RCI Hospitality - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 revenue of $71.1M fell 6.6% YoY but rose 8.0% QoQ; GAAP EPS improved to $0.46 from $(0.56) YoY and from $0.36 QoQ; Adjusted EBITDA increased sequentially to $15.3M while remaining below last year’s $20.1M.
• Nightclubs were resilient (revenue -0.8% YoY; GAAP operating margin 28.5% vs 21.7% last year), while Bombshells remained weak (revenue -34.5% YoY; modest $87K operating profit) as portfolio pruning continued.
• Free cash flow strengthened to $13.3M and FCF margin improved from 11% in Q2 to 19% in Q3, aided by lower capex and mix; management emphasized continued progress on the five-year “Back to Basics” capital allocation plan and active share repurchases (75,325 shares for $3.0M).
• No formal quantitative guidance; management highlighted catalysts: captive insurance formation to normalize non-cash actuarial reserves, potential monetization options for Bombshells real estate/operations at attractive values, and continued nightclub M&A at 3–5x adjusted EBITDA multiples.

What Went Well and What Went Wrong

What Went Well

• Nightclubs profitability improved YoY on GAAP: operating income rose to $17.8M (28.5% margin) from $13.6M (21.7%), reflecting much lower “other net charges,” despite -3.7% SSS and the Fort Worth fire impact; non-GAAP nightclubs operating margin was 33.2% (down YoY but improving sequentially).
• Sequential improvement across the P&L: revenue +8% QoQ to $71.1M, Adjusted EBITDA rose to $15.3M, and free cash flow grew to $13.3M; CFO: “free cash flow margin increased from 11% in the second quarter to 19% in the third”.
• Capital allocation execution: two club acquisitions closed, a new Rick’s Cabaret & Steakhouse opened, and 75,325 shares were repurchased; CEO: “We continued to make solid progress with our Back to Basics 5-Year Capital Allocation Plan”.

What Went Wrong

• Consolidated trends remain below last year: revenue -6.6% YoY to $71.1M, Adjusted EBITDA $15.3M vs $20.1M, and non-GAAP EPS $0.77 vs $1.35, reflecting Bombshells declines and higher non-cash insurance reserves.
• Bombshells softness persisted: revenue -34.5% YoY to $8.6M; SSS -13.5%; non-GAAP operating income $0.1M (1.2% margin), impacted by divestitures and pre-opening costs.
• Leverage optics ticked up: “debt to trailing twelve month adjusted EBITDA was 3.82x compared to 3.56x in the preceding quarter,” as acquisitions closed ahead of EBITDA contribution; average weighted interest rate was 6.68%.

Transcript

Speaker 2

Good afternoon, everyone. We're going to wait a few minutes for others to join, and then we will get this going. We'll give this another 30 seconds or so, and then kick off the third quarter 2025 earnings call. I've received word from Eric Langan. We're going to wait one more minute so Bradley Chhay can finish using the bathroom, and then we will begin. Good afternoon, greetings, and welcome to RCI Hospitality Holdings Inc.'s third quarter 2025 earnings conference call. You can find the company's presentation on RCI's website. Go to the investor relations section, and all the links are at the top of the page. Please turn with me to slide two of our presentation. I'm Mark Moran of Equity Animal, and I'll be the host of our call today. I'm coming to you from Washington, D.C.

Eric Langan, President and CEO of RCI Hospitality Holdings Inc., and CFO Bradley Chhay are in Houston. Please turn with me to slide three. RCI is making this call exclusively on X Spaces. To ask a question, you'll need to join the space with a mobile device. To listen only, you can join the space on a personal computer. At this time, all participants are in a listen-only mode. A question and answer session will follow the presentation. This conference call is being recorded. Please turn with me to slide four. I want to remind everybody of our safe harbor statement. 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 may occur afterwards. Please turn with me to slide five.

