Greetings, and welcome to the 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 or you could go to the webcast where you'll see our slides.
Please turn to Slide 2. 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. I urge you to read it.
Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards. Please turn to Slide 3. I also direct you to the explanation of non GAAP measurements that we use and are included in our presentation and news release. And please turn to Slide 4.
Here are comparable GAAP versions of 4 charts and tables we will be using in today's presentation. Now I'm pleased to introduce Eric Langan, President and CEO of RCI Hospitality. Eric?
Thanks for joining us today. I'm here with our CFO, Phil Marshall and our Controller, Bradley Shea. Before we start, I'd like to thank our staff and our new auditors again. For the last 2 weeks, they've worked long hours to get our Q1 10 Q filed and bring us current with our filings. Please turn to Slide 5 for today's news.
After the market closed we filed our 10 Q as we had expected to do during late February. We reported $48,400,000 in total revenues. That's up 9.9% year over year. GAAP EPS was $0.60 compared to $0.65 The year ago quarter included $1,100,000 in pre tax net gains on the sale of Access assets. On a non GAAP basis, EPS was $0.62 compared to $0.61 The star of the show was our Bombshell segment.
Quarterly revenues hit $10,400,000 up more than 72% year over year. Not only that, but the segment margin rebounded to 15.2%. Based on that and other trends I'll discuss, we expect performance to continue to grow. Nightclubs maintained their strong contribution despite an unusual calendar. We had one less holiday sales week during the important Thanksgiving to Christmas period.
As we previously reported, performance has also picked up due in part to a great Q2 sports calendar in markets where we have some of our largest clubs. Our Northeast Corridor acquisition continues on track. Regarding our capital allocation strategy, we generated $9,300,000 in free cash flow. That's in line with our current $30,000,000 run rate. We used $6,400,000 in excess cash to buy back 333,000 shares in the Q1.
That reduced weighted average shares outstanding 4% year over year. And we still ended the quarter with more than $13,000,000 in cash. During and subsequent to the Q1, we eliminated $10,800,000 in near term balloon debt to retain cash and increase our financial flexibility. This flexibility will be further enhanced when we close on approximately $6,700,000 in excess properties under remaining excess properties with approximately $9,000,000 in market value. After the Q1, we also increased our buyback authorization by $10,000,000 giving us a total of $13,800,000 available and we increased our annual cash dividend 7.7%.
Please turn to slide 6 to review our Q1 operating results. Nightclub segment sales were on a similar level to last year. The Q1 of fiscal 2020 included 2 new clubs, Rick's Cabaret in Chicago and Pittsburgh, which we acquired in November of 2018. 2 clubs were closed for part of the quarter and as I mentioned earlier, one less holiday week or sales week. Bombshells had a record performance.
This reflected 3 units in the new sales count for the full quarter. Bombshells Katy, which opened in the second half of October to great numbers and more than 19% same store sales growth from our first five restaurants. Nightclubs operating profit were down $1,600,000 Most of that was due to $1,200,000 in gains on sale of non core business assets in the year ago quarter. Bombshell's operating profit jumped to $1,600,000 from a relatively small amount in the year ago quarter. That reflects both improved revenue and margin despite preopening costs for Bombshell's Katy for several weeks and Bombshells 59 for the full quarter.
Corporate expenses were $1,200,000 higher. This was primarily due to higher audit, legal and overtime expenses related to our 10 ks filing. As I had indicated, they would be in our last call. On a non GAAP basis, operating profit was off only $375,000 from last year, which was made up for on a per share basis through our stock buybacks. Please turn to Slide 7 to review our sales and margin trends.
1st quarter revenue hit a new record, largely due to Bombshells. The segment's higher contribution offset the increase in corporate expenses. Looking ahead, you can see our total operating margin should begin to improve. Bombshell segment margin is expected to continue to grow with all new units open and continued improvement in same store sales. Nightclub segment margin should expand with all clubs open and big sporting events near our larger clubs.
I'm talking about the Pro Football Championship in South Florida, the Pro Basketball Weekend in Chicago, both in February and the college basketball tournament in New York and Houston in March. And as I've mentioned on previous calls corporate overhead as a percentage of revenues should decline in the second half with reduced auditing and related legal fees and overtime. Please turn to Slide 8 to review our Bombshell segment. Last call, we titled this slide Bombshells Turnaround Taking Shape. This call, we've retitled it Bombshells Turnaround is Happening.
All the new units continue to do very well. In the Q1, average revenue per unit totaled approximately $1,150,000 which was up more than 30% year over year. That gives us increased confidence in all 10 locations to generate annualized sales of $40,000,000 to $50,000,000 and as sales grow, margins should expand, especially with the elimination of all pre opening costs as of February. Our internal target continues to be in the 18% to 21% range. As we sell or lease out the access property around some of our newer Bombshells, we expect to generate additional increases in store traffic as those properties are developed.
We haven't currently selected any new Bombshells locations and we are waiting to build up our management teams after opening 6 stores in such a short amount of time and we want to evaluate our ROI on our new investments. Please turn to Slide 5 to the Nightclub segment. I've covered most of this already in this call and our call 2 weeks ago, I'll be happy to answer any questions you may have during the Q and A. If you'll please turn to slide 10 to review our cash generation. Also, I've also discussed most of what's on this slide.
The key thing I'd like to point out is that maintenance capital expenditures were significantly higher this quarter versus a year ago. This can have a noticeable effect on free cash flow. The reason why is that we stepped up our spending at our South Florida clubs in anticipation of the Pro Football Championship this quarter, as I mentioned in the last call, and we also remodeled and expanded our Bombshells in Dallas. We expect these investments to have significant payoffs. Please turn to Slide 11 to review our capital allocation strategy.
