Greetings, welcome to RCI Hospitality Holdings conference call and webcast. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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. Now, for those of you listening to this call on the phone, you can find our presentation on the RCI website. Click Company and Investor Information just under the RCI logo. That will take you to the Company and Investor Info page. Scroll down a little, and you'll find all the necessary links for this call.
Please turn to slide two. I want to remind everybody of our safe harbor statement. It's posted at the beginning of our conference call presentation. It reminds you that you may hear, receive forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those currently anticipated. We disclaim any obligations to update information disclosed in this call as a result of developments that occur afterwards. Please turn to slide three. I also direct you to the explanation of non-GAAP measurements that we use.
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 Chhay. After the market closed today, we reported our first quarter results for the period ending December 31st. The company and nightclubs generated their best performance since the pandemic began. We also continued 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 three 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 for other areas. 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 in an effort to lower overall interest rates, reduce principal reduction payments, and eliminate all short-term balloons. 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 the 12th.
While there are occupancy and time restrictions at many locations, it is nice to have our teams back to work. Here's Bradley to review the financials. 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 $38.4 million for the first fiscal quarter. That is up 33% sequentially from the prior quarter. GAAP EPS was $1.07, and non-GAAP EPS was $0.39. 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 $17 million at December 31st. First quarter net cash from operating activities was $6.3 million, and free cash flow was $5.7 million. Please turn to page five. The nightclub segment continued to rebound sequentially with more locations open on a more consistent basis. Revenues totaled $25.2 million. That's down from a year ago, but more importantly, it is up 92% from the prior quarter.
24 clubs were open through the first quarter. 26 by quarter end. To give you guys some color, our biggest two clubs, which are in the South Florida market, were open the entire quarter for the first time since the pandemic started. Keep in mind, however, that we still have clubs that are not operating at their full capacity or normal operating hours. 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 is at 33.7%. Operating income totaled $8.5 million. Bombshells segment. Please turn to page six. The Bombshells segment turned in another strong performance. That's without the prior quarter's benefit of a strong sports lineup and warmer weather.
Total sales of $13 million were up 26% year-over-year and 12% on a same-store sales basis. All 10 locations were 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 $2.7 million, 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 seven for a review of the few remaining items in our first quarter 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&A as a percentage of revenues at 31.6% was lower than last year at 34.2%. This was mainly due to cost savings initiatives mentioned in previous calls, and also lower variable expenses, partially offset by fixed costs. In the nightclubs and Bombshells segments, we've reduced advertising and marketing spend about $1.2 million. In the corporate segment, we've reduced audit and related legal fees about $800,000.
Depreciation and amortization were 5.3% of revenues compared to 4.6% due to lower revenues. Interest expense was down 2.1% due to debt paydown prior to and during the first quarter. There was a non-operating gain of $4.9 million pre-tax 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 eight. We ended the quarter with $17 million of cash on hand, a two-year high. During the first quarter, free cash flow continued to rebound sequentially to $5.7 million. 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%- 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 $6.6 million from our September 30th year-end due to debt extinguishment and scheduled pay down. We are now at our lowest debt level in almost two years. We continue to be current on all of our debt. Current liabilities are also in good shape. At $34 million, they are down about $3 million from September 30th and only up about $600,000 from a year ago. Please turn to page nine for our debt pie chart. We saw decreases in all categories since September 30th.
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 two remaining SBA loans as of December 31st.
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 first quarter. In the second quarter, we added about $2.17 million in real estate bank debt.
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 three 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&T Stadium and the Dallas Cowboys, and just blocks from the Texas Rangers also. We paid $2.9 million, of which $726,000 in cash and a $2.175 million bank debt at 3.99% fixed for five years with a 20-year amortization.
This is the best rate on debt we have ever received. We also are conducting due diligence on three other sites, one in Texas and two 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 in their holdings. Terms call for their opening of three locations in San Antonio and an option to open three more outside of the city.
We are collaborating with them to ensure the success of their first location. News that we have signed our first franchisee has generated a lot of new leads. Many appear to be well-qualified, and we are in the process of fielding 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%-15% on a compounded annual basis. Our strategy is similar to those outlined in the book, "The Outsiders." The author, William Thorndike, studied companies that 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 three 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 3-4 x 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%-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 clubs, we seek to earn at least 25%-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 million, to provide us with significant reserves. That's $2 million less than we said on our last call, but we are also much more comfortable with our current locations open. Under our buyback strategy, during the first quarter, we purchased about 75,000 shares of our common stock at an average price of $24.03, for a total of about $1.8 million.