I also direct you to the explanation of RCI's non-GAAP financial measures. Now I'm pleased to introduce Eric Langan, President and CEO of RCI Hospitality Holdings Inc. Eric, take it away.

Speaker 3

Thank you, Mark. Please turn to slide six. Thanks for joining us today. Let me run through some key takeaways. All comparisons are year over year unless otherwise noted. Nightclub revenues were nearly level despite economic uncertainty related to tariffs and the tax bill, which affected our customer base. Bombshells' revenue reflected the previously announced sale and divestiture of five underperformers. Both revenues and margins increased sequentially from the second quarter. Consolidated profitability benefited from the absence of impairment charges, partially offset by other factors. We continue to make solid progress on our back-to-the-basics cap allocation plan. We acquired two upscale nightclubs, Platinum West in South Carolina and Platinum Plus in Allentown, Pennsylvania. Price multiples were in line with our cap allocation strategy. We opened Rick's Cabaret and Steakhouse in Central City, Colorado.

We also purchased more than 75,000 shares of common stock for $3 million and ended the quarter with approximately 8.76 million shares outstanding. Subsequent to the quarter, we opened a Bombshells location in Lubbock, Texas, which has been doing very well right out of the gate. Now here's Bradley to review our performance in more detail.

Speaker 0

Thank you, Eric. Turning to slide seven, I'll start with a review of our third quarter results. All comparisons are year over year for the quarter unless otherwise noted. Total revenues were $71.1 million compared to $76.2 million, a difference of $5 million. This primarily reflected the sale and divestiture of underperforming Bombshells rated locations late in fiscal 2024 and early fiscal 2025. Impairments and other charges were $2.3 million compared to $18.3 million, a difference of approximately $16 million. Net income attributable to RCI Hospitality Holdings Inc. common shareholders was $4.1 million compared to the loss of $5.2 million, a difference of $9.3 million, and GAAP EPS was $0.46 per share compared to a loss of $0.56 per share.

Net cash provided by operating activities was $13.8 million compared to $15.8 million, a difference of $2 million, and free cash flow was about level at $13.3 million compared to $13.8 million. Adjusted EBITDA was $15.3 million compared to $20.1 million, and non-GAAP EPS was $0.77 compared to $1.35. Most of the year-over-year difference in non-GAAP EPS was due to slightly lower margins in nightclubs, lower margins in Bombshells, and higher non-cash expenses related to our captive insurance program with higher taxes. Now moving on to slide eight, I will now cover our third quarter results by segment, beginning with nightclubs. Revenues totaled $62.3 million, down less than 1% year over year. Key factors included a 3.7% decline in same-store sales and the absence of Baby Dolls Fort Worth due to a fire. This was mostly offset by $2.6 million from newly acquired or rebranded nightclubs.

By revenue type, food, merchandise, and other increased 5.1%, service increased 0.3%, and alcoholic beverages declined 3.9%. Other net charges totaled $2.3 million compared to $7.7 million. In the third quarter of fiscal year 2025, this included a mostly non-cash lawsuit settlement, partially offset by a gain on insurance. In the year-ago quarter, this primarily included impairments. There were none in this quarter. Operating income was $17.8 million compared to $13.6 million, with a margin at 28.5% of revenues versus 21.7%. Results reflected the decline in other net charges and same-store sales, acquisitions not yet fully optimized, and the Central City pre-opening costs. Non-GAAP operating income, which excludes other net charges, was $20.7 million compared to $21.9 million, with a margin at 33.2% of segment revenues versus 34.9%.

I'd like to point out that while GAAP and non-GAAP operating margins were down year over year, they have increased two quarters in a row sequentially. Turning to slide nine, here are the results of the Bombshells segment. Revenues totaled $8.6 million, a difference of $4.5 million. The key factors here included the sale and divestiture of five underperforming locations in the fourth quarter of 2024 and the first quarter of 2025, which impacted revenues by $3.8 million and a 13.5% decline in same-store sales. This was partially offset by two new locations not in same-store sales. Other net charges were minimal in the third quarter of 2025 versus $10.3 million in impairments last year. There was an operating income of $87,000 compared to a loss of $8.9 million, with a margin at 1% of segment revenues versus a negative 68%.

