equity really, really close to the best, not in a hurry to go out and I mean, I've had 2 investment bankers have already called me trying to get me to do converts at $60 trying to get me to, hey, would I sell equity At an 8% discount to the current price, market price, no, I won't.
It's not going to happen.
Yes, definitely not do that again.
I'd say we've been there, done that, got the bloody T shirt. We're going Continue with the plan. It's been working very, very well for 5 years for us. Are we excited about stock price share? We get excited like everybody else.
But I always tell my friends, because I get friends that come, well, man, you made so much money, you made so much money. I said, hey, it's monopoly money, okay? I can't do anything with it. It just looks good stacked up under my side of the board. It's really kind of an afterthought to the business.
We really are focused on the business side of things. We're focused on generating more and more Free cash flow every year and doing the right deals, just finding the right deals, doing the right deals. We're not in a hurry for them. If we had 10 of them tomorrow and they were all right, yes, we would do 10 deals tomorrow. If we don't find a deal in the next 6 months, that's right, we won't do a deal in the next 6 months.
I mean, that's just the reality of it. We're not starved for deals, but we're not scared of them either. If the right stuff comes along, we're going to make moves And there is stuff coming off. I mean, there's we're kicking a lot of tires right now, looking through a lot of windows. And I'm seeing a lot of stuff that I like.
Now we're so yes, at the used car lot, we're digging under the hood, right. We're doing the inspections. We're checking things out and we're going to I think we're going to start having quite a few possibilities as we progress through the next few months. It's going to be a very exciting summer for us.
Sounds good. I mean,
I'm looking forward to it.
Me too. Thanks, Alex.
Our next question is a follow-up question from the line of Greg Pendy with Sidoti.
Just flipping on to Slide 5, can you just give us a little bit of color on just the Margins at the Nightclub segment, how you got them kind of at 33.7%, it looks like a pretty big jump. And then also, should that come down In 2Q, given the New York re openings at reduced capacity, will that actually weigh on it, albeit it will be positive for the top line? Thanks.
Well, I'll say one thing, it won't weigh on anything because remember, we're paying all the expenses now. We've kept our general managers on payroll through all of this. Other key personnel in certain locations we've kept on payroll, Continue to pay them, some of them since March of last year. We have paid our rents. We have paid our property taxes, our insurance, our electric bills and gas bills and water bills.
So when a location reopens, I don't believe I have to have Bradley verify for me, but I don't believe we've had locations that have opened That we've kept open for more than 3 weeks if they're not generating more cash than they were costing closed. So basically, everything that opens everything that's closed is an anchor and as soon as it opens, it's wind in the sails. So it's all a plus. I think that's what's helped keep the margin so high and just keeping our costs down. I mean, our guys are watching costs Right.
They've never watched costs before, and they've always watched costs very well. But we're questioning Every dollar spent through this COVID process. We were forced to. And the beauty is it was a it Teach you a really, really good lesson in that when you have to struggle and scrutinize everything as the cash flow starts coming back Once you've created that habit, it's a hard habit to break. So we keep questioning if this bill goes up or that bill goes up or this item, they're Charging us more for why?
Why are you raising our prices? Why are you doing these things? Everything is questioned now. And I think that's just going to be part of our internal culture at this point. So I don't think it'll I don't think we'll get a lot of creep.
Obviously, As things get better and better, every business has a creep, but if it's one point, it's one thing. But I don't think you're going to see that I think you're going to see us back in those high numbers, I mean, of cost. We're going to keep those down. And every time something else opens, I think we're just going to do better At this point. Got it.
And then just any color, how is attendance looking for the expo?
I don't know yet. I haven't talked to Don, who is the President of ED Publications And manages the expo and runs everything. I haven't talked to him about I know It was not looking good for the Vegas, which is why we ended up canceling and moving it to Miami in May. And so we've I've talked to club owners, so I know a lot of guys are coming. I don't know what kind of I don't know if they're going to come themselves, if they're going to bring a bunch of people with them.
That I just don't know yet. We'll probably won't have more color on that. It will be I think this year most people plan Expo. I think this year everybody's going to do it last minute. I think everybody's in wait and see mode.
Okay, what's it going to be like? How is COVID going to be affecting it? What are the numbers look like? Am I going to be vaccinated by then? Those types of things are going to have a lot of effect on expo turnout.