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, produce strong year-over-year performance with Bombshells, and generating a growing amount of cash. 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 next 10 Bombshells, with more on the way, and Bombshells is increasingly being recognized as a sports bar restaurant franchise concept. I'd also like to let everybody know that I am very proud and excited for our teams, especially our operations teams. Nightclubs did an unbelievable job this quarter.
Thanks to Ed Anakar 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. 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. With that, let's open the call to questions. Operator?
Thank you. Ladies and Gentlemen at this time we will be conducting a question-and-answer session. If you'd like to ask a question you may press star one on your telephone keypad. A confirmation tone in your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment and may necessary to pick up your headset before pressing the star key. Our first question comes from the line of Greg Pendy with Sidoti. Please proceed with your question.
Hey, guys. Thanks for taking my questions. Just on New York reopening on the 12th, is that all three locations in New York? Are there any restrictions that are notable that you're aware of that we should be thinking about just in terms of how much you can ramp up from the reopening?
Yeah. We're opening with the same restrictions we opened with last time. Of course, last time we were only open for about three or four weeks. Hopefully this time with the current track record and that, we'll stay open. Still have to close it by midnight. We won't see full operations. To give you an idea, around the country, we have some places where we have occupancy restrictions, but we don't have hour restrictions. Some places have hour restrictions, but not so much occupancy restrictions as 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 to it. I think everybody's just kind of guessing, and we just have to deal with that.
Got it. Last earnings call, when you mentioned the refinancing, I believe you put out maybe a $5 million run rate, once it took place. Rates have moved up a little. Maybe should we be thinking a little bit lower than that, or are you guys still kind of comfortable with that number?
I think we're probably between 5% and 5.5%. We haven't locked yet, because we don't have appraisals, so we don't have the full packages to present to their board yet. I'm guessing, I think the appraisals are due back by the 12th or the 16th. I can't remember off the top of my head here. 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. That won't be an issue. I believe that all things right now, we're probably looking at a closing on the loan between mid March and the end of March. Therefore, we're just going to have to see what rates are doing at that time.
Okay. Got it. I guess pre-COVID, your expenses, SG&A, were raising, I believe for some legal and audit expenses to roll off. I guess throughout the pandemic, you did a good job rationalizing your expenses to the lower revenue run rate. Is there anything you think that could stick as we try and think, what is the normalized sort of SG&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 $1.2 million. 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'll help keep our costs down, at least for a while. At some point, as competition opens and continues and new places come and start reopening again, we'll have to evaluate as we go.
For the time being, at least I think the next 12-18 months, I think we're going to be in a very great spot, and hopefully we can keep that between 30% and 32%, which is where I think it's at the low end of over the last few years.
Great. Just one final one. You put out the bar for 10 new Bombshells locations in 36 months if you can find the right locations. You gave us a little bit of color on the Dallas site. What is your hurdle rate? I know you guys look at real estate pretty closely. 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? What are you seeing in the environment as you 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 are 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. Hopefully, that one may move a little quicker.
T hen we have the other property. We're waiting, the developer bought 33.8 acres. We're buying two acres out of that site, we're just waiting for them to replat the land right now. That should be completed, hopefully, in the next three or four weeks, we've already got the bank financing lined up for that property. We will get that property closed, get our plans turned into the city, get our building permits, and get started on that one as well.
Basically, we'll have, right now with what we're looking at, two leased locations and three owned locations where we'll own the property. The other property in Dallas, we have a variance hearing coming up in the next couple of weeks. In Florida, we have a variance hearing in March. Everything's moving forward. Obviously, it'll 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. 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.
Yep.
As a reminder, ladies and gentlemen, it is star one to ask a question. 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. The weather is beautiful, and I've been fortunate enough to drive by Tootsie's and Scarlett's, and it looks like standing room only. Clearly, getting New York back open is critical, although I never really underwrote that. I wanted to build on Greg's question. He was a little coy, but when we talked about where you were on free cash flow, coming out of calendar 2019 or first Q 2020 pre-COVID, you guys were running, call it $60 million of EBITDA and call it $40 million of free cash. Bombshells was not doing whatever it was doing. I haven't looked at it, 21% operating margin on 13.