Results primarily reflected the decline in impairments, sales from open locations, and Lubbock's pre-opening costs. Now, on a non-GAAP basis, which excludes impairments, there was an operating income of $100,000 compared to $1.4 million profit, with a margin at 1.2% of segment revenues versus 10.8%. Moving to slide 10, you will see a summary about corporate expenses. GAAP expenses totaled $8.7 million, an increase of $1.5 million. Non-GAAP was $8.3 million, an increase of $1.9 million. As we've explained on previous calls, starting this year, corporate expenses are being affected by an estimated non-cash self-insurance actuarial reserve for the quarter. That's why expenses were higher year over year in the first quarter, lower in the second, and higher in the third. Please turn to slide 11. We have slides coming up that discuss free cash flow and adjusted EBITDA, which are non-GAAP.

In advance of that, we wanted to present the closest GAAP equivalents, which are operating income, net cash from operations, net cash by operations, and net income. Please turn to slide 12. We ended the third quarter with cash and cash equivalents of $29.3 million. During the quarter, we used $5.25 million as part of our two Platinum acquisitions and $3 million to buy back shares. While they were down year over year, I'd like to note that both free cash flow and adjusted EBITDA increased sequentially. As a percentage of revenues, free cash flow margin increased from 11% in the second quarter to 19% in the third, and back to where we were two years ago in the third quarter of 2023, while adjusted EBITDA remained approximately level at 22% for each of the first three quarters of this fiscal year. Please turn to slide 13.

Debt at June 30th declined slightly to $201,000 from the March 31st quarter. This reflected scheduled paydowns, new acquisition-related debt, and construction financing for Bombshells Rowlett and Bombshells Lubbock. We continued to control the rate paid on our debt with an average weighted interest rate of 6.68% compared to 6.74% in a year-ago quarter. Total occupancy cost was 7.9% of revenues, level with last year, and debt to trailing 12-month adjusted EBITDA was 3.82 times compared to 3.56 times in the preceding quarter. While debt stayed approximately level because of the recent acquisitions and adjusted EBITDA increased sequentially, adjusted EBITDA for the trailing 12 months declined. As new locations generate revenue and EBITDA, occupancy costs and debt metrics should improve. Debt maturities continue to remain reasonable and manageable. Now here's Eric.

Speaker 3

Thank you, Bradley. Please turn to slide 14 to review our capital allocation strategy. Our plan calls for allocating 40% of free cash to club acquisitions and 60% to share buybacks, debt reduction, and dividends in order to grow free cash flow per share annually at a 10% to 15% rate. Please turn to slide 15. Operationally, we are focused on our core nightclub business, reviewing every club to increase same-store sales on a regular basis, and we will rebrand, reformat, or divest underperformers. Our nightclub plan also involves acquisition. Our goal is to acquire an average of about $6 million of adjusted EBITDA per year, focusing on the best clubs, buying base hits with an occasional home run.

Our target matrix remained the same, three to five times adjusted EBITDA for the club and fair market value for the real estate, targeting 100% cash-on-cash returns in three to five years. Purchases would be made with cash on hand, bank financing, or seller notes. We would also consider using stock when our valuation improves. For Bombshells, we are working to improve performance at existing locations, targeting 15% operating margins and return to same-store sales growth. We also plan to complete the one remaining location currently under development. The final part of our plan is to regularly buy back our stock, selecting up if we consider the price to be particularly undervalued. We also anticipate modest annual dividend increases. Over the five years, we aim to generate more than $250 million in free cash flow and repurchase a significant amount of shares.