But I do have several meetings In May, with some groups that I've been looking to talk to. So and we've all agreed that we'll meet at Expo in May. So That'll be I know those people will be there. So I think we're going to get about an average or above average turnout. It's what I think will happen.
Got it. Thanks.
Our next question is a follow-up question from the line of Adam Wyden with
From your guy, Alex Hardman, I mean, I think the guy has got COVID or he's got on hallucinogens because I don't know what math he's doing to Have a free cash flow yield lower than 10%. I just bridge you to $8 a share of free cash flow. That doesn't include any new Bombshells openings Or any incremental M and A. I think it's highly likely that your free cash flow is higher than $8 a share. And last time I checked, the stock was $46 less.
If I open up my TI-eighty three and I do 8 divided by 46, it's about 17% free cash flow yield. So I don't know what he's smoking. Look, I think what you said, which was right, is that there's a high probability that, that number is actually higher than that because What will happen is that everybody will come out of their house and you're seeing what Tootsies and all these guys are doing with 50% occupancy. I mean, how do we know that EBITDA is not 150,000,000 Organically, because all these things are topping up 60%. And remember, you have 100% incremental margin on the night club, once you get over fixed costs, because remember, you can just take the cover fee from $50 to $100 And discharge and make people do $2,000 minimums in New York.
I mean, remember, I mean, I think we talked about it. I mean, Remember what they even freaking made a movie about it with J. Lo in 2007, pre Lehman Brothers. I mean, there were strippers in New York making $1,000,000 a year. I mean, look, they made a freaking movie about this.
I mean, I believe that when we get out of this thing, you're going to see With capacity restraints taken down, you're going to have you can see the whole my $100,000,000 of EBITDA is predicated on a 10% stack comp. What if it's 50? What if it's 100? I mean, the problem with this is you got people idiots on the conference call basically saying you're trading At lower than a 10% free cash flow yield. I mean, I literally want to hang up the phone and jump out my window.
He's just looking at 2019. I mean, You're not looking at 2019. I think he's just looking at 2019. He's looking trailing. We're looking forward.
And I think we got
to Last time I checked the stock market is the stock market looks forward. Remember, you had Bombshells making no profit, Okay. We know that Bombshells are making a ton of profit. Guess what, share count is lower, interest expense is lower, G and A and marketing is lower. You don't have the SEC.
You don't have the accounting. I mean, how do you I mean, it's like saying Google made $1 a share 2 years ago and now it's making 10. You want to do the dollar share? You want to do 10. I mean, it's literally, I don't want to hang up the phone, I'm so angry.
Maybe that's the opportunity and maybe that's why the stock is still trading at 47, but I think the better answer is We need to get people to actually peel back the onion and do math. I mean, I went to Wharton and Columbia Business School, but this is 5th grade math. Okay. You don't have to go to more than Columbia Business School to do the math, right? You have fixed costs, you own the real estate, you have really, really high incrementals on the nightclubs, right?
Franchises are 100% margin, right? Like it's not rocket
We just got to keep getting everything open, Keep doing it, keep showing it, and we're going to get there. Each quarter seems to be getting better and better. I don't think this quarter is going to be any different. I think January, February, March is going to be better than October, November, December. For the first time in I think Look, I can only go back 7 years when I went and looked and I didn't find one single January that ever beat December.
This was the first time ever that a January beat December. Our total revenues in January are higher than our total revenues in December.
It's not a logical, Eric. I mean the reality is
I know, I understand. As we get more things open, more people are getting comfortable And the spend is going up. That's what we're really seeing. But if you look, our service revenues are still down 40%. So when those service revenues come back, that's that late night VIP spend that we're not getting because we're closing at 10 We're closing at 11 That's 95% margin money.
That was our 92% margin money that we're missing. Imagine doing 40% more revenues with 92% margins on it. That's when we're going to that's when the nightclubs are going to be Really cranking. And I think we're there by May. I'm not 100% positive today that May is the day, but if I project out on what I've seen and how I've watched things over the last through this COVID crisis or what are we suffered through, That's when I see the restrictions the majority of these restrictions being lifted as we get through the end of May.
