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 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 the next page. 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 or see forward looking statements that involve risks and uncertainties. Actual results may differ materially from those currently anticipated.
We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards. Please turn to Slide 3. 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, Gary. Thank you for joining us today. I'm here with our CFO, Bradley Shea. I hope everybody and their loved ones have continued to get through the pandemic and that you are following all safety recommendations. After the market closed yesterday, we reported our 4th quarter and fiscal year for the period ending September 30.
We continued to make good progress dealing with effects of COVID-nineteen. Total revenues of $28,800,000 nearly doubled from the Q3. Both our Bombshells and Nightclub segments exceeded expectations, in particular Bombshells. We generated net cash from operating activities of $3,500,000 and free cash flow of $3,400,000 EPS was a loss of $0.31 mainly due to some additional year end noncash COVID related impairments and a tax valuation allowance, which we'll explain. On a non GAAP basis, we earned $0.15 per share.
Looking at the Q1 of 2021, we're estimating 1st quarter club and restaurant revenue should come in around $35,000,000 to $37,000,000 assuming no further closings or restrictions. We think that's pretty good considering the spike in COVID-nineteen cases we've seen since the beginning of November. Currently, we have 36 locations open based on 26 clubs in all 10 of our Bombshells and $18,000,000 cash on hand. Looking forward, we are proceeding with our plan to develop 10 new Bombshells, and we are actively pursuing new club acquisitions. We believe we are well positioned to reap the benefits of COVID-nineteen vaccines could have on the economy, consumer spending and our business.
Now I'd like to turn the call over to Bradley to review the financials and then I'll return to wrap up. Bradley?
Thank you, Eric. Please turn to Page 5. Bombshell's sales were a record $15,500,000 for the Q4 and operating margin hit a record 32.7 percent. As a result, operating income was more than $5,000,000 yet another record. Sales benefited from more locations open on a more consistent basis compared to the Q3.
In particular, our new locations are doing really well. We also benefited from renewed interest in sports, in particular, pro basketball and baseball and the beginning of pro college beginning of college and pro football. In addition, new meal delivery services added $365,000 of revenue. Operating income benefited from a higher level of sales and more consistent occupancy throughout the day, as we continue to follow indoor restrictions. While our performance might tone down a little to the new normal, which at the end of the pro basketball and baseball seasons, as well as the cooler weather, we believe that we've built a lot of momentum at our locations and Bombshells will continue to be a strong performer.
Please turn to slide 6. Nightclub revenues of $13,100,000 for the 4th quarter more than doubled from the 3rd quarter. Similar to Bombshells, this reflected more locations being opened on a more consistent basis throughout the entire quarter. All locations continue to limit occupancy in accordance with COVID-nineteen safety plans. Not all clubs operated at full schedules in line with other restrictions.
Given those limitations, our customers came back to newly reopened locations and continue to frequent open locations, in particular, our younger patrons. Most clubs experienced good sales and a steadier flow of business during operating hours. Looking at operating income, the segment broke even. This mainly reflected $1,400,000 of additional impairments and other net charges of $450,000 primarily due to hurricane related losses, which we recorded on our small Louisiana club. However, we anticipate recovering those from insurances.
On a non GAAP basis, nightclubs earned $2,100,000 on a 16.1% margin. We're actually pleased to see that considering everything going on. Please turn to Page 7 to review the few remaining items in our Q4 statement of operations. Cost of goods sold as a percentage of revenue was higher due to the change in sales mix, mainly more food and less revenue services. Salaries and wages at about 28% of revenues held steady due to effective labor cost management in the face of continually changing COVID-nineteen environment.
SG and A as a percentage of revenue, as well as depreciation and amortization increased due to fixed costs on a lower revenue base. SG and A was partially offset by some cost savings. Interest expense was down approximately 4% due to debt pay downs prior to and during the Q4. Income tax was $769,000 expense. However, this did include a non cash $1,300,000 expense for recognizing a deferred tax asset valuation allowance.
And please turn to Slide 8. We ended the quarter with $15,600,000 of cash on hand and currently have approximately about $18,000,000 During the Q4, free cash flow rebounded to $3,400,000 As you can see, so far, through the COVID affected second, third, 4th quarters, we have remained free cash flow positive. This is a huge testament to our businesses, our teams, our management and strategies. Debt fell $1,300,000 from June 30 due to previously mentioned pay downs. Current liabilities increased about $4,000,000 due to the annual renewal of our insurance coverage.
This had a similar effect in the year ago Q4. Otherwise, 4th quarter current liabilities would have been flat with June 30. Having said that, September 30 current liabilities did include the effect of some notes on deferral, but we are current on all our debt payments as of today. Slide 9. Please turn to Page 9 for our debt pie chart.
Debt is down $1,300,000 from our June 30th quarter with small decreases in almost all categories. Secured debt consists of the 61% of our debt is secured by real estate, the 18% listed as seller financing is secured by the respective club to which it applies, the 6% is secured by other assets, and lastly, the 1.5% represented in the Texas Comptroller settlement. This is secured by businesses and assets of clubs related to that settlement. Our unsecured debt consists of the 9.9% listed as unsecured and the 3.8% represented by SBA loan. Last Thursday and last Friday, we learned that 10 out of our 12 SBA loans have been forgiven for a total of $4,900,000 Please turn to Page 10 to review our debt manageability.
As we reported, during the 1st 9 months of fiscal 'twenty, we moved and or converted about $14,000,000 in near term non realty balloons to out years or to amortizing loans to give us more financial flexibility. We have continued this strategy in the 4th quarter, converting about $2,100,000 realty balloon to a 15 year note. For additional financial flexibility, we have excess we have one excess parcel under contract to sell and 4 excess parcels listed as to be sold around existing Bombshells. Currently, we are in discussions with our bank to refinance some of our debt for a lower rate and longer term. Now, I'd like to turn the call back to Eric.
Thank you.
Thank you, Bradley. Last month, we announced our plans to double the number of company owned Bombshells over the next 3 years. COVID-nineteen has created a unique and compelling opportunity. The concept has proven itself to do well through the pandemic unlike some other casual dining chains. From inception through the end of fiscal 2020, the cash on cash return of the first ten has met our capital allocation objectives.