By fiscal 2029, our targets are $400 million in revenue, $75 million in free cash flow, and 7.5 million shares outstanding. The end result would be doubling our free cash flow per share to approximately $10 per share compared to what we did in fiscal 2024. Please turn to slide 16. To give you an idea of the progress we've made on the share buyback, 10 years ago, we had about 10.3 million shares outstanding. As of last Friday, we had about 8.7 million, which represents a reduction of 15.5%. Turning to slide 17, we have only three remaining projects. We are targeting Bombshells Rowlett for opening late this summer, early fall. We are also still awaiting construction permits for Baby Dolls West Fort Worth, and we are awaiting engineering review and zoning plans for the Baby Dolls Fort Worth that burnt down last year.

I would like to thank all of our loyal and dedicated team members for all their hard work and efforts, and all of our shareholders who believe and make our success possible. Now here's Mark to open up the question and answer section.

Speaker 2

Thank you very much, Eric and Bradley. If you would like to ask a question, please raise your hand in the X space. When you finish, please mute your microphone to eliminate any background noise. We have a limited number of speaker spaces today. After your question, we may move you to the back of the audience to free up space. First off, we have Orchid Wealth. Please take it away.

Speaker 1

Hey guys, can you hear me?

Speaker 3

Yes, I can hear you.

Speaker 1

I just got a question. How much in real estate do you guys have that you think you could be selling off that's non-performing or just holding in general?

Speaker 3

As we've said in the previous calls, about $28 million is our estimated value of it. We have some contracts on a couple of pieces. We're in negotiation on a couple more. I think, as I've said, by the end of this year, I think we'll start, which will actually be fiscal first quarter, fiscal 2026. I think we'll start seeing some of those closings happen, and I think we'll see more offers if the Fed cuts rates or if the economy picks back up again for commercial real estate.

Speaker 1

If you were to liquidate all, let's say, $28 million, how much of that would have to go to just pay back debt, and what do you think you guys would be left over with?

Speaker 3

I'm not sure. The main piece is a piece that we buffer about $2,150,000 in cash and then rechange zoning on it. It's worth somewhere between $8 million and $14 million, and we don't really owe anything on it. That would be a big chunk of cash. The rest of it would be about, you know, less than 60% would go to debt because all of our original loans were 60% or 65% loan to value, and those were based on appraisals from a few years back. I would say somewhere around 40% to 45% would go to cash, and the rest would go to service debt, other than a few pieces that are worth considerably more than what we paid for them. That'd probably be the opposite. About 60% to 65% would go to cash and 30% to 35% to debt.

Speaker 1

Okay. The thing about the insurance, you know, you guys are now not buying insurance, you're self-insuring. How much should we basically be modeling that you guys are going to be setting aside for this particular self-insurance going forward?

Speaker 3

There's no way for us to really know that number at this point. I can tell you year to date we're at $9.4 million. It's based on actuarials, and it's based on when we settle claims from the past, when new claims are made. It's a constantly changing number for us. At this point, we can't really say what they're going to reserve. To me, the real key is when will those reserves come back to us if they're not used? We have to wait through certain statute of limitations and certain other things. This reserve number could become a very large number over time. We're in the process of initiating a captive that we would have set prices so we know exactly what we'd be paying for the insurance. I'm hoping we can get that operational soon.

Speaker 1

Okay.

Speaker 3

We'll be able to answer those questions because we'll have a policy through a captive that we'll own, but at least we'll know what the fees are.

Speaker 1

Okay. Is this one of these things that like it's got a lot of startup costs in the beginning, and then you kind of taper down and then reach a run rate for every quarter?

Speaker 3

We thought that because we had $4.1 million in one quarter, then the next quarter was $1.4 million, but then we just had $3.9 million in this last quarter. We cannot figure out the math of it. The problem is the math is ever changing based on claims, based on, you know, loss runs with our other insurance companies because they have to take those claims and put them out. Since we're not using the insurance companies anymore, they're all setting, you know, they may change, we may get a claim and they may put some high reserve on it, which that reserve then affects our reserves going forward until that case is actually settled and we know exactly what we pay on it. They'll revamp and the next quarter we might not pay anything. Right? I mean, like I said, it's a lot of math and it's all guesswork.