We don't have any updates on this slide from 2 weeks ago. We just like to reiterate that based on where we are today, we would continue to be comfortable buying back shares up to $32 per share. Please turn to slide 12 to review the progress we have achieved with our capital allocation strategy since we started it going in fiscal 2016. Revenues have grown about 34% based on a 7% increase in units and a 25% increase in average revenue per unit. That reflects our strategy of weeding out 4 performing locations, organically growing better locations and acquiring or building in the case of Bombshells, revenue generating locations.
With this base of business, we have generated a 124% increase in free cash flow. As we've shown on a previous slide this reflects our ability to convert revenue dollars into more free cash flow dollars. At the same time we have reduced common shares outstanding close to 7%. In total over the last 5 years, we have spent $13,600,000 to acquire 1,200,000 shares for an average price of about $11.43 per share. Please turn to Slide 13 to review our long term debt.
Long term debt net of loan costs fell $1,700,000 from September 30 and $11,300,000 from a year ago. That reflects scheduled debt amortization, debt pay down as a result of certain asset sales and new debt associated with the development of our new Bombshells. We added a notation on this slide regarding our operating lease liabilities in line with the new accounting standard, they totaled $28,300,000 as of December 31. These are liabilities, not debt, as I had referred to them on our last call. Please turn to slide 14 for a look at our debt manageability, which continues to look good.
As I mentioned earlier, during and subsequent to the Q1, we eliminated $10,800,000 of near term non realty balloon payments. We did this to increase our financial flexibility by eliminating any large cash needs for debt repayment. During the quarter, we moved $3,000,000 due in May of this year to fiscal 2023. That is already incorporated in the bar chart on this slide. Subsequent to the quarter, we converted 2 balloons totaling $7,800,000 into 10 year notes.
That's not reflected in our maturities bar chart yet. So the next time you see this chart, dollars 4,000,000 in non realty balloon come out of fiscal 2021 and $3,800,000 in non realty balloons will come out of fiscal 2022. Looking at other debt metrics, the ratio of long term debt to trailing 12 months adjusted EBITDA continued to fall. That's largely due to our reduced debt and stable EBITDA and occupancy costs fell to 7.3% of revenues that largely reflects increased revenues from Bombshells including the Katy location which opened during the Q1. To conclude, please turn to Slide 15.
Going forward, our focus remains the same, running the business for maximum free cash flow. Looking at nightclubs, our priorities continue are continuing to improve operations, finalizing integrating our Northeast Corridor acquisition ensuring that any acquisition opportunities fit our parameters. Regarding Bombshells, our priorities are guiding all new locations to ensure their success and continue to grow same store sales and margins at older units. In terms of asset management, we would like to close all of our pending opportunities. We continue to be focused and we have the financial strength to grow free cash flow per share at least 10% to 15% through a combination of buying back shares, buying the right clubs in the right markets and of course internal growth.
Now that we have filed our 10 Q, we are up to date with our filings and look forward to resuming our pre fiscal 2017 track record of always filing on time. Operator, let's start with the Q and A. As always, I'm happy to talk about all aspects of the business, but I appreciate if you would understand that I'm limited in what I can say when it comes to certain legal matters.
Our first question comes from the line of Marco Rodriguez with Stonegate Capital Partners. Please proceed with your question.
Hey guys, thanks for taking my questions. Real quick, just wanted to circle on the accounting costs, the extra costs that you guys are expecting in Q2. Can you quantify how much you're expecting to be excessive, if you will?
I mean, I don't have the numbers yet, obviously, because we're still in the queue. But several $100,000 of the auditing fees will be paid in this quarter for the 2019 audit and a lot of it over time.
Right. So I think you identified about $500,000 in Q1 that was excessive, so maybe another $200,000,000 $300,000 in Q2?
Possibly. It could be a little higher. Like I said, it's just too early. We don't have all the I mean, we just filed the case 2 weeks ago. I don't even think we've gotten all the bills in from the auditors from that period yet, from the January period yet even.
Understood. And then as it relates to Bombshells, just wondering if you might be able to help us understand and quantify some of the pre opening costs associated with the ones you just opened here in the last couple of quarters.
Sure. Well, I mean we've had to carry management. An average store has about 10 managers. Our average manager goes through a training process of 4 to 6 months. So we've been carrying for almost a year and a half now an excessive amount of additional managers because we knew we were opening all these stores.
So we've had managers in training, we've had cooks in training, excuse me, kitchen managers and just other staff, ran we knew the stores were opening, so we run our staff a little higher than average. And of course, pre opening, we have our training teams. When our training teams are actually opening the stores, there's a lot of additional costs in the 1st month that a store is open associated with actually opening the store.
Got it. And last question, kind of a difficult one here, a big unknown, the coronavirus and a lot of the news has kind of come to the forefront here in the U. S. And obviously with all your locations in some pretty major cities. Just wondering kind of how you guys are thinking about that?
And then I know it's still very early days, but have you seen any sort of change in the traffic patterns at your places?
We've seen nothing right now. Our numbers are fantastic. If anything, I guess people are going out more right now just in case they get locked up for 2 weeks after reading about some of those cruise ship quarantines. Like I said, so far we haven't seen any effect. Obviously the virus isn't in any of our markets at this time.
So we will monitor it and basically follow the advice of the health officials at the time to do what we need to do.