They have more than covered the cash investment in them and can easily self fund new units. Because so many restaurant chains have had COVID-nineteen difficulties, we can access prime locations not previously available and in some cases buy or lease them at significantly lower prices. Our plan is to open 10 new units over the next 36 months, but only if we can find the right locations and structure the development of each in line with our capital allocation strategy. Target markets are 3 we know well: the Dallas Fort Worth, where we have 1 Bombshells Houston market, where we have 8 the market is so big here, we believe we have found some additional opportunities and the Miami Fort Lauderdale area, we believe the demographics and highway patterns are ideal for Bombshell's concept. We also have existing club and restaurant management in all three markets to provide us with additional operating leverage.
Please turn to Page 12. We've been talking to a lot of new investors, so I'd like to review our capital allocation strategy. We are very focused on growing free cash flow to enhance shareholder value. Our strategy is similar to those outlined in the book, The Outsiders by William Thorndyke. The companies we study or companies he studied focused on how they generated cash per share and allocated the cash to generate more cash.
They also realized equity was not cheap form of capital, but a very expensive one. Included in their capital allocation, we're buying back shares, but only if shares were represented a compelling way to increase free cash flow per share. We have been applying these strategies since fiscal 2016 with 3 different actions, subject, of course, to whether there are strategic rationale to do otherwise. The first is mergers and acquisitions, specifically buying the right clubs in the right markets. We like to buy good clubs, solid cash flowing clubs at 3 to 4 times adjusted EBITDA, use seller financing and acquire the real estate at market value.
Our goal is to generate an annual cash on cash return 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, market awareness and to sell franchises. Similar to acquiring clubs, we like to see at least a 25% to 33% cash on cash return. The third is buying back our stock. When the yield on our free cash flow per share is more than 10%.
During the pandemic, our plan is acquiring shares using the same formula, but only if our cash on hand exceeds $18,000,000 to provide us with significant resources. In our last call, we had indicated $15,000,000 Our ultimate goal is to drive shareholder value by increasing free cash flow per share 10% to 15% on a compounded annual basis. Please turn to Slide 13. On the final page of our formal presentation, I'd like to spend a moment talking about our fiscal 2020 accomplishments. We collectively demonstrated strength, resiliency, agility and unity through adversity created by COVID-nineteen, and our people, processes and systems pass with flying colors.
We turned on a dime in March to the new reality and began to open our clubs and restaurants as soon as we were able to do so. During the last 3 COVID impacted quarters, we have not been profitable on a GAAP basis, mainly due to COVID-nineteen related impairments. But we have been cash flow positive, which we believe is more important in the financial analysis, and we have proved the value of the Bombshells of our Bombshells investment. During all of this, we also resolved the SEC situation. With our new auditors, our second and third quarter Qs and 10 ks have been filed in a timely manner, and we seamlessly transitioned our new CFO position to Bradley Shea.
I have seen a lot in my 30 plus years in the nightclub and restaurant industry, and I'm proud to say and it's easy to recognize that we have the best teams in the business. Ultimately, that's how we got through fiscal 2020. It was with our people and our culture of hard work and dedication. And I'd like to take a moment to really thank some of our team members, especially our restaurant guys at Bombshells, David Simmons, James Watkins, Rafael and Marco. You guys have been unbelievable for us, really carried us through a couple of quarters.
And also to our management team at the club level at Anacar, Dean Reardon and all of our regional managers who have really put in a lot of effort, traveled around the country when their markets were closed to help out in other markets as we were getting them open because we were short staffed and short management. And it's been really impressive to see what you guys have been able to do and keep this company going. And with that, let's open the call to the question and answer session. Thanks, operator.
Thank Our first question is from Greg Pendy with Sidoti. Please proceed.
Hey guys, thanks for taking my questions. My first question just on the Bombshells operating margin 32 7%. I know that's probably not sustainable. Can you just talk to us about the puts and takes and maybe how it might be different than what you had as an operating margin target there pre COVID?
Well, we were shooting for 18% to 22%. That's kind of always been our key what we think is our our success rate. We just had unbelievable sales with our outdoor patios, the weather, basketball going every single day, 4 or 5 games a day while they were in the bubble, was fantastic for us as well, really helped our alcohol sales, which you know are much higher margin. I think we'll return, but I think that with what I'm seeing on closings, like a lot of little neighborhood sports bars aren't reopening, a lot of little things like that, a lot of small restaurants, a lot of older chains that have been around for a long time are very regional. We're seeing them close down.
I think the restaurant association said over 110,000 restaurants or chains have closed and they're expecting up to maybe 3,000,000 more if this continues. I was like, man, that's a lot of closures. I mean, I think our new margins could be a little higher, maybe 22% to 28% as we move forward. It's just really hard to know at this point because we just don't know what normal is. But I don't believe that we'll be below the 18% to 22% again.
I think that's the key part of it. But I think it will be a little higher for the foreseeable future anyway.
Great. And then just on the M and A comments that you made. Can you just has there been any transactions outside of you guys? But can you just give us a little bit of color on maybe buyers or sellers that become a little bit more reasonable post COVID, do you think? Or just kind of what you're seeing in that environment broad based?
I mean, I think 3% to 5% is pretty reasonable to begin with. So you say more reasonable, I don't think it's really more reasonable. I think there's a few sellers out there that become a little more desperate. They want to get out, so they're tired of the industry or maybe they're older and don't want to be exposed. You have to actually operate these locations.
So I think that's part of it. We're seeing a lot of just like I said, a lot of guys going, okay, well, what is my club really worth now with COVID? And then we're talking to a lot of new faces, I should say. Guys we didn't really talk to in the past as much about selling their locations are considering it now. And with our stock performing, if our stock continues to perform and gets our yield better, that's going to give us even more opportunity to maybe make the right deals.
So that's the kind of things we're looking at right now, and I think we're going to continue to see that. We have a convention in May where I believe we're going to talk to a lot more people.
Perfect. And then, just one final one. I know you gave us a lot of color on the openings and closings, and keep us updated there. But is there any kind of key restrictions at some of your big marquee clubs, maybe, Miami, New York, those types of clubs?