I know you did 30. I don't know if you're allocating corporate against that. When I just do back of the envelope math, Bombshells got hit a little bit this quarter, I think because of closures and all the rest off and on. When I think about the business now, I say, okay, Bombshells, without the franchises and without the new locations, which you'll have, I think you'll do about $60 million of sales and 30% margin. That's $18 million of EBITDA that didn't exist before in the old paradigm. If I just take the $6 million that you were doing before, add $5 million for the legal and accounting, all the garbage from the SEC that isn't being duplicated, maybe give yourself credit for the marketing and the billboards, I don't think that even does that.
I get to a number that looks more like 65+ 18 is 83. Then when I do a 10% stacked comp, and when you look at Australia and what they're doing in terms of restaurants, if you do call it 150 of sales in the nightclubs and you have a 10% stacked comp, I think I'm doing the math roughly, that's another $15 million in sales, and that's all to the bottom line. That's 90% margin. You're looking at a business that's doing close to $100 of EBITDA. 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 about $8 a share of free cash. It's about $70 million. Because you've got the depreciation shield, you've got the corporate tax rate, all the rest.
I guess my question to you is, am I doing my math wrong? Is it conceivable that you're doing $100 of EBITDA and call it $60, $70 of free cash? More importantly, that does not give yourself credit for the allocation of the capital, right? That's the second part of the stool, or third part of the stool. You are franchising new Bombshells.
You are opening up new Bombshells. You are buying more nightclubs. Conceivably, in 2022, if you guys get $100 on organic and you guys buy in another $25 of EBITDA, this could easily be a business that is, call it $125, $150 of EBITDA. Look, that to me is a real public company. It feels like we're on the precipice of being a real public company, and I do the math, $150 of EBITDA, all your debt's property level debt.
I look at Del Frisco's and all these other Look at Chipotle, 40 x EBITDA. If you even trade at a modest multiple of 10 times, that's a billion and a half dollar company. That's several multiples of where we're trading, and that's on 2022 numbers. What am I missing? Why are people shorting the stock here? I know you've had a run. Look, at the end of the day, you can't anchor to stock price. You've got to anchor to numbers. Am I doing my math wrong? Are we about to become a multibillion-dollar company?
I think we're on the cusp of that ledge there, so to speak. 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, July 1st, we get July, August, September, maybe our first real quarter of 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% and 50% occupancies. We'll be open till 4:00 in the morning like we're supposed to be, or 6:00 in the morning like we're supposed to be. Be able to do the things that we do. I think we're probably on a run rate of $50 million-$55 million a quarter. Should be $200 million-$220 million in revenues.
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. 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.
Okay. Yeah.
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. Now, I get it, there's one analyst here, but why is there only one analyst? Why, if this thing is a $100 million EBITDA company, why don't we have Dana Telsey from Telsey Advisory Group? Why don't we have the who's who of consumers? People say nightclubs and no one wants.
We're not looking to raise money, Adam. If we're not giving banking business, they don't want to write reports on us.
Well, that's fine, and I appreciate that. We shouldn't raise any money. At $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 flow. We should be buying back shares. The irony is that it's.
we have been. [crosstalk]
This is $160 stock. I guess my question to you is, here you are sweating in the desert, delivering God's work, and people are spitting in your face. We got 600,000 shares short. How do you see us converging to the right cost of capital? 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. There are big assets out there. Everybody who follows this industry knows that Troy Lowrie at VCGH, he did a private in 2008. There's another guy I found out about in Canada who's huge. There's another guy that we've talked about in Minnesota. There's some big players out there, and the reality is if 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, $150 of EBITDA, and you're trading at the right multiple. You can be buying companies that are doing $20, $30, $40, $50 of EBITDA, and then this becomes a real company. I see a path to hundreds of millions 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 think we're on the verge of where the casinos were. We're in the final phase. I call it the acceptance phase. We're pushing into that phase right now. We're still at the very beginning of it. If you look at what do they say? The first 10% takes the longest time. The next 40% happens in about half of that time. That last 50% happens overnight. Right now we're on the verge of, I think, reaching right up towards the end of that 10%. Hopefully go from 10% to that 50% acceptance level much, much quicker. 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 cash because no matter what, at the end of the day, no matter what everybody thinks or what anybody says about the business or the company, cash can't be denied. If we're generating that type of cash, and we're putting that cash back to work at 25%-33% returns, then our 10%-15% annual growth rate's going to be dwarfed, right? We're just going to slaughter it as we move forward.