Got it. Thanks a lot guys. Appreciate your time. Thank you. Our next question comes from the line of Jason Sewell with Orchard Welt.
Please proceed with your question.
Hey, guys. Quick question
for you. Just reiterate a little bit more, if we can, on the stock buybacks. So basically, you're saying you've got $13,000,000 available for the buybacks as of today. And when can you commence doing that? And approximately how much of the average daily volume can you do?
Well, I mean, we only we buy within safe harbor or we do block transactions, which exempt us. So we follow those deals. Basically right now, we're current. So as long as we don't have any material inside information, we can purchase stock within 3 days from today. Typically what the rules are for us.
Okay. And then in your free cash flow numbers that you're looking for the year, you're not including those numbers from the sale of these properties that are outstanding?
Correct.
Okay. So if anything, I could be looking at like a $6,000,000 surprise at some point throughout the year?
Well, you got to remember, that's not all profit on those sales. We do have costs on those sales. But yes, there will definitely be some upside on the sales of the assets as we move through the year.
When you're doing the when you're looking at the Bombshells properties, do you find that actually just by putting your location there, you maybe at some point have come up with an average that, hey, guess what, every time we buy a property, the subsequent property goes up by 30% or something? Because obviously, I love your idea about like making sure that the businesses that you're selling to are complementary to the club itself or the restaurant itself?
I mean, it's varied. We've basically done 3 of these developments. 1 is completely under contract. Hopefully, we've closed. I think we're scheduled to close in the next 3 weeks on the last piece of that property.
We originally bought the property for about just under $9 a foot. We put about $2 a foot into developmental costs, bringing in utilities and retention and those types of things. So we had just under $11 a foot into the property. After we built our store, we've contracted the property. The first lot, I think we sold at 16 a foot and the second lot we've got under contract at 18 a foot.
So obviously, we had significant value as more places are developed and build there. The other property we bought a considerable amount of property. We've got 1 piece sold for almost double what we paid for the property originally, which is the frontage piece. We've got a piece on the back under contract at about 40% over what we paid for the property. And we'll have an additional piece there for sale.
And we still have in the Pearland, we still have both of those properties listed for sale. We do not have a contract on either yet, but there's a lot of road construction going on right there down there. And we knew it was going to be we bought the land really cheap and we knew it was going to be a considerable amount of time that we probably have to hold the land up to about 18 months. It's been about 12 so far. So I think in the next 6 months as that construction starts to complete, we'll see activity on that property down there as well.
That's great. All right. Well, thank you very much guys. Awesome.
Thanks.
Our next question comes from the line of Adam Wyden with ADW Capital. Please proceed with your question.
Hey, this is just a follow-up on the last question here. So I guess you have some real estate that's held for sale today that you expect to make a profit on in some capacity that will be in your free cash flow. And then some real estate is not is kind of under development, but not quite held for sale. I mean, can you try and quantify like over the next, call it 12 to 18 months, how much cash you can take out of real estate sales, maybe not just profit, but actual cash?
Yeah, I mean, it's really hard to say because obviously I don't know when things will close, but if we sold everything, if we sold all $16,000,000 or $15,000,000 $15,700,000 worth of property and we got what I consider our kind of minimum mass price on it, probably an additional $4,000,000 to $6,000,000 in cash and we eliminate another $10,000,000 in debt or so.
Okay. So what you're saying is another $4,000,000 above the carrying value?
Well, above the debt value. I don't know about the carrying value, but yeah, but the level of debt. Remember, we put cash down. The problem is we built some bombshells on some of this property. So what happened is, let's say there's a loan on the property for $5,500,000 and we sell the excess land, the way the notes written we have to pay off 100% of the net proceeds to go against the loan.
Even though the bombshells is worth $7,000,000 by itself, we still the way the note is written, we'd have to pay off. Now what we'll do is come December November of December of this year as Chicago and Pittsburgh become 2 years old, we will do a big refinance again like we did in 2017, where we'll take all of our existing Bombshells properties, the location in Pittsburgh, location in Chicago and probably do a refinance into a large long term 20 year real estate note where we'll be able to pull out some of that equity probably on a 65% or 75% loan to value ratio, eliminate these other loans and then pay out from there.
Right. The higher interest loans that you have outstanding, the $15,000,000 unsecured and stuff. But you'll be able to basically refi that out and get more kind of
Right. And turn it into real estate debt against the existing real estate, kind of like we did in 2017, very similar. Well, that's We made a whole bunch of notes and come up with 1 turn it into one note.
For the long term. Perfect. Let me ask something else. So you guys have about $15,000,000 authorized on the buyback. Your free cash flow, I guess, your run rate is about 30, but that probably on some level is burdened by your excess legal and accounting, which we'll kind of get through.
But I mean, when you think kind of forward in terms of closing for Boston and kind of getting out of the kind of in the back half, I mean, your run rate free cash flow should be materially higher, right, as you kind of pro form a for these accounting costs and kind of Boston. I mean, do you think about doing anything else with your money other than buying back stock? I mean, the stock I mean, this coronavirus on some level, I guess, is a gift, right? I mean, the stock went almost $30 on you guys publishing your filings and now you're back at almost $20 and your free cash flow run rate at the end of the year will probably be closer to 40 than 30. I mean, I guess my kind of more philosophical question is, how do you think about doing anything other than buying back stock here?