Well, New York just closed again yesterday. Yes, New York just closed again yesterday indefinitely. We don't who knows, when they'll decide to let us open. They only closed the schools for about a week or so. So maybe we'll get lucky and get open pretty soon.
In Florida, Miami Dade County has a curfew that we're dealing with. We're dealing with more curfews in other markets now and closures in Minneapolis. We're still closed, I think, through December 18. I don't know if that's been extended or not. I'm going to have to check into that.
I think probably in the next couple of days, we'll hear some news on that. But those are kind of things. Chicago market has been closed. I think we've got open for a very, very short period of time, a couple of weeks or something got closed again. So we do have some markets that are very difficult to We're doing our social distancing.
We're limiting our occupancies. We're doing our social distancing. We're limiting our occupancies and doing the best we can do to keep people working. It's Christmas time. It's really sad when our employees just get back to work after being off for 6 months and they get to work for 2 months and now they're back off work again.
We don't know for how long. They're saying if you read a lot of these even the New York came out yesterday and said they're 74% of their tracing found that their COVID cases are being transferred in small household, meeting areas where people don't wear masks, not in businesses. So I think I'm hoping that they'll realize that the businesses are the safer place for these people to be. They're forced to wear masks. They're forced to social distance versus when you have something in your own home, you get comfortable and it's a little different.
So we'll keep pushing, we'll keep working on it. We've had to sue a couple of cities, we've had to sue states, we've had to sue the counties. In some places, it stay open, and we've been fairly successful with that. It's a last resort. It's nothing we'd like to do.
Hate being in court. But at the same time, we've got to keep our employees working and earning a living and paying their bills and keep our businesses flourishing. All right. Any other questions?
No, that's it. Congratulations on tough environment.
I'm sorry, what did you say, Brandon?
I just wanted to ask to the first comment that the first question on Bombshells. Just wanted to add that our newest locations Bombshells 59 and Bombshells Katy's was also instrumental to that extreme margin because they are our best performing stores in terms of revenue and operating margin. And they opened in the earlier part of fiscal 2020.
Got it. Thanks.
Our next question is from Jeff Moore with Bur Oak Capital. Please proceed.
Yes. Thanks for taking the question, guys. Looking out, say, 3 quarters from now, where do you guys hope to be in terms of Bombshells openings and share repurchases and club acquisitions in kind of an average scenario, where it's just kind of going with what you see, not accelerating reopenings or reopenings taking forever to have happen? I mean, I think in 3 quarters everything is going to be with the vaccine, I think everything is going to be back open. I think we're going to see pretty strong openings, re openings March through May.
And I think we're going to get pretty normal occupancies and whatnot definitely by June, July, August. So by the end of our fiscal 2021, which is September 30, I think we're going to be running on all cylinders, Everything is going to be going. We're in the process of these Bombshells now. Typically, Bombshells can take us anywhere from 8 to 14 months to get open depending on if we're building from the ground up, doing remodels, different city permitting, things like that. So I think we could see in the next three quarters at least one of those locations opening, a second location not far off.
We're also pushing forward with a couple of franchisees that we've been talking with, and hopefully, we'll get one of those signed up here very soon and maybe even get one of their stores open in the next 9 months. The ones we're talking to are both looking at doing a remodel versus a ground up build, so it could be a little quicker. That's for the Bombshells, for the club side. I mean, we're looking at multiple acquisitions. We probably in the next three quarters close at least 1, possibly 2 of those acquisitions and get everything up and running.
I think we're going to be well over 200 plus 1,000,000 in revenue, maybe $220,000,000 in revenue on a going forward run rate, maybe even more. I mean, I just it depends on these club acquisitions and how quickly we can get them integrated into the systems. Okay. And then what about share repurchases? What would you like
to have done by then?
We don't have a goal on share repurchase. Our share repurchase is real simple. We have excess cash. We have what we call our cash reserve, which is our safety net. We ran that at $15,000,000 for a while, but with the COVID shutdowns, I've increased that to $18,000,000 cash on hand.
And any time that we have cash in excess of that amount and we don't have something to put it into, a Bombshells location or whatever, then we buy back stock. I think you can see that we bought back about 50,000 shares last quarter. All those shares were bought in the last 3 days of the quarter or 4 days maybe, 4 days, 20 7, 29, 30, yes, 4 days, last 4 days of the quarter. And that's because we just we were sitting on a ton of cash. And it was over our reserves, and we didn't have anything that we are immediately going to put it into before we would have rebuilt it.
So we said, okay, let's buy back stock. If you look at the 10 ks, you'll see that we continue to buy back stock through this quarter and we now have 8,999,910 shares outstanding, and we will continue to do so. And we have cash in excess of our safety net and no immediate use for it, we will continue to buy back stock provided the yield on our stock is over 10% of what we consider forward going free cash flow.
Okay, thanks.
And then one last question regarding Bombshells. Has there been any progress with the 3rd party valuation or potentially bringing in a strategic partner? There hasn't been at this time. We're in very early talks with that. We're going to continue to pursue it.
But in the meantime, we're not letting it slow us down. We're going to continue to build the brand regardless. If we could take in a growth partner or something, we may want to do that, we may not. It's just going to depend on the terms. I mean, we're going to evaluate everything on an as it comes basis.
We have no real expectations one way or the other on it.
Okay. Thanks very much for
the clarity. Great quarter, guys. Yes. Thanks.
Our next question is from Adam Wyden with ADW Capital. Please proceed.
Hey, guys. Can you hear me?
Yes. How are you doing?
I'm doing great. Thank you, Eric. Well, look, in the depth of March, did I ever really believe that things would that you guys would rally like this and find ways to an unparalleled environment. It's just it's really remarkable. It's a testament to the team that you have.
And look, I'm tickled that I get to be the largest shareholder in this company. And I'm really looking forward to seeing this company level up. But I think as you said, you spent the last 30 years kind of wading through a lot of crap, whether it be the SEC or the audit or bad advice from investment bankers as it relates to capital allocation. And the last 5 years, you've clearly demonstrated you're adhering to a pretty consistent capital allocation strategy. That being said, look, I think the short interest in this company is as high as it's ever been.