Well, look, if you look at your Bombshells returns, you're doing much better on an ROIC basis than 25%-30%. Look, if you just start doing Bombshells at leased locations, your return on invested capital is 60%. Remember, if you do a franchise Bombshell, you're not out any capital. That's infinite return on invested capital. When I look at your metrics.
I agree. That's why we've moved in those directions.
Yeah. No, when I look at the metrics of your kind of incremental capital opportunities, they're fucking incredible. Look, I am so excited about what you have built. You should really be proud, and I'm not patting 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. Look, I am happy to be the largest shareholder in this company. I think you are building a multi-billion dollar company. Look, I really look forward to seeing the growth. Look, obviously, you don't want to go out and raise capital, and we lived that, and we're not going to do that again. I would say, on the margin, I think, more exposure through additional research analysts and all the rest.
Look, I think this is an opportunity that is still very much misunderstood by the public markets. 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. The only reason why a company like this would be public is to have access to capital, and you've never had access to capital. 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 billion-dollar company; it will be a multi-billion dollar 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 $4.9 million in cash, saving us over $1.8 million in interest expense a year. That is bigger than when we did our $80 million 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. It's actually getting easier and easier to make the maneuvers we need to make, to find the properties we need, to close the transactions. We've got the prototype store down. They're getting easier to build and cheaper to build for us.
I think as we continue to move forward, the returns are going to be better and better.
Great. Well, look, I'm very pleased with the performance, and I look forward to fighting the good fight.
Yep, me too. Thanks, Adam.
As a reminder, ladies and gentlemen, it is star one to ask a question.
Eric, this is Gary. I've received a question via email. Somebody was asking among people that have multi-unit franchise operators, what parts of the country are they interested in? Is it the southern area, or is it all over?
We've talked to people from all over the country right now. It's just finding the right qualified people is our biggest concern right now.
Sure.
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 at for three hours for being 30 minutes late. How are you, sir? I've never been late to a Friday appointment since in New York City, I'll tell you that.
With all the soccer girls around the new club. That's so funny. I wanted to ask, and I'd just say I'm glad the stocks are only 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.
Yeah.
A lot of the big guys own their real estate, so they're not in those situations. We have gotten calls from, I would call, small to mid-size clubs where they're very behind on their rent, and their landlord's trying to throw them out, stuff like that. We've been talking with them and trying to figure out if something makes sense. Right now, we're still being a little picky. We are swinging for the fences. We want to do the big-type acquisitions like Scarlett's 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. They're the clubs we know just, I call them ATM machines. All we do is plug them in and just collect our cash. Those are the kinds we're looking for.
Okay. 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. The owners that are just tired of it. You're tired of the hassle, you're tired of the calls at 3:00 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. Those are the transactions we're looking for. 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 five years, 10 years, 20 years. We can structure a deal however they want. They can defer their taxes. 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. Stock for stock deals aren't taxable. I'm just not comfortable, even at $46, $48, I think the stock's still cheap. I just don't see with what we're seeing in our numbers with what is open. Without getting too much detail, but Tootsie's is incredible right now, 50% occupancy and killing numbers from previous years.
Right.
Scarlett's in Miami. Oh my God. 70% year-over-year numbers. With 50% occupancy. Let me open it up and pack it out again, and let me see what I can do. 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 frames, Chicago is opening. 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 closing at 10:00 P.M., we're closing at 11:00 P.M., we're closing at 12:00 A.M. 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 our paper at in that acquisition would have to be negotiated.
Okay.
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's trading for $46 today, 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 a share." 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. There will be. We are getting people that are asking for equity now. We will look at it, we will consider it. It's got to make sense. We're not going to make the mistakes of 2008. We're not going to make those mistakes again. We'll have lockup and leak- out agreements.
If we give up equity, it's going to be a very tight controlled way that they're going to orderly put that stock into the market at some day in the future. For us, it's about long-term shareholder value, and we're not going to do anything that could possibly jeopardize that.