I mean, it seems like this is just a wonderful opportunity. I mean, do you think you can do more like an
As you've seen in the last quarter, that's all we did. We bought back $6,400,000 worth of stock. With all the cash flow we generated and all the debt we paid everything else, we ended up with $1,000,000 less in cash than we started the quarter with and bought $6,400,000 of the stock back. As we move into this quarter, if the stock continues to sell off into next week, we'll be out there buying it, I'm sure. So if the market wants to continue to discount our assets, we're going to continue to buy them back.
So is it fair to assume that next week, the stock is at $18 that you guys could, I mean, within the guidelines of safe harbor and volume blocks, I mean, you could in theory
obviously, we have to have about obviously we have to have about $8,000,000 to $10,000,000 in cash to operate. So we're not going to get ourselves into a situation where we're short cash on hand for operations. But yeah, I mean, we would be extremely aggressive. It would depend on if blocks became available. In the last quarter, we had 2 major blocks come available that we bought from a single investor.
If those blocks become available, we're definitely going to look at them. We've now eliminated $10,800,000 worth of balloons over the next few years. We've got a couple of smaller balloons out there still we're dealing with now. We'll decide whether we're going to try to push those or pay those off as we move forward. The real estate balloons will be paid off with the property sale, so I'm not really worried about those.
I mean, right now, we're in a great position where we have the flexibility to basically do whatever we need to do or whatever we want to do depending on what the market allows us to do. If the market continues to allow us to buy our own assets at these prices, we will be very aggressive. If they get more expensive, we will slow down. But unless they get fully priced, I don't see us doing a whole lot of stuff other than buying back stock. I mean, obviously, continue to grow the business at our 10% to 15% clip, but we're doing most of that through debt financing right now.
And I think we'll continue to do that. I think after debt service even with after debt service right now, we're probably in the $250,000 $300,000 a week in free cash flow after debt service that we can put into the stock. We're sitting on several $1,000,000 of extra cash right now today. And as we close on these other properties, we're going to pick up I think the first two properties we pick up about $2,800,000 in additional cash. So right now, cash is not a problem for us.
So it's just going to be a matter of whether we can find available shares for sale and what the prices continue to be.
Got it.
Can you talk a little bit about the last 3, 4 openings of Bombshells and why you think they've performed a lot better than the previous ones?
Sure. We've learned a lot, opening 10 stores. You've got a cookie cutter floor plan now. So they're all almost identical. We've learned our demographics.
We've learned the traffic flows or what's important. And the locations that we bought were very, very good locations, very high traffic locations, Class A restaurant locations. I think as we continue to look the thing of it is it cost me the same amount to build a store, whether I build it in a Class A location or a Class B location. So before we were growing, we weren't really as I would say as wise as we are today, where we've really learned which locations and what traffic flow patterns we need to do the $100,000 a week, dollars 140,000 a week store. So you're doing a $5,000,000 to $7,000,000 store.
I've looked at a lot of locations that we've passed on that are probably $4,000,000 $80,000 $90,000 a week store. So they're doing $4,000,000 $4,500,000 but it cost me the same amount of money to build that store as it cost me to build one that does $7,000,000 So we're trying to really hold out and find the right locations right now. There'll be stores that will do these higher numbers.
Got it. And in terms of, I mean, you guys I think more or less you publicly committed to not building any new Bombshells this year, kind of showing people the kind of the true earnings power of Bombshells and kind of showing people kind of a clean year with less legal and less accounting. I mean, mean, looking forward, I mean, taking a step back, I mean, you've grown this thing from $2,000,000 of EBITDA or whatever it was, gazillion years ago to maybe next year, exiting this year, you'll be run rating close to 60. How do you think about the next move from 60 to 120 of EBITDA? I mean, you're there are a lot of big strip club chains out there, but they're going to cost more than these smaller deals.
I mean, how do you think about kind of getting your cost of capital to a level where you're not just buying the stock, but you're able to use it to kind of do more transformational deals? I mean, what do you think the market needs to see to kind of get you to that next level? I mean, obviously, you had to get your financials in order and all the rest of that was a prerequisite. But I mean, do you think that do you have confidence that you'll be able to get back up? I mean, I think before all the financial shenanigans with the numbers, you guys were trading at 12, 13, 14, 15 times cash flow.
I mean, do you have confidence that if the numbers are in order and the financial performance is there that you'll be able to get the stock back up to those types of levels where you can use it to do more transformational deals?
I mean the idea that's why you put Slide 13 in there to kind of show you or Slide 12, I'm sorry. Slide 12 to kind of show the progress of the capital allocation strategy. What we're going to do is we're just going to keep taking it 1 year at a time. We're going to keep growing at a 10% to 15% compounding rate of free cash flow. And eventually, the market is going to have to recognize the consistency.
I think once the market recognize the consistency, then we'll get the multiple expansion, especially as we continue to prove ourselves over and over. Or what's going to happen is there's going to be a few shareholders left that won't sell their stock, that have been with us for a long period of time that have seen the consistency. And so anybody else that wants to own part of this is going to have to pay up for it. I mean, that's kind of the reality of it.
Good. All right. Well, I look forward to the buyback,
all right. And I'll jump back in the queue.
All right. Thanks.
Our next question comes from the line of Douglas Weiss with DSW Investments. Please proceed with your question.
Thanks and congrats on a good quarter. Most of the questions ahead have been asked. But on the I guess on M and A a little more, could you talk a little bit about how much how many deals you're seeing and what are the pricing is interesting at this point?
We're seeing new ones every week. Pricing is not the issue on most. A lot of it has to do with where it's at and those types of things, some of it's pricing. We're just taking it easy right now. We've got this big acquisition, we're getting ready to close, we want to get that done.