So clearly, there are people betting against you. You basically built this concept bombshells de novo. Now whether you can get a 3rd party partner or not, I totally agree with you. If you can invest capital at a 50% to 60% unlevered return and Bombshells can do these type of numbers, then look, numbers don't lie, people do. At some point, someone's going to pay you for it.
And if it's not inside a RIC, it's in a sale or a spin out or something like that. So I'm not particularly nervous. You do 33% operating margins for long enough, nobody's people are going to be passing through autograph. In fact, if you go back and look at Buffalo Wild Wings, in their early days, they were easily achieved 35% location level margin. You can actually go look at what they were doing on a consolidated basis and they didn't even own their real estate.
So as we talk about the art of the possible, I definitely don't think obviously, no one wants to underwrite to a 30, but I don't think it's unrealistic that numbers could settle in around the high 20s. I mean, remember, I think you guys are running your rent through these margins. So you're obviously benefiting from the fact that you're buying the land, building the location and subparceling it out and getting those numbers. Out. But my question is a little bit more philosophical, and I don't want to sound like a dead horse or repeat myself over and over again.
But I go back to kind of the math I've been doing. And obviously, building more Bombshells is incremental, club acquisitions are incremental. But when you look at what the business was doing pre COVID, you were doing about $60,000,000 of EBITDA, maybe even a little bit more. And you still have you were still burdened by all those costs from the previous audit in the SEC. And you've used that as an opportunity to clean up your cost structure.
You've done some refinances. So I look at this stock and I say to myself, you were doing $45,000,000 of free cash, I mean easy, dollars 40,000,000 to $45,000,000 without even opening an eyelid. And that was before kind of this bump in Bombshell. So like when I think about that and I think about the private market cost of capital, I mean look at what Apollo has done with Great Canadian. I mean there are all types of private equity firms that would be chomping at the bit to buy this thing and really take it out underneath you.
And look, I know you've got all types of control and things like that to protect shareholders. But at the end of the day, it's very hard to turn away a $40 or $45 offer with the stock trading at $30 You obviously like the stock at $24 You were buying $500 in shares there on average. Can you talk to me about your initiatives to bridge the public in what I would call public and private market valuation. Now we can talk about the financials and all these things that you had before going against you, but you pass all those tests with flying colors. They threw COVID at you.
You're generating cash. I mean, if I'm a private equity firm and I'm looking for ways to put money to work in the kind of a COVID rebound play, the first thing I would do is make a public offer for Rick. So the way you play defense against that is you make it too expensive for them to go after you. How do you think about that?
We just keep pushing forward. We buy our stock when it's time to buy the stock. And we don't really think about a lot of private equity guys have talked to us in the past, but you got to remember, our industry, you have to run it. You have to manage it. So and it's not something that there's a lot of people out there that have experience doing something, especially the size of our organization.
You look at the private sector even and there's not too many companies out there of our size in our industry. Maybe 2 other operators out there that could possibly operate this large. Now you can bring outside people in, but they don't understand the tricks of the trade, so to speak, and they will make some minor mistakes that can affect cash flow really quickly, is my opinion. But at the same time, I'm a never say never kind of guy. I can figure it out, I don't think I'm the smartest guy in the room.
So I think there's probably plenty of other people out there that could figure it out if they wanted to. And do we think about it? Sure, we always think about especially when our we don't really think about as much when our stock is as high as when it was down at $8 $10.8 why didn't somebody come buy our whole company. I mean, this is crazy, our underlying real estate values and then just the Bombshells concept alone and the cash flow. I mean, if you took 3 or 4 of our major clubs, Miami, 2 clubs in Miami, the 3 clubs in New York, now Chicago, the 3 clubs in Minnesota.
I mean, there's a lot of hidden value, I think, or locked up value still in this company based on the value of our individual licenses in certain markets.
Yes, that's kind of what I mean, my math is quite simple. Now, look, obviously, we can talk about the opportunity of Bombshells, right? Look, your job as an operator, and I don't pretend to think that I could ever run this thing, as you did it and you learn the capital allocation on your own. That being said, when I look at Bombshells and I say to myself, okay, fine, if we can open up and this isn't even franchise, this is company owned stores. If I can buy the real estate, subparcel it out and do all that stuff at a 40%, 50%, 60% unlevered return, then maybe you can make an argument that that's a better investment than buying your own stock at 4x EBITDA.
But I mean, the simple math I'm doing, right, is your $256,000,000 market cap, you've got $130,000,000 in net debt, you've got of which non cross collateralized property level mortgages, you're doing you probably have another $15,000,000 to $20,000,000 of what I would call unencumbered non income producing real estate, right? So I look at myself, I'm like, okay, this thing has got $1.10 in net debt, right? It's under levered. Your $360,000,000 kind of EV against the $80,000,000 EBITDA, which I think could be conservative as it relates to kind of the near term for COVID, but let's say an $80,000,000 normalized, I mean, you're basically buying a retail restaurant concept that's growing at 4 times. I mean, that's kind of hard to beat.
And so question really becomes, look, I totally get the bombshells, but like how do you justify doing club acquisitions with the stock trading at $30 I mean, I get it at $40,000,000 $50,000,000 I mean, I'd have to spread it out. But I mean, at this point, like it seems like the only thing that totally makes sense is buying back shares and doing Bombshells. I mean, am I thinking about this?
Well, you say that, but well, you got to remember, the way we've done all of our club acquisitions from 2017 on, I have basically been 100% debt, right? And what we do is we go in and we look at this we go in and we look at it and we say, okay, this club is making X amount. We're going to give 70% and this is their free cash flow. We're going to give 70% of that free cash flow back to the owner. We're going to keep 30% of that free cash flow.
We're going to or I'd say the owner or debt holders, or debt holders are going to get 70% of the free cash flow. We're going to take 30%. We're going to manage it. So we're basically managing to own, and we get 100% of the upside. It's how we did Chicago.
It's how we've done Pittsburgh. It's how we did Scarlet. And couple of the Kappa, a couple of the other locations. We don't really use the company's free cash flow to buy those club acquisitions. We've used financing, our reputation and our ability to actually go in there and operate the businesses.