Great. Well, thanks, and congratulations for managing through this pandemic the way you have. Thanks a lot.
Thank you. Our team has been unbelievable. I really appreciate them all. They've been great.
As a reminder, it is star one to ask a question. Our next question comes from the line of Alex Hardman, a private investor. Please proceed with your question.
Hey, Eric, this is Alex. I had a quick two questions, Don, around the capital allocation strategy. One, first off, it's been a while since I've ever had to think about this, but finally that the stock price is up there above your free cash flow of 10% level. I was wondering on the bottom side, have you guys looked at You pretty much are assuming a 10%-15% growth rate. Have you thought about bumping that threshold up to assuming a 5% growth rate over five years as your threshold for buyback instead of just using current free cash flow? On the top side, do you guys have a hardened path 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.
Oh, for sure. We just borrowed money at 3.99%. Our cash flow yield on our equity is nowhere near at 3.99% yet.
Okay.
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. That's basing on 2019 numbers. 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. 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%. That's going to make a big difference in spending as we go forward for the next two years.
There's just a lot of pluses that make me say, "I'm going to hold this equity really, really close to the vest." Not in a hurry to go out. I've had two investment bankers that 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.
Yeah, definitely not do that again.
No. I say we've been there, done that, got the bloody T-shirt. We're going to continue with the plan. It's been working very, very well for five years for us. Are we excited about stock price? Sure. I always tell all of my friends, because I get friends that call me, "Oh, 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 six months that's right, we won't do a deal in the next six months. That's just the reality of it. We're not starved for deals. We're not scared of them either. If the right stuff comes along, we're going to make moves. There is stuff coming up. We're kicking a lot of tires right now, looking through a lot of windows. I'm seeing a lot of stuff that I like. At the used car lot, we're digging under the hood, right? We're doing the inspections, we're checking things out, and 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'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. Please proceed with your question.
Hey, guys. Just flipping onto slide five, can you just give us a little bit of color on just the operating margins at the nightclub segment, how you got them kind of at 33.7? It looks like a pretty big jump. Then also, should that come down in 2Q, given the New York reopenings at reduced capacity? Will that actually weigh on it, albeit it'll be positive for the top line? Thanks.
Well, I'll say one thing. It won't weigh on anything because, again, 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, continued 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. When a location reopens, 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 three weeks if they're not generating more cash than they were costing closed. Basically, everything that's closed is an anchor, and as soon as it opens, it's wind in the sails. It's all a plus.
I think that's what's helped keep the margins so high. Just keeping our costs down. Our guys are watching costs like they've never watched costs before. They've always watched costs very well. We're questioning every dollar spent through this whole COVID process. We were forced to. The beauty is it teaches you a really, really good lesson in that when you have to struggle and scrutinize everything, as the cash flow starts coming back in, once you've created that habit, it's a hard habit to break. We keep questioning them. 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.
I think that's just going to be part of our internal culture at this point. I don't think we'll get a lot of creep. Obviously, as things get better and better, every business has a creep. If it's one point, it's one thing, I don't think you're going to see us back on those high numbers, of cost. We're going to keep those down. Every time something else opens, I think we're just going to do better, at this point.
Got it. Just any color, how's 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. I know that it was not looking good for the Vegas, which is why we ended up canceling and moving it to Miami in May. I've talked to club owners, so I know a lot of guys are coming. 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. 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's COVID going to be affecting it?
What do 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. I do have several meetings in May with some groups that I've been looking to talk to. We've all agreed we'll meet at expo in May. I know those people will be there. I think we're going to get about an average or above average turnout. It's what I think will happen.
Got it. Thanks.
Yep.
Our next question is a follow-up question from the line of Adam Wyden with ADW Capital. Please proceed with your question.
Yeah. Eric, do me a favor. Can you stop taking questions from your guy, Alex Hardman? I think the guy's 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 bridged you to $8 a share of free cash flow. That doesn't include any new Bombshells openings or any incremental M&A. I think it's highly likely that your free cash flow is higher than eight bucks a share. Last time I checked, the stock was $46 last. If I open up my TI-83 and I do eight divided by 46, it's about a 17% free cash flow yield. 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 number is actually higher than that because what will happen is that everybody will come out of their house and you're seeing what Tootsie's and all these guys are doing with 50% occupancy. How do we know that EBITDA is not $150 million organically because all these things are comping up 60%. Remember, you have 100% incremental margin on the nightclubs once you get over fixed costs because remember, you can just take the cover fee from $50- $100 and just charge and make people do $2,000 minimums in New York. I think we talked about it. They even freaking made a movie about it with J.Lo in 2007, pre Lehman Brothers. There were strippers in New York making $1 million a year.