Speaker 1

Okay, all right, thanks.

Speaker 3

Yep.

Speaker 2

Fantastic. Thank you so much for those questions. Next, we have D&D Realty. Please take it away.

Speaker 1

Hey Eric, thanks for taking my question. I really want to commend you guys on your pace of acquisitions. I think that's a really nice tailwind for the company and you guys are sticking to plan. I think that's great. My question, I have two. One pertaining to the acquisitions, which is when you guys go out and bid on these assets, who are you competing with? Are there other groups out there that are bidding against you? Are you bidding against yourself? Are you the only real exit capital that exists for a lot of people? I'm just curious around that dynamic. My second question pertains to, I think in a prior call you mentioned a potential tailwind from some of the tax policy that would get reworked, that has now since gotten reworked under the Trump administration.

I'm just curious, do you, are you, early days hopefully, are you seeing an uptick in activity potentially due to that? Or is the economy, do you still feel that the economy and some of your service charge, which you called out last quarter, is still muted? Thanks.

Speaker 3

Sure. From the acquisition side, there are lots of competitors for acquisitions in that their own management team. You've got LVOs, you've got other operators that would like to expand in local markets that they're operating in. I do think we're the acquirer of choice. They know we have cash. They know we can come up with large sums of cash. We've done it multiple times through the last two decades. They know if they want to carry paper and create an annuity for themselves or for their family or for their trusts, we have an unbelievable track record and unmatched track record from other operators of making all of our payments on time, even through COVID. I think those things weigh in. We don't really bid against anybody or against ourselves. We kind of have a set formula. We ask for their numbers.

What we do is we evaluate what we believe is the longevity of that cash flow, whether it's licensing restrictions in the area, how easy competition can open up, whether the license has court protections or grandfathered in. Then we use a three to five times multiple based on what we believe the protection of that license is. That's how we've always done it. That's, I think, how we'll continue to do it. It can slow the process sometimes, but it also saves us from making big mistakes. I think right now, especially in this environment, the most important thing we can do is not make mistakes. Your second part, the tax bump. I think that the tax bill just passed. I think companies are starting to realize they've got, I guess, what we're in August now. You've got five months left.

You want to make a major purchase and get it closed by December 31, you better get on it. I think those transactions are, I think companies are starting to look at that. I think you're going to start seeing some capital improvements done at some major companies. I know we've been hearing all these manufacturers that, I'm saying $600 billion here and a trillion dollars there and $500 billion here and new plants and whatnot. I don't know if those will all hit this year. They did make the tax cuts permanent, so it's not like they have to rush out and do it by December 31 unless they owe taxes for this year. I do believe that as we are going to see some of that. Look, our clubs do very well when there's new money or money's really moving.

The pace of money has slowed down considerably, right? They're having record numbers in money market accounts, a lot of people sitting on the sidelines. Only the top stocks in these indexes are really performing well. I think there's, like I said, a lot of money sitting on the sidelines. As that new money starts moving into things as we move forward, I think that'll be a considerable bonus for our company. As far as, you know, liquor sales were down 3.9%, but our service revenues were actually up just a little bit over last year. I would say service revenues are coming back a little bit. We'll see what happens as we move through these next two quarters. Hopefully, we'll continue to see the service revenues increase. They are our highest margin revenues for sure.

Speaker 2

Thanks so much for that question. Next up, we have Adam Wyden. I'd like to encourage anyone who has a question to raise their hand, and we'll bring you up. Adam, take it away. Hey Adam, you're on mute.

Speaker 3

Can you hear me now?

Speaker 2

Yes.