And our reputation with the owners in the industry of our ability to pay them regardless of what their club does, we still pay we pay them. But we have been very successful in not only generating the cash flow out of the business, but actually increasing and actually increasing our side of the cash flow as well. And that's been very successful for us. We put some short term balloons in, which if we weren't able to then go and get longer term financing, wouldn't force us to put some of our cash up. But so far, every time our balloons come due, we've been able to roll it into with our other existing real estate portfolios or through other investors or whatnot, been able to roll that debt forward.
And most times lower interest rates as we do it.
So basically what you're saying is you think you're creating club assets net of synergy at multiples lower than what you're looking for? Yes. All right. Well, look, from your mouth to God's ears, I mean, if you can do deals under 4.5x EBITDA and it builds brand and it builds the mode and you can buy back stock and look, I'll quit my hedge fund and I'll come work for you, Eric. I mean, shoot, this is going to be a $10,000,000,000 company.
It's pretty impressive. So look, I'm happy to be the largest shareholder in this company. It's pretty impressive. And I'm looking forward to seeing you guys level up because the business performance is there and the market recognition is not. So please let us know how else we can be helpful in that
Our next question is from Jason Schur with Archer Wealth. Please proceed.
Hey, guys.
Great quarter. I like to hear everything that we're going. I had wanted some clarification though. How are you guys looking time wise in terms of the debt restructuring at these record low interest rates? And how much do you think you could like bundle together and get a better rate than what the cost savings might be?
Sure. Our goal is $115,000,000 We're trying to close before February 28. It's been we had to get the K out. We had to have current financials. We had to show positive cash flow whatnot.
So we just basically sent everything to the bank last night after we filed. And so we're moving forward. We'll probably start working on the appraisals soon because we're going to have to get appraisal updates. A lot of the properties were already financed, some are not. Most of our surveys should be current.
We may have a few surveys to get. We may have a couple of environmental studies to get, Phase 1 environmental to get done, basically get the whole package wrapped up. But now that the K is done, we'll be pushing full speed ahead on that. So February 28 is what, 10 weeks from now. So hopefully, we'll have some news by the time we file the next Q.
Okay. And then in terms of like can you give me any idea as to what the new rates might be range wise?
It's probably going
to be in the 5% to 5.5% range. But if you look at Slide 9, basically, you're going to take obviously all the current real estate. We're going to take the VIP and blush seller notes at $10,100,000 7.47 percent, that will be rolled in there. We'll be rolling in the $14,100,000 in unsecured debt, that will all be rolled in there. And so that will be your that's going to be basically your $115,000,000 it's actually not even $115,000,000 anymore.
I think we paid down some of it. So it's probably like $112,000,000 now, something like that. So we'll either lower the amount or we'll pull $3,000,000 in cash out depending on what the bank will let us do. And that's all going to depend on the appraisals. The appraisals are going to have to come in at the right level.
Our current debt service on that is $1,174,000 I'm sorry, dollars 78,000 And when we do the new payment, we will be paying $768,000 a month. So we're going to save about $410,000 a month in cash outlay for debt service or about $5,000,000 a year, just under $5,000,000 a year. So it's very significant that we get all this rolled up and done. And it will give us basically a set of all these payments we have right now, we'll have basically one loan payment there. We'll have the top comptroller's debt.
And as we've learned, we still have the SBA loans on there, but $4,900,000 of that has been forgiven now and we're working we're waiting to hear on the other 2 they're pending. So we'll see what happens with those. And should be very good for us on a go forward basis once we get all that get that done.
Couple of industry questions. First one, with the big clubs that you guys would target that you're going to have this conference in May and you're speaking to the operators, What percentage of these clubs are basically owned by groups of people and how many of them are you dealing just with like some guy that started the business 40 years ago, you know, or a family?
Usually it's one guy that we're dealing with. He may have a group of smaller investors, but usually there's one control person that we're dealing with. We're not dealing with a group of control people. There's occasional deals where there's 2 equal partners in deals, stuff like that. But the majority of the clubs, I believe, are just they're basically owned or controlled by 1 guy or one entity.
Okay. Yes, I mean, then the other thing was with the bombshell design with COVID now, have you guys had any discussions like with the the architectural structure to maybe increase the overall footprint so that maybe you get graded at a higher capacity, like let's just say instead of having 200 people in a restaurant, you can have 300, just in case these guys turn around and say, well, you can only operate at 30% capacity, but the 30% capacity with the new design is ideally like 60% of what you originally intended.
The patios have no occupancy requirements because they're outdoors. The interior of typical Bombshells is 450 to 550 people already. So we don't really need we already have extremely large restaurants. I think that's been a big key to our success is that our restaurants are so large that people have been able to get in. The place seems busy, but you're not sitting on top of each other.
When you go to a 4,500 square foot to 6,500 square foot standard Brinker Darden restaurant and you put 50 people in there and they're you're starting to get close together. At our locations, because of our 8,100 Square Foot Indoor, 2,400 Plus Outdoor, we can put 150 people indoor or 200 people indoors and still everybody be all the tables are still 6 feet apart. So it's been really good for us. Our patios, while there's no number occupancy, we do enforce social distancing. You can't walk around the restaurants or the bars.
You can't the bar areas and stuff, you have to be seated, you have to have your up, you have to have your mask on. We've been able to do that and I think that's created a little sense of security for our guests. And I think that's why they like the locations. I think that's why they come back.
And then I guess the other thing too about the Bombshells as an overall concept, when you guys are pitching this to any prospective franchisees and stuff like that, I'm assuming compared to most of the other ones out there, your overall liquor sales relative to food costs are just so much higher than the industry as a whole, is that right?
Well, they are from 10 pm to 2 am, right, because that's when we really kind of convert. We bring the live DJs in. We sell a lot more appetizers. It's more appetizers and mix. It's typically 25 to 35 year old guests that are, I call it the meet and greet place.
We're going to meet and greet up here. We're going to grab a couple of drinks because our drinks are cheaper than the high end bars that they're going to go to afterwards. And some of them might be hungry, so they're going to grab a couple of appetizer orders, couple of drinks, and then they're going to head out for the night to where they're going. Our key success has been a group of girls come in, they are going to meet up, they're going to head someplace else, a group of guys come in, they meet up, they're going to head someplace else. But when they get to Bombshells, they meet each other and they end up staying at Bombshells till 2 o'clock in the morning.