Look, they made a freaking movie about this. I believe that when we get out of this thing, you're going to see, with capacity restraints taken down, you can see the whole My $100 million of EBITDA is predicated on a 10% stacked comp. What if it's 50? What if it's 100? 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 literally want to hang up the phone and jump out my window.
He's looking at 2019. Like I said, I think he's just looking at 2019. He's looking trailing, we're looking forward.
Last time I checked.
Slight difference. [crosstalk]
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&A and marketing is lower. You don't have the SEC, you don't have the accounting. It's like saying Google made $1 a share two years ago and now it's making 10. You want to do the $1 share or you want to do 10? It's literally I want to hang up the phone, I'm so angry. Maybe that's the opportunity and maybe that's why the stock's still trading at 47. I think the better answer is that we need to get people to actually peel back the onion and do math. I went to Wharton and Columbia Business School, this is fifth-grade math, okay?
You don't have to go to Wharton and 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 science.
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's 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 I can only go back seven years when I went and looked, and I didn't find one single January that ever beat a December. This was the first time ever that a January beat December. Our total revenues in January were higher than our total revenues in December.
Well, it's not illogical, Eric. The reality is-
I know, I understand. [crosstalk] As we get more things open, more people are getting comfortable and the spend is going up. That's what we're really seeing. 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 10:00 P.M. We're closing at 11:00 P.M. That's 95% margin money, or 92% margin money that we're missing. Imagine doing 40% more revenues with 92% margins on it. That's when the nightclubs are going to be really cranking. I think we're there by May.
I'm not 100% positive today that May is it, but if I project out and what I've seen and how I've watched things over this COVID crisis or whatever we've suffered through, that's when I see the majority of these restrictions being lifted as we get through the end of May. If it's the end of July, then it's the end of July. Another 60 days isn't going to be the end of the world.
Right.
The nice thing is, they're slowly being re-lifted. We're getting incremental growth, incremental growth, incremental growth, sequential quarter-over-quarter growth through COVID, I think we're looking at a 12-18 month run of this.
Well,
Then I'll have to judge then. I can't see three years out right now because I don't know what the world's going to look like then. It's too hard to gauge exactly where we're going to be. Even if we grow like that for 18 months and then we have a 12 month or 18 month decline of three or four or 5%, who cares. We're going to be at astronomical numbers compared to where we are today, and our stock price is dirt cheap. 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.
At least.
Forrest Gump thing we talked about. We talked about Forrest Gump. All the other ships are crashed into the dock. You stayed alive, and look, I'm just telling you stayed alive. The reality is when everybody else has their boat crash and you got your boat, well, you're going to catch all the shrimp. My point is, everybody wants shrimp, and you're going to have it. Because remember, listen to Stan Druckenmiller, he's saying it's going to be like the Roaring '20s. There's going to be inflation. People are going to spend money. You're going into an environment that could identify like the Roaring '20s, and you're the only bar open, and everybody wants their alcohol. Look, 100, 120, 150, you are going to be doing numbers that you've never seen before.
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.
Make it even quicker.
Take advantage of that. Yeah, make it even quicker. I agree.
The beauty of it is it's self-fulfilling. If we do better, doing better gets easier.
Right.
As our cost of capital goes down, it gets easier and easier to do better.
Right. You take advantage of the opportunity. A guy that you would normally pay 6x EBITDA for, if your stock's not there, you'll tell him, "Hey, my stock is cheap. I'll pay you 3.5x EBITDA." It's the same thing as saying, "Hey, I'll pay you lower on your EBITDA. If you want equity, fine. I normally pay you 6, I'll pay you 4. I'll pay you 3.5." 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's accretive to that. As long as every deal's 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.
Let me ask you a question. Why do you think that we have these bonehead investors on this conference call, like this guy Alex Hardman? The guy shouldn't be allowed on the call. At some point, I can't be the only person on the conference call doing math. We have to have other people doing math, or we'll stay here forever. That's the reality.