Speaker 3

Yes. This is for Bradley. On the insurance reserve, you guys have $9 million year to date, and I guess you'll have some on the fourth quarter, but you're not paying for insurance anymore. The question I have is, at some point, I know it's going to normalize. Can you sort of quantify how much, because it's obviously non-cash? You're taking this charge, but the cash is sitting on your balance sheet. It's in treasuries or somewhere. I don't know if it's, but how should we think about the total sort of weight on EBITDA this year relative to what you would expect it to be going forward? Is there any way we can try and do that? I think the goal in this was to save money. At least from when I read the filings, it looks like it's costing you money year over year.

I'm just trying to understand, at some point you build enough reserve that eventually you don't have to reserve anymore in some capacity or the reserves go down. How should we be thinking about that?

Speaker 1

From a net income standpoint and adjusted EBITDA standpoint, these charges are very real from a GAAP basis and non-GAAP basis. Technically, yes, it's hurting EPS. It looks like a negative charge, but we don't get to add it back because it's normal and recurring. Now you're saying it costs us money. It doesn't really cost us money because it's not impacting free cash flow. Those are the clarifying points I wanted to make. As far as the run rate, like Eric once mentioned, I hate to just lean back on this. We just don't know. Every quarter we have an actuarial expert, and they go and they look at all our claims, all our losses, any new claims, any closed claims, and they do what's called a true up or true down.

On a normalized run rate, call it somewhere between $10 million to $12 million based upon this year's year-to-date actuarial estimates. That's all there is. As far as the actual captive insurance program, once that's live and operational, we would be paying ourselves somewhere between $400,000 to $500,000 a month for the premiums.

Speaker 3

I think, I mean, again, I'm just going back in time, and then I got another question. My understanding was that you guys had never really paid out more than a few million dollars in any given year for settlements. The idea was you were paying like $10 million or $12 million in insurance, but the actual settlements on average never really were more than $3 million. I guess the question I have is, you know, you're basically reserving as if it's $12 million, but that, I mean, you've never paid out $12 million in a year. This can't sort of continue, right? I mean, that's just sort of, right, real logically. You never paid out $12 million in lawsuits in a year, right? Ever?

Speaker 1

Correct. There are some years, like the New York one that was, you know, about a decade ago, that, yes, some settlements are a lot bigger.

Speaker 3

That wasn't insured.

Speaker 1

Okay, that was not insured.

Speaker 3

Yeah, so that's sort of my question. I mean, if we're run rating $12 million of insurance reserves, that would imply that we would pay $12 million in lawsuits a year. I just, you know, because again, the EBITDA number, the free cash flow looks great, right? Obviously, in light of what's going on, but the EBITDA number doesn't make a whole lot of sense. That's why I'm just trying to reconcile those two, because if I sort of just think about it, like you guys don't want to pay insurance anymore. You are run rating $12 million of reserves. You're not paying it out in cash, obviously, because we can see it in the free cash flow. It's sort of like, presumably at some point after you build a big enough buffer, right, with these charges, at some point you would expect them to go down, right?

I mean, like realistically?

Speaker 1

You know, I hope so, Adam, to be honest, I just don't have enough data on it. We really thought our captive would be active before we ever went into any type of self-insurance mode to where we're at today. It just took the state a long time to get it done, and now we're really working on our policy. The more we study it, the more we learn about it. We just want to make sure we do it right the first time because we don't want to set up a captive that then goes bankrupt. We believe we have the formulas down. We're working on them. When it comes to these actuarials, this is a completely different math. It's a GAAP principle that has to be followed to do these actuarials and to do these accruals. I mean, you've heard me say it before.

I don't think it's rooted in any type of reality of what is. It's always what ifs. All of your GAAP stuff, when you're accruing stuff and you're doing these things, must take into account the absolute worst-case scenarios, not best-case scenarios. What you want to look at is best-case scenarios, and what they have to look at is worst-case scenarios. If you look at an average for the last 15 years of actuarials where we have what we've actually paid out versus what we paid in premiums, we would have come out way ahead if we had self-insured all of those years. In fact, I think there's only one year where we wouldn't have.