They never leave and go to another lease. And that's been a real key to success for those late night hours. And you can see it in the numbers where the locations that do extremely, extremely well, as far as especially on higher margins like you said, our 2 newest stores that's because we started the concept out correctly from the very beginning. We've built that late night. We focused on that late night build and have done very well with it.
And that's where, like I said, we really reap the reward of high margins, because you're selling high margin appetizers, you're selling high margin drinks and 4 solid hours of that, you're doing very well.
And then just one last thing to dispel the whole politically correct crowd. What would you say the breakdown of the customers coming into the bombshells is between men and women?
I'd probably say, we're probably 40% men, 30% women and then the rest is mixed. I mean and then late night, I mean, it could be I've been in Bombshells where there's more women than men in the evening times at certain locations.
These are the little things I like to hear in the politically correct world.
Yes. Well, I mean, I think the problem is, as everybody tries to associate us with Hooters or Twin Peaks, and while we have a little flare of Hooters or Twin Peaks, and that's where our slow hours, that's our 2 to 5 p. M. S and our kind of as we move from lunch to dinner, as we move from dinner to late night, that's kind of where those where that business comes and helps. That's 20% of our business maybe.
But because of our large menus, our drink menus are very female friendly. I mean, all of our basically all of our drinks on our menu cater to females, right? Because guys don't guys got to win, they know what they want, right? Oh, I want a whiskey or I want this beer or I want this on the rocks or scotch, whatever. Or the females that come in, they want a fruity drink, they want a big drink, they don't know which one they want.
And so they have all these different drinks on the menu and it's been worked very, very well. Same with our food. If you look at our menu, we have salads and wraps and different seafoods and different chickens and everything that caters to basically a much, much larger crowd where if you go into Hooters or Twin Peaks, they have a very, what I call, male centric menu. And we've done everything we can do to stay away from that male centric menu and to make everybody feel welcome. We have kids' menus that fold up, little army hats, kids put on the army hats, they have little games on them.
So I mean, we're very family friendly. We're very female friendly. We're not I know we get thrown into that restaurant category a lot, but I just don't think that's what our concept is. I think it's a very small part of our concept just because we have the girls in the uniforms, but and they have fun and we make it a fun place because that's the real key, right? Nobody wants to go out and have a boring experience at a restaurant.
Now it's an experience. It's not just I'm not going to go eat. If you want to eat, you're going to go casual dining, you're going to go Chipotle, you're going to go to Peiway, you're going to go to these quick, fast casual dining deals. But if you're going to go out and have an experience, that's what Bombshells is about. It's about the experience, not just the food.
That's great.
Our next question is from Yaron Namark with OneMain Capital. Please proceed.
Hey, guys. Congrats on a strong quarter. I second everything Adam Wyden said earlier in terms of you guys managing through the crisis. I still remember in March April, I was calling you guys every 3 days to ask if you were comfortable with your cash balance and to think that you managed through as well as you did.
I won't lie, it got pretty scary around here. That PPP money came in at the exact moment we needed it. I mean, right we weren't sure what was going to go on. We weren't we're like, okay, what are we going to do from here? I think we were down to $4,000,000 cash on hand at the time.
We were hearing that we're supposed to be opening the Bombshells. We actually we opened 4 of them. We didn't open all of them because we just things were tight. And we tried to open 4. We're going to open a few at a time.
We didn't know how they were going to do. We didn't even know if customers were going to come. And so Yes, congrats
on getting through. I mean, I think it's rare to have a combination, especially in small and midcap land of a company that has an incredibly strong business with a wide moat like you guys have at a low valuation with a really great management team with insider ownership and with the ability to redeploy capital at the rates of return you guys have shown that you guys can deploy capital at. So I think it's a trifecta. I'm excited to be a shareholder. We're
going to cure that low valuation. That's what we're working on. Yes, exactly.
The only thing I disagree with Adam on is I hope you guys don't even consider selling the company for $45 because I think you guys have How
we would. I mean, I'm not looking to sell the company. We just built it to this machine that we've created with the teams that we put together and the new accounting software that Bradley put in and the systems Bradley has put in for us that give us just immediate access to information that used to take weeks to get. And now Bradley can give it to us at a click of a button. It's amazing.
And that's how I mean, without the systems that they created and the ability to get this information and the teams on the accounting side of things, I mean, it may have been a different story. Our management can do so much, but without data and not correct data, their decisions may not have always been the best. But we always had the best data that we could have possibly had at the time on what was going on and it made a big difference.
Yes. So the main question I have is, I mean, you touched earlier on on the fact that when you do club acquisitions, a lot of times you fund them with debt, whether it's seller note and mortgages on the properties. And so the returns on equity on those are basically infinite. And then clearly the returns on the most recent bombshells, which it took you a while to tweak and find the right locations and the right build outs, but like the returns on Bombshells are also extraordinary. And so you guys have these long term targets out there of growing free cash flow per share at 10% to 15%.
And I'm just wondering why you guys can't be growing free cash flow per share at 25%, given the fact that you're going to have excess capital, especially if you guys I mean, it sounds great to hear that you said you think you're going to get franchisees on the Bombshell side. So you could potentially be in a scenario where you have other people building Bombshells with their capital where you get paid on that. The capital you're putting into your own Bombshells are earning, I don't know, 50% ROEs or something. And the acquisitions you guys are doing on the club side are infinite ROE. So if you're taking your cash and reinvesting it at infinity percent or 50%, like why can't free cash flow per share grow at those types of rates?
Well, if you look at our 5 years since we started the capital allocation strategy, we're averaging about 22%. But if I say 25% and grow 22%, everybody goes, oh, if I say 10% to 15% and grow 23%, everybody says, oh, great, good job. And the reality is we just need a realistic goal, right? I mean, sure, we may have some years at 25%, but to do that every single year, year after year, I think is a little more difficult. And that's why I think a reasonable goal is 10% to 15% and we want to overachieve and hopefully we'll continue to overachieve as we move forward.