And if it's the end of July, this is the end of July. I mean, another 60 days isn't going to be the end of the world. And the nice thing is they're slowly being We lifted, right. So we're getting incremental growth, incremental growth, incremental growth, sequential quarter over quarter growth through COVID. And I think we're looking at 12, 18 month run of this.
Well, I just think that's why. And then I'll have to judge them. I just I can't see 3 years out right now because I don't know what the world is going to look like then, right? I mean, it's just it's too hard to gauge exactly we're going to be. But even if we grow like that for 18 months and then we have a 12 month or 18 month Decline of 3% or 4%, 5%, who cares?
We're going to be at astronomical numbers compared to where we are today. And our stock price is dirt cheap. And our free cash flow, like you said, the free cash flow you're looking at for 2019 is chump change compared to where we're going to be by the end of 2022.
Hey, you're going to be double. And the reality is, this is what the force that we talked about. We talked about Forrest Gump, right? Like All the other ships are crashed into the dock. You stayed alive.
And look, I'm just telling you, look, you stayed alive. And the reality is that when everybody else has their boat crashed and you got your boat, well, you're going to catch all the shrimp. And so my point is everybody's going to want everybody wants shrimp and you're going to have it because remember, if you ask You look at listen to Stan Duncan Miller, he's saying it's going to be like the roaring 20s. There's going to be inflation. People are going to spend money.
So you're going into an environment that could identify like the roaring 20s And you're the only bar open and everybody wants alcohol. So like, I don't I mean, look, 100, 120, 150, You are going to be doing numbers that you've never seen before. And all I'm saying is the sooner you're able to get people to recognize that, The sooner you will be able to get your cost of capital right, take out your competition and make it even quicker. Yes, make it even quicker. I mean, it's
Amiri is a self fulfilling, right? It's self fulfilling. As we do better, doing better gets easier. Right. As our capital goes down, it gets easier and easier to do better.
Right. And you take advantage of the opportunity, right? I mean, A guy that you would normally pay 6 times EBITDA for, if your stock is out there, you'll tell them, hey, my stock is cheap, I'll pay you 3.5 times EBITDA. It's the same thing as saying, hey, I'll pay you lower on your EBITDA, right? If you want equity, fine.
I normally pay you 6, I'll pay you 4, I'll pay you 3.5. I mean, it doesn't mean you have There's all these different ways around it is my point.
Exactly. At the end of the day, it's going to boil down to free cash flow per share generation and then making sure the deal is accretive to that. And as long as every deal is accretive to our free cash flow per share, the structure is secondary to that principle of Generating additional free cash flow per share from every deal.
So why let me ask a question, why do you think that we have these bonehead investors on this conference call Like this guy, Alex Hardman. I mean, the guy shouldn't be allowed on the call. I mean, at some point, I can't be the only person on the conference call doing math. We have to have other people doing math, but we'll stay here forever. I mean, that's the reality.
Everybody values their way. I mean, I understand. We just have to we have to keep educating and keep showing and keep increasing the free cash flow. That's the name of the game. Eventually, their mouth will catch up with ours.
In the meantime, you got in at the right time, right? I mean, you made a huge investment in other people. We're not doing the math right.
It's a better investment at $48,000,000 coming out of COVID than it was when I was buying it at $20,000,000 $10,000,000 $15,000,000 and up all the
way up to 4. Certainly a lot less risk. Yes. There's a lot less things that can go wrong today than there were in May June July when you were buying, that's for sure. We're on the backside.
I would argue that like in May, June July, it wasn't clear on how the economy was going to rebound. Now I think it's abundantly clear to me that we're going to be the running 20s. Bumagum Shrimp is open for business. You got all your boats. Everybody else is crashing into the shore.
And you got your nets open and Hopefully, you get your cost of capital, so you're not just catching shrimp, but you're buying other people's boats, right? You got to catch your own shrimp and then you got to buy other people's boats, right? That's what we got to do.
For sure, as they get their boats working. The hardest part right now is a lot of their boats aren't working. So they get their boats working again.
Good. All right. I'm done. I hope we don't have any other I hope we have no more Alex Hardmans on the call. I hope that everybody should go to sleep.
All right. Well, I got to go soon. So I appreciate the call. Thanks, Alan. Thanks, Adam.
We'll go to Alan.
Our next question comes from the line of Steve Martin with Slater. Please proceed with your question.
Hey, guys. Congratulations. I have some more mundane questions.