Our accounting team needs a breather. So we'll let them relax for a couple of weeks through spring break, get them back to work in April. But I mean, we're looking at quite a bit of stuff. There's new stuff every week. I'm getting new emails, new text messages and calls from people, stuff all over the country right now.
So really it's just about finding what fits best for us next. That's kind of what we've been discussing internally. Some of these acquisitions that we have on our plate, like which one do we want to really move on next.
Do
you think it's better? Do you think it's better or are you looking at expanding in existing markets? Or are there advantages to are there other new markets you'd be interested in expanding into?
We're looking at both. I mean, obviously, existing markets are easier for us for the most part or something that's what we want is a new market that's close to an existing market. That works out best for us. That way we have a sports staff that's close, but we're also entering a new market, picking up new market shares in another market. That's why Pittsburgh and Chicago were both very good acquisitions for us.
So those are the types of acquisitions we're looking at right now, Something that price range as well. We're trying to stay in that probably $10,000,000 to $15,000,000 price range.
Right.
It's easy.
Right, right. As far as
your accounting and accountants,
I know you
brought in an outside consultant to help remedy the internal controls issues that were cited. Would you say that work is done at this point? Or have you kind of implemented their recommendations or is that still a work in process?
Well, we're 3, 4 out of 5 of our material weaknesses. I mean, it's constantly evolving, right? Because the rules are constantly evolving. And as we grow, we've got to make sure our systems grow. The biggest problem we had is we grew so fast and we were in the process of doing our ERP system, but it hadn't been put in place in 2016 and 2017.
And we just grew so fast that the accounting system couldn't keep up. And as we converted from one accounting system to another, while our numbers all checked out every time, there were no material changes to any of our financials or any material restatements of our financials, but we had to learn. And the biggest problem you have as you get larger and larger is you don't know what you don't know. And so we had to go through that learning process. The new ERP system is incredible.
It gets I think it gets better every quarter. We find something new that it can do and get better reports and we're continuing to grow with it. And it's very scalable. So the nice thing is to go from where we're at now to double in size or triple in size, this software won't even know it won't even stretch it. I don't know what numbers, how high we have to get to in revenues before this software has any problems.
Well, hopefully, someday we'll find out.
Right. Oil prices have come down quite
a bit. Have you seen any impact in your Houston,
either in the Bombshells or in the clubs as far as attendance?
Nothing since January February for sure. We'll watch and we'll see through March if we have any real effect. We only have really two locations that are affected by oil prices. That's Odessa and Longview, Texas. Longview is a very small club anyway.
You wouldn't even know if it's affected. We know, I mean the market would never know, it's too small. The Odessa market is a big market for us, 2 very large clubs up there, very profitable clubs for us. And so we watch that and we're definitely seeing some slowdown in that market on a year over year basis. But oil was, I think, dollars 70 last year, it's in the 50s this year.
And we'll just watch and see. I mean, it's still very profitable, still very profitable club for
us. But Houston
is not really affected by oil at all or really any of our other markets. I think the real markets that are affected. If anything, they're helped because gas prices get cheaper, so people have more disposable income.
Right.
And then
I guess last question, do you have any thoughts generally on comps looking out for the rest of the year? I guess it sounds like the sporting calendars might be helpful, but anything you'd say there?
Yes, this quarter, I mean, January February March is going to be some really nice comps. I think our comps were a little weaker last year. Super Bowl was in Atlanta, so we didn't get any big push from that. We got a huge push from that this year. The NBA All Star Game this year is big for us.
So and I'm hoping that the college basketball tournament is going to be fantastic for us too. So we'll watch as we move forward. And the big fight last weekend was great. We had a really big weekend.
Okay. Okay. Well, thanks. Talk to you next quarter.
All right. Thank you.
Our next question comes from the line of Darren McCammon, a private investor. Please proceed with your question.
Hi, guys. Few of them have already been answered. Can I get I think you already partially answered this, but maybe I can hear it again? On the you had about a $2,500,000 increase in SG and A cost. Could you detail out how much of that was non reoccurring one time?
Probably not. I mean, to be honest with you, we've been too busy getting everything done and not really looking at what everything costs. In the next quarter or 2, yes, we'll be able to break it out because you're going to be able to see the differences as the costs come down. But the reality of it is, is not I don't really know. I know a lot of it is accounting, a lot of it's legal and a lot of it has been it's overtime.
I mean our accounting staff has been in this office for about 8 am to 10 pm, 6 days a week, almost the entire month of January. So Bradley says that the accounting legal is probably between $800,000 $1,000,000 of it just by itself, just related to getting the 10 ks stuff done, yes.
Okay. So it adds up to about $0.27 a share. So yes, maybe offline, if I could get a little more breakdown, I'd appreciate it. But the $800,000,000 to $1,000,000 is pretty helpful all by itself actually.
Okay.
I'm going to ask the same thing I asked a couple of weeks ago. You're at a $9,000,000 run rate on your free cash flow, which why I add up adds up to about 36,000,000 dollars Why are you using $30,000,000 for your stock buyback?
Well, you got to remember, we did $9,000,000 this quarter. So we don't have those kind of numbers in the 4th quarter typically. And the 3rd quarter is usually down a little bit. Let's see how this January, February, March quarter goes. And maybe we'll have adjustment to it.
But I still think pretty much we're pretty close to that $30,000,000 actual run rate. So we'll see. I mean, the second half of the year, we'll have a lot to tell. It's hard it's just hard to tell with all these added expenses where for sure we're at. Dollars 30,000,000 is the number that we're most comfortable with right now.