That's because we allowed someone to sell us way too much insurance, and then we couldn't settle any cases because everybody would rather try their luck in court and go after the big lottery ticket versus settling the case for a reasonable amount. That particular year we had some high stuff, but that was many years ago. Of recent years, it's been much more realistic. The problem was when we got our insurance quote this year, or for this year, they wanted, between the fees and everything, we would have paid almost $9 million for $10 million worth of insurance. To me, that just did not make any economic sense whatsoever. When we could not do that, we could do this captive accrual system where we put the money in. Part of the actuarial system is you don't get any return on what you put into reserves, right?

It's just basically held in reserves and it's not growing. Whereas when you have a captive or an insurance company, they take the premiums and invest those premiums, which then help offset the costs and expenses. The actuarial is very, very different in a self-insurance versus a captive. Hopefully we'll have this captive set up soon. I would like to see it set up by October 1, if at all possible. I think we're definitely working towards that date. Whether we'll be successful or not, I don't know. I think by calendar year end, we should be able to have everything in place for it. Then we'll have the actual insurance costs because we'll be paying insurance costs, not accruing an actuarial. The insurance company will accrue actuarials, but they'll do that based on their premiums and whatnot, not their claims, not past ones.

Speaker 3

Right. I get it. The idea is, long story short, when you guys get the captive set up, the non-cash charge to EBITDA will be a lot less because you're going to, you basically, it's a separate insurance company that you're going to pay premiums to that you control. All of this, you know, $12 million a year stuff is probably going to go away. If you look at, on slide 12, you look at the free cash flow, it's basically flat year on year. Most of the quarters, it's more or less been flat. EBITDA in this case, the way you report it is sort of not a great reflection of financial performance because, you know, you're not actually paying out the money, if that makes any sense.

Speaker 1

Makes a lot of sense for fiscal 2025.

Speaker 3

Yeah, all I'm trying to say is next year when you get the captive set up, you should get a reversal on reported EBITDA because you're not going to be taking these types of insurance reserve charges realistically.

Speaker 1

There are a few things we can possibly do when that time comes. That is, we can leave this 2025 as a self-insured year, and then they'll run actuarials every quarter going forward. If there's X reserves, they would be put back in. If more reserves are needed, we'd have to expense more. The other thing we could possibly do is buy an insurance policy. Once we would know all the claims, there's a two-year statute of limitations, I think, but we could figure out what the claims are. A lot of insurance companies do this where they will then, what's called selling the book. We would take all the potential liability and sell that book for a set dollar amount where basically we would pay a company X amount of dollars, and then they would take all the liability on a go-forward basis for those deals.

What they do is they hope to settle those cases for less than reserves. If the reserve, if we can sell, let's say we've got $12 million in reserves, but we can sell the book for $8.5 million, then maybe we sell that book for $8.5 million and we get the other $3.5 million as an income back in on our books. There are lots of things as we move through the future of this and figure out this insurance math in a much better format. Of course, our actuarials, I mean, as we get the actuals, we'll be able to, actual costs, we'll be able to have a much better idea as well. We may have no claims, right? I mean, we just, right now you don't know. Typically, a claim in an insurance year usually takes anywhere from 18 to 24 months to be made.

Since we've only been doing this for nine months, it's all guesswork. It's literally 100% guesswork, everyone's part.

Speaker 3

Two other questions. These should be easier. One is on the startup cost, Bradley, you know, you guys talked about Rowlett or said Lubbock, Central City, and some other stuff. Obviously that's not being added back, but what do you think the burden on EBITDA is in terms of startups and other stuff that you would expect to sort of go down? I think we covered the insurance thing pretty closely, but on the sort of the startup costs, like what do you think, or pre-opening costs, what do you think that sort of cost you in the quarter?

Speaker 1

It's typically a couple hundred thousand dollars per unit, Adam. It's just, you know, we have to put people up, we have to train. We send people out two to three weeks ahead of time, they start training, they hire staff. We've got hotel rooms, you've got training costs, you've got, you know, the hourly wages with no revenue coming in yet.