Okay.
What do you think the timing is on the next couple of Bombshells getting open?
I think we're looking at sometime between August November. It's really hard to tell these cities are You would think there would be with not very many people doing growth and building right now that they would be very quick on turning stuff. But With COVID, I think they're not in the offices. They're working from home. So I think the building permit process is as slow as it's ever been.
Even though there's not as many people trying to get the permits, I think there's just slow turning them. But I think We've got the permits in Arlington. They've been filed last week. I believe the San Antonio franchisee is filing his permits in the next 2 weeks. So basically, it's really going to depend on how quickly they're turned, how quickly we get the building permits.
Both are basic remodels. So both are I believe the construction time on both will be 3 to 5 months. So if we get the permits turned in the next 60 days instead of 90 days or 120 days. I mean, that's the real unknown is are we going to start building in 2 months or are we going to start building in 4 months? And we'll be open 4 to 5 months after we start building.
The good news is by the next call, I should What permits have been issued, where we're at in the construction phase and I'll be able to give you a better timeline than August November. I mean that's a 4 month timeline. I understand that. And so hopefully, I'll be able to get you a much better window.
Another mundane question. You had some Properties for sale, both real estate and buildings, where do you stand on those?
Well, we have a couple of contracts that I'm expecting in, we've been negotiating on. Hopefully, we'll get some earnest money contracts signed soon and get those processes started. I do got I've got a group that's looking at 2 properties in Dallas that we have leased to 3rd parties that they're now Thinking about buying from us, so we may go ahead and sell those. They were looking for a 1031 tax free exchange. And I mean, we'd rather have the capital right now To do other things within than the return we're making on those leases.
We have a property that they've Just bought an option on a group bought an option on to close sometime between August November. So we'll see what they do. They're paying us $10,000 a month to basically keep the property off the market While they decide if they're going to buy it or not, we've got, I guess, a lot of target. We just signed the lease. I signed today, the tenant should sign tomorrow.
We should have the tenants on that lease on the Property behind the Bombshells on 59. We've got a group that's taken the entire building off the 12,400 square foot shopping center we built there. They're going to rent the Entire center, so that's a very favorable lease for us. We're excited about that. And they're an operator that only operates till 7 pm at night.
So that'll leave all the parking for the entire shopping center for Bombshells at night like we wanted. So that's a win win for us. I'm excited. We're getting I think that the business world is waking up again. The political climate's changed.
The uncertainty is gone. We know what they say, as they say, the devil we know. And We'll know that devil for the next 4 years and we're business are playing accordingly. And people are growing. Again, especially in Texas, Florida, I'm hoping that as the northern markets awaken, they'll see very similar Growth patterns that we're seeing here.
All right. One last question. You talked a little bit about Some of the northern markets, what is the what do you see in the competition in terms of are a lot of you going to never open again, You know, in New York as an example?
I'm hearing I mean, obviously, we don't know. I'm hearing there's a couple of clubs in New York there They're not going to reopen. They're repurposing the properties. And so hopefully, we'll see. In most of our markets, we don't have a lot of competition in a lot of our markets.
Some of our Texas markets, we have competition. I have seen smaller clubs that have gone away. I noticed that the like the bombshells on 290 have the Hooters right down the street. I noticed the Hooters Was all boarded up and had for sale sign on the building. So that location is gone for Hooters.
Whether they're going to build a new one someplace else or what they're doing, I don't have any clue. But that's kind of stuff we're seeing a lot of small restaurants I've gone out of business, especially the mom and pop little mom and pop restaurants that just aren't reopening. Most of the restaurants that are reopening are the big chain restaurants. But I think that will only last for a brief period of time. And I think I'm guessing 12 to 18 months.
We have a nice 12 to 18 month run. And then I think you'll see new entrepreneurs awaken and New places start to open and competition will start returning to a more normalized But I do think we have a very nice window of opportunity here over the next 12 to 18 months.
Thanks a lot. And like Adam, I appreciate the stock at this price, although I don't quite have the targets he does.
I'd like to hand the call back to Gary Fishman for closing remarks.
Thank you, everybody. Thank you, Eric and Bradley. And on behalf of the company and the subsidiaries, thank you for listening and good night. Stay safe, stay healthy, and as always, please visit 1 of our clubs or restaurants. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.