Fair enough. So you're going to look at it again in well, in your Q2, which is after the March quarter basically?
Yes, we should put our 2nd quarter results out in May. So we'll have a better hope we have a better idea of where we're at and how things are looking in May. Okay. If we're going to be if our run rate is increasing, we'll let you know at that point.
Okay. Just a comment, I get confused every time you guys say Q1, Q2, Q3. You guys use December quarter, March quarter, September quarter, December quarter, it's just easier to keep track of.
I know, but then I get confused. But yes, I understand what you're saying. And this was the December quarter. So in the March quarter, which results will come out in May, we'll have a better idea of how these 1st 6 months have gone, how the costs are starting to get in line. And I think definitely the June quarter will be the real telltale because I think we'll have no real outside costs other ordinary business costs, I think, in that quarter, hopefully.
That should be an exciting quarter for us, which will come out. Those results will be out in August.
Do you think you talked before about doing some ROI modeling on Bombshells. Do you think you'll have that out in May, August timeframe also?
It's possible. We'll see how these guys do that. They're going to be sitting around
your twiddling their thumbs a
lot compared to what they've had to do for the last 2 years. So maybe they'll be able to model some of that for us, get us a good idea of what it's looking like. I definitely want to see the actual cash outlays on all these new stores with the property purchases and whatnot, especially as we start selling off these added pieces. So we're getting a bunch of our cash back. It's going to be interesting to see the cash on cash returns on these stores.
And you're going to share those kind of models with us to some extent both with the property sales and without?
If we can get them all done and put it out into a format that makes sense, certainly. I mean, it is what it is. At the end of the day, I mean, if it's great, that's even more reason to show it. If it's good, I mean, it can't be bad. I can tell you because I know I can see the returns.
I know what cash we spent. I think it's going to be a lot better than we've even anticipated as we sell off these properties. And the numbers are coming in so strong from these new stores. New stores are opening at about $150,000 to $170,000 a week in sales. At that rate, even after the honeymoon period is over, those stores are $6,500,000 $7,000,000 a year stores depending on what they hold out at.
We started at $150,000 170 and we bounced down to $120,000 $110,000 and then climb and hold steady $130,000 $140,000 a week, we're going to be just under $7,000,000 a unit on those new stores, which are very highly profitable.
I suspect kind of the same thing, but the market's always going to assume the worst unless you give them something concrete. So that's kind of why I'd like to see it basically is to show the market that whatever is true, I was what I want to see, but I We
just
We just got bogged down with accounting stuff and didn't have the time to sit here and evaluate every little nuance as we built these new stores. We're just more important, let's get them built, let's get them open, everything will catch up with itself later. And I think that's what we're going to see, like I said, as we get into this June quarter and get into the end of this fiscal year in September, you're going to start seeing those numbers. I think we're going to start hitting our margins. We're going to air 15% to 21% margins.
That's our first goal. I mean, obviously, if these stores come into 15%, 20% margins or 18% to 21% margins and we do $45,000,000 in sales, all of a sudden you've got Bombshells, bringing up $45,000,000 in revenues and $9,000,000 in earnings. I think that's going to to show they pay for themselves pretty quick.
Yes. So on the M and A front, just an addendum to the previous question. I've noticed that you tend to do most of your purchases towards the latter half of the calendar year. Is there is that just coincidence? Or is there something built into it that, that tends to happen?
No, everybody wants to sell their clubs in August. This is one of those businesses where in October March you're going, this is the greatest business in the world. Then in the summer you slow down and you're like, uh-oh, then of course you hit school starts back up in August and we're all dying. You'll see our Q4. I mean even our numbers, our Q4 is if you go back to history, our Q4 is our lowest revenue numbers.
And so that's when guys started thinking, oh, I should get out of this business, happens every year. So nobody wants
to sell it.
That's the reason right here. Everybody wants to get out one. Yeah. And so guys start getting really serious about selling their clubs in the summer, August, September starts coming around, they really get serious about it. And then by the time we make a deal, do the due diligence, do all the paperwork, get it all closed, we close between November February typically.
Okay. That's interesting. That's all I got. Thanks guys.
All right.
Thanks a lot.
Our next question comes from the line of Dan Boyle with Sherwin Boyle. Please proceed with your question.
Hi, Eric. First, I want to compliment you on how you've handled yourself through this somewhat challenging period. We appreciate that. Secondly, a question on the acquisition, how it actually works. Are there many other bidders out there for clubs of the sort like Boston, Miami?
Or is that just how competitive are these sorts of deals?
I'm sure there's other people out there that would love to be in these markets and whatnot. The trick is coming up with the cash. I mean, if you look at our next acquisition, we're putting $11,000,000 cash down to the buyer. Now we're borrowing that money from a bank, but the seller is still getting $11,000,000 in cash. So as far as the seller is concerned, he's getting $11,000,000 cash down, he's carrying a $4,000,000 note.
I don't think there's a lot of other buyers out there that have the wherewithal to pull up that $8,000,000 $10,000,000 $11,000,000 cash down payments like RCI has been able to do. 2nd, I think we have a great track record of closing transactions now, which I think that the sellers are taking note of. Our reputation on actually not only making the deal, but actually closing the transaction. And all of the sellers, they get paid and they're happy, which definitely helps, I think, our reputation and helps us to be able to buy additional gloves.
When you do the U. S. You net the EBITDA that you kind of put out for the acquisitions, you're sort of netting out, as I understand it, a rental expense, that sort of net of a rental expense. Is that am I correct on that thought observation?