Obviously, COVID has thrown a big wrench in that, but I still think we're going to see, as soon as we reopen everything, a return right back up. And we're going to see a significant increase in, say, our 2021 or 2022 numbers versus our 2019 run rate with what our 2019 run rate was. And that's going to be because of what we've managed pre COVID.
I don't even mean like pre COVID, post COVID. I mean once you get back to your baseline, like I don't know why you guys can't grow at 25 percent every year if you're taking all your cash and reinvesting it in these projects every year that in theory generate returns that are way higher than that.
And we may as we get our debt service even more manageable than it is right now with the new long term note saving us almost $5,000,000 a year in cash layouts for debt service. That's $5,000,000 is another 2 bombshells if we want to do 2 more bombshells. That's a possible club acquisition. We could say pay off high interest debt, but we won't have any high interest debt left. The only thing we'll have to do with our cash is either buy back our stock or put more to use by buying more operations, growing operations.
And probably do both if you generate cash. So I mean it sounds like 10% to 15% is the overpromise, under deliver target.
I mean that's what we try to do. I mean that's obviously we don't want to we definitely don't want to fall short of our 10% to 15%. That's for certain. And of course, we like to do better when we can.
Right. Okay. That's helpful. And then my second and last question is, could you just give some more color on the you kind of gave some color on these franchisees. There's 2 of them.
How far along are you and what do you think the likelihood of one of them getting signed here?
I think definitely by if not this quarter, next quarter, we'll have our 1st franchisee signed up. From there, I think once you do your first one, I'm hoping, I've heard from other operators and other guys that I know very well that once they sign up their first one, it kind of rolled pretty fast for them. It got kind of crazy. We're prepared for that. I think it will be a little slower for us just because of COVID.
I think that we'll probably really pick up right at the end of this fiscal year. So this summer, going into July, August, September or maybe even in that next quarter, October, November, December, that's when I think we'll really start seeing a lot more interest in Bombshells. I think once we open up our and it could take longer, it could take until we open up a couple of our Florida locations and show that, hey, this isn't just a Texas thing, because that's what I get from a lot of guys. Well, yes, this concept works in Texas with the military and everything, but I don't know if it's going to work in this market or that market. And I just try to tell them, look, the military is another small part of the piece.
It's not the concept. And to be honest with you, I can't even explain the full concept and why we're so successful. I see all the little pieces and I think we just put all these little pieces together and it created this beautiful puzzle came together and it's just working very, very well. So we'll keep doing it. We'll keep focusing on the things that are important for the Bombshells brand and keep growing it.
We're going to put out another menu change here soon with some new items, take off some items that aren't selling so well and keep everything fresh. And I think that's just been the key. We're constantly reinventing it. We're constantly keeping it fresh and fun and exciting, and it's worked out real well for us.
Got it. Thanks guys. That's all for me.
Our next question is from Stephen Martin with Slater Capital Management. Please proceed.
Group.
Hi, Steve.
Having been a shareholder for quite a while, I had more than enough confidence that if there was a management team that could manage through this crisis, it was you guys. I didn't know how bad the crisis would be. So it was hard to gauge, but I echo the sentiments of the previous callers that you guys have done a great job in a very tough environment. I know having talked to you through the period on any given day, you never knew what was open, closed, what the hours were going to be or how the staffing was going to be, but you guys rose to that occasion.
Thank you. Certainly tried.
Couple of things. 1, the previous caller's question about growing cash flow and all that, I just wanted to say that while I'm supportive of growth, I'd rather see controlled intelligent growth than reckless growth for to achieve some ridiculous target. You guys have done a great job of rationalizing, growing on a controlled basis, and I'd love to continue to see that.
Yes. I think that's what you'll always see from us, because everything is 5th grade math, Steve. I mean, we look at everything. We take it to the capital allocation strategy. We look it out.
And a capital allocation strategy, I mean, while we simplify it here for you guys in these slides, internally, it's much different and much deeper than just a simple slide. And that we look at total debt to EBITDA ratios. We look at mean, we have all these different metrics and each deal has to fit and make each of those metrics. Or we just go back to 2016, which we call the do nothing mode, right? We just go back in the do nothing mode.
We set and we wait And we let the cash build up and we let the cash generate. And if our stock price is cheap, we buy back our stock and we wait for the right deal. We're in no hurry to do a deal. We're quite happy with the current cash flow that we have and we always seem to be able to find ways to meet our goals without taking on any undue stress. We don't like to stress the systems at all.
That's the real key, To keep everything growing without stressing the systems, our management systems, our internal systems, accounting systems, everything. No system wants to be stretched, no system is going to be pushed to a limit, because that's when we make mistakes. And we've learned from that over the last 30 years that at the end of the day, one mistake can cost us 2, 3 years of growth and it's just not worth it. So we'd like to take it nice, slow and steady.
Well, I appreciate that. And you actually led into my next question for Bradley. Now that you've got pandemic, When you look out over the next 2 or 3 years at the ability to grow, what do you think your incremental overhead or G and A might be if you were to start to grow again, I don't know, 3 or 4 clubs a 3 or 4 restaurants a year and 1 or 2 club acquisitions? What would it cost you on the margin?
Sorry, I had to take myself off mute. Hey, we're not exactly sure yet, just given the fact that this year's data is kind of skewed and it's an anomaly. I know that we trimmed a lot of fat in these last three quarters and we don't expect that to come back on. But on our normalized margins, we know the direction that we're going. So it's very hard to say because until we get about couple of quarters worth of normalized margins with everything back open at the right occupancy, at the right hours with our normal staffing, very hard to say.
I can't give you that information. I don't want to get at it.
No. Bradley, I was more addressing the corporate overhead side. Less about the divisional expenses and restaurant margins, but more your ability to add units and grow the retail side and control the corporate G and A?
That's the plan. The plan is always to control our fixed costs, to control our overhead in terms of salaries and wages, SG and A to negotiate with our insurance companies and to reduce that as much as possible. We're doing that with the best information that we can. What we learned during COVID is that a lot of our vendors are willing to work with us. When we're stressed, we can press them for discounts and whatnot and work with them.
And we're seeing opportunities in different markets even at the corporate level.
And what about headcount?