Everybody values their way. I understand. We just have to keep educating and keep showing and keep increasing the free cash flow. That's the name of the game. Eventually, their math will catch up with ours. In the meantime, you got in at the right time. You made a huge investment.
Are you saying- [crosstalk]
You made a huge investment, and other people, we're not doing the math right.
It's a better investment at $48 coming out of COVID than it was when I was buying it at $20 and $10 and $15 and up all the way up.
There's certainly a lot less risk. Yeah. There's a lot less things that can go wrong today than there were in May and June and July when you were buying, that's for sure.
I would argue- [crosstalk]
We're on the back side of it.
I would argue that in May, June, and 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 Roaring '20s. Bubba Gump Shrimp is open for business. You got all your boats. Everybody else is crashed 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. You got to catch your shrimp, and then you got to buy other people's boats. That's what we got to do.
Yep. Oh, for sure, as they get their boats working. The hardest part right now is a lot of their boats aren't working. Got to get their boats working again.
Good. All right. I'm done.
All right, buddy.
I hope we have no more Alex Hardman on the call. I hope that just everybody should go to sleep.
All right. Well, I got to go soon, so I appreciate the call. Thanks, Adam.
Our next question comes from the line of Steve Martin with Slater. Please proceed with your question.
Hey, guys. Congratulations.
Hey, thank you.
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 and November. It's really hard to tell. You would think with not very many people doing growth and building right now, that they would be very quick on turning stuff. With COVID, I think they're not in the offices, they're working from home. 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 they're just slow turning them. I think we've got the permits in Arlington. They've been filed last week. I believe the San Antonio franchisee's filing his permits in the next two weeks. Basically, it's really going to depend on how quickly they're turned, how quickly we get the building permits. Both are basic remodels. I believe the construction time on both will be three to five months.
If we get the permits turned in the next 60 days instead of 90 days or 120 days, that's the real unknown, is are we going to start building in two months, or are we going to start building in four months? We'll be open four to five months after we start building. The good news is by the next call, I should know 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 to November. That's a four-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've got a group that's looking at two properties in Dallas that we have leased to third parties that they're now thinking about buying from us. We may go ahead and sell those. They were looking for a 1031 tax-free exchange, and we'd rather have the capital right now to do other things with than the return we're making on those leases. We have a property that a group bought an option on to close sometime between August and November. 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. Like I said, a lot of targets.
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 got a group that's taking the entire building off the 12,400 sq ft shopping center we built there. They're going to rent the entire center. That's a very favorable lease for us. We're excited about that.
They're an operator that only operates till 7:00 P.M. at night. That'll leave all the parking for the entire shopping center for Bombshells at night, like we wanted. That's a win-win for us. I'm excited. I think that the business world is waking up again. The political climate's changed. The uncertainty's gone. As they say, the devil we know. We'll know that devil for the next four years, and businesses are planning accordingly. 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 do you see in the competition in terms of, are a lot of you going to never open again, in New York as an example?
Obviously we don't know. I'm hearing there's a couple of clubs in New York that are not going to reopen. They're repurposing the properties. 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 some smaller clubs that have gone away. I noticed that the Bombshells on 290 have a Hooters right down the street.
I noticed the Hooters was all boarded up and had for sale sign on the building. That location's 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 the kind of stuff we're seeing. A lot of small restaurants have gone out of business. Especially the little mom and pop restaurants that just aren't reopening.
Most of the restaurants that are reopening are the big chain restaurants. I think that'll only last for a brief period of time. I'm guessing 12 to 18 months. We have a nice 12 to 18 month run. I think you'll see new entrepreneurs awaken and new places start to open and competition will start returning to a more normalized deal. I do think we have a very nice window of opportunity here over the next 12 to 18 months.
All right. Thanks a lot. Like Adam, I appreciate the stock at this price, although I don't quite have the targets he does.
As a reminder, ladies and gentlemen, it is star one to ask a question. Are there any final questions? This is the last chance for questions. I'd like to hand the call back to Gary Fishman for closing remarks.
Thank you, everybody. Thank you, Eric and Bradley. On behalf of the company and our subsidiaries, thank you for listening and good night. Stay safe, stay healthy, and as always, please visit one 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.