Yes. We use what's called adjusted EBITDA. And what we do is we take the revenue that they're earning and let's say that the revenue earning is $3,000,000 and then we buy the real estate for appraised value and the real estate is 7 point some odd 1,000,000. We would take an 8% cap rate or about $630,000 We take that $630,000 off of the $3,000,000 which will give us an adjusted EBITDA of about $2,400,000 We pay a 3 times multiple of that giving us a $7,200,000 purchase price for the business. So we pay 3 times adjusted EBITDA for the business and then we buy the real estate in addition to that.
So if you want to do I've seen people out there saying, oh, you're paying 6 times or you're paying 5 times. If you want to look at an overall deal, sure, we pay we're buying $3,000,000 and we're paying $15,000,000 for it. But we're getting a $7,800,000 piece of real estate. People want to forget that that real estate has real value and as we pay that real estate down because as we own it we pay those mortgages down we're able to go out and re borrow that money again at 5%, 5.5% and take and reinvest that money again in the next deal. And so each deal, I think, gets a little bit better and a little bit better for us, especially as we're using 100% basically, we're 100% financing.
So the reality is the company is not using a single dollar of its own cash and they're picking up $3,000,000 in new dollars.
Got it. Got it. And even
that's right.
Thanks for your hard work.
All right. Thank you.
Our next question comes from the line of Yaron Namark with OneMain Capital. Please proceed with your question.
Hey, guys. Congrats on another strong quarter. I guess just looking at your free cash flow, I mean, if we look at the current run rate, it looks I think our previous someone else asked on the call that it looks like your run rate in closer to $36,000,000 of free cash flow, but I understand you're $30,000,000 as a starting point. There's a lot of puts and takes this year. But just thinking about that $30 ish million starting point, that number, it sounds to me like is burdened by, that number, it sounds to me like is burdened by basically you have preopening expenses from the new Bombshells locations.
You have training costs associated with those are the pre opening expenses, I guess. But you have the accounting charges this year and the legal, which sounds like that's a few $1,000,000 Your maintenance CapEx sounds like it's elevated this year because you spent money on the Miami locations in anticipation of the strong Super Bowl. You're paying down debt associated with the asset sales that you earmarked when you sell those, so interest expense should go down. And you have the Northeastern Corridor acquisition as well as, I guess, next year you're going to have the full year benefit of the new Bombshells locations that didn't open up until midway through Q1 of this year. So just thinking I mean if I look at a $30,000,000 run rate that you're talking about, that you're comfortable talking about for this year, is there any reason to think that the run rate entering next year, assuming you don't do any more M and A or don't open any more Bombshells, won't be higher than that decently higher than that 30 $ish,000,000 or the $36,000,000 that you're run rating?
I agree. If we were giving you 21 run rate, yes, the 21 run rate will definitely be higher than the $30,000,000 2020 run rate is. There's going to be a lot of there's a lot of one time stuff in 2020 that should not carry over into 2021. So our run rate going forward into 2021 is definitely going to be higher than $30,000,000
And then any M and A on top of that would be incremental. So you have the you're going to be a run rate above this year going into next year. And then if you do M and A, that will be incremental, correct?
Correct. And the idea is that we grow that at a 10% to 15% clip, right? So we need to do enough acquisitions that we increase that run rate at a 10% to 15% annual growth rate.
Got it. Okay. And then if you guys were able to get back to I think in 2018, you guys were trading at a double digit EBITDA multiple before all this stuff started to hit the stock price.
I mean,
if you guys got back to, I don't know, 11x, 12x EBITDA or what you were selling at 18 months ago, I mean, do you think it's possible to accelerate M and A and do potentially bigger deals if you're able to pay up with stock. I mean, if you're able to buy stuff at 3x to 4x EBITDA by issuing a little bit of stock, if instead of paying 3x to 4x, you're willing to pay 5 or 6 times if you're selling for 11 or 12 times. I mean, do you think that would help you accelerate M and A? Or if you're willing to pay a little more, it wouldn't necessarily?
It wouldn't hurt. Anytime we're willing to pay a little bit more, we're going to have more deals on the table. Number 1, whether we want to use equity or not, I don't know. But if I didn't have to use my stock, if I didn't have to use my cash to buy back stock, my cash would be building up. So if I hadn't bought back $6,400,000 worth of stock because the stock was trading at $34 right now and so my $6,000,000 or $7,000,000 in cash was sitting on the books, I could do a deal where I could do a much larger deal where I use $10,000,000 of company cash, dollars 10,000,000 worth of bank debt and there are $8,000,000 or $10,000,000 worth of owner financing and I could be doing $30,000,000 transaction, right, and still not use any equity, but yet get a much larger transaction.
So there's definitely benefits to our equity trading at a fair market value. They're out there. Oh, yes. We want to come up with the cash. I mean, like I said, there's deals out there that are just going to require some of the larger, I call multi club operators, they're going to want a considerable more amount of cash down.
They're going to want $20,000,000 $30,000,000 in cash down on a $40,000,000 $35,000,000 acquisition, close to 50%, 60% cash down. And so those are the kind of things we're looking at and I think we're getting we'll get there. In the meantime, we found some nice basically one off acquisitions. We're buying 1 club at a time and we're continuing to hit our growth rate. The only thing that the only concern for me right now is do I have the next acquisitions lined up so I can continue to grow at that 10% to 15% growth rate.