I expect the revenue per headcount to continue to grow. A lot of our systems are basically leveraged now. We have a lot of automation in. So before, whenever I had 2 or 3 profit centers, I would have to add a couple of headcount here and there. A lot of our systems and we'll continue to use artificial intelligence and AI to bridge the gap between how do we get our data really fast, quickly and accurately into our corporate environment.
So as we continue to automate, I expect our if we can continue to manage our salaries and wages, we will continue to keep growing revenue per headcount and margins per headcount at a reasonable rate.
As we are reaching the end of our hour, we are going to take one final follow-up from Adam Wyden with ADW Capital. Adam, please proceed.
Sorry to keep you guys all here, Eric. I know you've been at this for an hour now and I'm probably tired. I don't know. I just I would just want to clarify one thing on your two things actually. On your comment, he said, well, Adam would be an advocate of selling the stock for $45 I mean, look, if you guys really want me to, I can do it on Twitter.
I can pencil it out why this is a triple digit stock easy today and that's before using our imagination on Bombshell. So by no means am I indicating that you should sell for $45 What I'm saying is if you're Apollo or some Sharky private equity firm, right, why don't you step in there, buy a bunch of shares and make a public offer, right? You and I both know that one of the great things about being a United States citizen and the SEC in the public markets is that like this is a country and this is why I'm in the hedge fund business. This is a country of manifest destiny. If I want something, I go out and freaking get it.
And if I'm Leon Black or one of these guys, I'm going out and buying all these shares and I'm contacting Renaissance and Adam Wyden and all these people telling us why Eric can't get the stock up and he's infinite and blah, blah, blah, blah, blah, and we should sell at $45,000,000 I mean, look what's happening in the great Canadian gaming, Apollo is stealing the company. Now I'm by no means am I saying that you're a fantastic, I mean, freak no, I mean, you've done the unbelievable. I was just implying that like there aren't these types of value opportunities. I don't see a lot of companies that can do 100 of EBITDA coming out of COVID and then have this unbridled 500 unit franchise company owned Chipotle, Buffalo, Wild Wings, Lollapalooza in front of them. I mean, what the I mean, that's pretty freaking incredible.
And so like I'm by no means saying, I mean, look, I didn't buy a 1,000,000 shares of this thing because I wanted to sell it at 45, I want to sell it at 400. So I don't believe that. I was just saying, look, I'm not that smart of a guy. And if someone like me who's got a basic, like you said, who can do 5th grade math and get on Google to see why can't some Harvard MBA in New York City. So I was just saying, look, it's value, cream rises, however you want to say, cream rises to the crop, numbers don't lie, people do, however you want to say it.
This is going to become obvious to folks and I just I want us to be able to get the full scope of that opportunity. That's what I was saying. And then I wanted you can answer that. And then the other question I had was, you mentioned that you have a refinance coming in the end of December and you said roughly $400,000 a month in savings. That was not in my free cash flow analysis in 2019.
So as far as I can tell, that's about $5,000,000 of free cash flow at even a 10 multiple. Now we can argue why this should trade a 5, right? I mean, if you're growing free cash flow of 15% a year and you trade at a 5, that's a 20% total return on Buffet math, that's an acceptable return for most investors.
So I mean,
I can easily tell you why this thing does $5 of free cash flow and I think it will do much more at a 20 multiple, it's $100 stock and that doesn't really discount any growth at Bombshell. So that's how I get to my 100. But as it relates to the refinance opportunity, not alone, I mean, even if you don't believe in the multiple, at a constant 10 multiple, that's $50 a share at 9,000,000 shares outstanding. That's what is that, dollars 6.5 that's a little less than $6 a share. I mean, I were if someone was actually listening to this conference call, I would have expected the stock to go up by some fraction of that.
I don't know, 75%. I mean, it's just completely ludicrous. I mean, I follow this company as well as anybody. I didn't really think about a $5,000,000 refinance. I mean, that's almost $6 of equity share that just falls in our lap.
You don't have to do anything other than make a phone call.
Well, we'll just keep pushing it. That's all we can do right now. I think the loan will close in February, not December, just a little bit confused by that, but that's okay. But other than that, everything else is very accurate. I mean, we just we're just going to keep doing what we do.
That's the market will catch up. That's what Buffett says, right. Don't worry about the market. Just run your business and the market will catch up. We're just sitting waiting for the market to catch up.
So in the meantime, we're taking advantage of it. We've taken our share count down from almost a fully diluted 10,800,000 back in 2014 or 2015, and we're under 9,000,000 shares now as of the filing of the K. And we're sitting basically on our reserve amount. So if we can continue to keep generating cash flow even with these close downs and whatnot until we get everything reopened. We may have less shares outstanding.
I know we're going to be working on closing on a couple of these Bombshells locations here soon. We're working with the bank financing on the real estate side of that right now, and we'll get those started. Like I said, just right now, the plans just keep moving forward. We're focusing on our day to day operations that are open and we're focused on adding some new locations as we move into fiscal 2021.
Well, good. And Eric, look, I think you guys are doing a tremendous job and Bradley sounds great on the call and it sounds like you got this well oiled machine going. So I look forward to many more of these things and especially in triple digits. So hopefully sooner rather than later.
All right. Well, when you said it was going to go to 30, I thought you're crazy. Now you're saying 100, I think I'm just saying, okay, we'll keep doing it and you'll get us there. I mean, this thing just keeps rolling as long as we keep producing. So that's been the what we've had in the past.
We've had shareholders that they as soon as the stock goes up, they all sell out. And I really appreciate you staying here with us now that you're on the right side of the trade and we're going to keep pushing it up and keep growing for you.
So we appreciate it. All right, Kevin. Nice holiday if I don't speak to you. All right.
You too. Thanks a lot.
We have reached the end of our question and answer session. I would like to turn it back over to management for closing remarks.
Thank you, Eric, and thank you to all our investors for your questions. On behalf of Eric, Bradley, the company and our subsidiaries, thank you. Have a great day and best wishes for a happy holiday season and New Year's. Stay safe, stay healthy as always. And as always, please visit 1 of our clubs or restaurants.
Thank you. This does conclude today's conference. You may disconnect your lines at this time and have a pleasant day.