I want to take Slide 12 and I want to run it out 5 more years and I want to continue to see that compounding growth rates growing where free cash flow is doubling in 5 years, every 5 years or so. And we can keep that going, where we're doubling free cash flow every 5 or 6 years, then I think the market cannot continue to ignore the opportunity that we've created. I'll have to start rewarding the share price for it.
But I guess the follow-up to that is, so you say there's these $30,000,000 acquisitions or even bigger where you need to put down more cash. If your stock was at 12 times EBITDA, do you think those sellers would be willing to accept equity as a down payment?
They want equity now. Yes. I don't think we'd have a problem using our equity. We used it for years. It's just the problem is the math doesn't make sense because our equity is the most expensive form of capital we have right now.
I mean, especially now we're getting back up there, we're going to get down to 32% is a 10%. I'm borrowing money of 5%, 5.5% and I get to get a 22% tax benefit on that. So my true cost is 4%, 4.25% on the capital. So why would I want to use equity that's costing me 14% or 15% right now when I use debt that's costing me 4%. And that's the real issue with using equity.
So but if like you said, if we were trading at 12 times cash flow, now all of a sudden, it might make more sense. And we will look at that. We'll do the math. The beauty of it is it's all 5th grade math. We just figure out the cost of capital and we use the cheapest capital we can because that's what gives us the highest return.
All right.
All right.
That's all I have. Thank you, guys.
Okay. Our next question is a follow-up question from the line of Adam Wyden with ADW Capital. Please proceed with your question.
Yes. This is just a follow-up on Yaron's question, I think. But I mean, I totally get your math in terms of and it's like music to my ears. It's like when a CEO says, hey, 5% debt money with a 22% tax shield, that's great. I think what Yaron might be getting at and perhaps what I'm getting at is that there's a balance in terms of optimal capital structure as it relates to if investors like to see a certain amount of they don't like to see companies excessively levered.
So there is I mean, there even though you can borrow at a percent or 4%, there's a limit to the amount of transactions you can do as it relates to the gross amount of debt or net debt to EBITDA. And so I think maybe the question is and maybe the question I have is that like, if you could get your equity cost of capital, right, I haven't done the math on 12 times EBITDA, but I can probably do it. It's 8%. It's if you have no CapEx, it's roughly an 8% pre tax yield and after tax it's 6%, right? So if you could trade a 12 times EBITDA, that's a 6% equity yield and you were able to buy assets at a 10% or 10%, 12%, 15%, it would actually avail you of the option to buy things faster because you wouldn't have to wait for the deleveraging.
So I guess the question is, if you could access equity at an 8%, a 9% and 10% pretax and after tax whatever, that would allow you to, like you said, not have to wait for the cash that you're kind of filling up on your books as it goes, right? You could buy something big and give equity to the seller or more importantly, I don't know if you ever done this, but go to a bank and say, hey, I want to raise $30,000,000 to buy X, Y and Z club.
I mean,
I don't know. We did it in 2,007 and 2,008. We're very familiar with it. When our equity gets to the point where it's cheap for us to use equity, we can use equity. We're not adverse to issuing equity.
We're only adverse to issuing equity at a high cost. And if we can find the right acquisition, of course, it would make a lot of sense. I mean, if we're getting 22% or 20, say, we're buying close to 5 times, we're a 20% yield and we're able to do equity at even at 8% cost like you said, we're still getting a 12% spread there. And if we're doing it on a large scale transaction of $60,000,000 acquisition or $70,000,000 acquisition, all of a sudden, yes, it makes a whole lot of sense because that's a lot of that's a pretty big number when you look at the spreads.
Right. And as you get larger, presumably, I'm sure the multiple there's more diversity, you're more diverse geographically. I mean, a $60,000,000 EBITDA business is worth more than a 10 and a 120 is worth more than a 60. So the bigger you get, the more justification you have for a better cost of capital and multiple. So taking a step back, how many large club chains are there in the United States?
I mean, it just how fragmented do you think this whole thing is? And how many $10 plus 1,000,000 EBITDA chains that you would be interested in? I mean, how many of those exist in the United States right now?
I mean, there's several. I don't know off the top of my head, but I think there's probably 500 clubs that we'd like to own. Out of those 500 clubs, 300 of them are owned by probably less than 40 people. So there's definitely some significant acquisition targets out there if we when we get serious about it.
What you're saying is you got to have cash?
Yes. We have that kind of cash available to us. We can go start knocking on different doors. We knock on the doors that we can knock on. It doesn't do any good to knock on a door if I can't consummate a transaction with the seller that I know the seller would be interested in.
So I haven't really talked to too many very, very large operators out there because we're just not in a position, I think, at this time to really close the transaction with them.
So we got to figure out how to get back to trading at 12 times EBITDA again. That's the answer.
Consistency, yes. But that is the answer. We've got to stay consistent.
Good. All right. Well, that's it. That's it for me. Thank you.
Yes. Thank you.
Are there any final questions? This is the last chance for questions. There are no further questions in the queue at this time. I'd like to hand it back to management for closing remarks.
So thank you, operator, and thank you, Eric, and thank you, everybody, who called in with their questions tonight. We've included a few supplemental slides in our appendix. We'll also be meeting with investors and presenting on March 26 in New York at the Sidoti Spring Conference. If you are a professional investor and would like to take 1 on 1 with management, please let me know. Just e mail me.
We might also hold to meet management that night at Rick's Cabaret in New York that hasn't been decided yet. On behalf of Eric, the company and our subsidiaries, thank you very much for calling in and listening to us tonight. 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.