Speaker 3

Like a half a million of EBITDA on the quarter, basically. Is that fair?

Speaker 1

Yeah, $400,000 to $500,000 is what I guess, yeah.

Speaker 3

Okay, we got the insurance, we got the startup costs. On the real estate, you talked about in the past, you know, potentially selling Bombshells. I think you got rid of all the lease locations because you didn't control the real estate. You now have, I guess, 10 locations. I guess that includes, does that include the Grange, or does that not include the Grange?

Speaker 1

That does not include the Grange. The Grange is gone. We actually have 11 locations open with Lubbock as of July. No, it didn't open this last quarter. That is, after the June quarter ended, Lubbock opened. For this quarter that we're in right now, fourth quarter of 2025, we'll have 11 Bombshells locations open.

Speaker 3

Not including Rowlett?

Speaker 1

Not including Rowlett because Rowlett's not open yet. If Rowlett opens before September 30, then that will change, but I don't suspect that Rowlett will make September 30 based on some of the construction reports that I got yesterday. I think it's going to be a little bit longer.

Speaker 3

I guess the question is now you've sort of got it cleaned up. You got rid of all the lease locations. You know, you've got a lot of big expanding restaurant chains, Texas Roadhouse, and a bunch of groups that are looking for locations. I think one of the biggest issues as you've encountered is basically building a restaurant is taking a very, very long time. You've got basically 12 locations that have more or less been open for not that long. The oldest ones I think you closed.

I guess my question to you is, given where your stock is and given how valuable, I don't know, $65 million, $75 million of real estate is in terms of getting capital, how do you think about sort of going all in on the stock and nightclubs, given that the restaurant real estate is still trading at a relatively low cap rate, and you have, you sort of have control of the whole, all the locations now.

Speaker 1

I mean, look, we've been talking with different groups for the past year or so. More groups in recent, last month or two, we're getting more calls. I'm guessing that, you know, restaurant, especially Prime A restaurant space, which is what most of our Bombshells locations are, are being sought after because we are getting lots of calls. Of course, you've got every leaseback group in the world trying to call us, which we're not interested in doing sale-leasebacks. We are interested if we were to, if we were to sell the real estate, you'd have to buy the operating businesses as well. We would put together a package of the operating businesses and the real estate for the right price. We're just not looking to sell at the bottom of the range. We would want a fair price for our shareholders.

If somebody comes and makes us that offer, we'll consider it.

Speaker 3

Yeah. I mean, look, obviously given where your stock is and, you know, given the fact that, you know, I suspect the nightclub stuff is going to ramp up because you did some deals this year and you didn't do any in 2023 or 2024. I suspect there's probably more nightclubs to buy, but I sort of do the math and I say, you know, I don't know, what is it, $100,000 of net income or non-GAAP income? And I don't know what that works out in terms of EBITDA, but let's say for a minute that EBITDA at Bombshells is, you know, I don't know, a million bucks. I don't know, I don't know what the DNA is now, but let's just call it a million dollars. And let's say you get a little bit of EBITDA from Lubbock and a little bit of EBITDA from Rowlett.

I mean, even best case, it's, you know, $4 million or $5 million. I mean, if you could sell the real estate for $65 million, $70 million, $75 million, it would go a long way in terms of buying nightclubs and buying stock.

Speaker 1

I do not, you know, right now, I will tell you my number has been about $85 million. Would I take $75 million? I do not know, no one's offered it to me yet. If someone comes in with an $85 million offer, it's something we definitely have to, you know, put the pencils to and see if we make it work. I can tell you that at $65 million, I would not be interested. I think the real estate alone will appraise somewhere around $65 to $67 million. Our current debt load on that real estate is about $35 million. Our current book value is around $45 million. If somebody comes in at $85 million, I do not think there's much to think about. That would be about a $40 million overbook. I think we would probably jump on that pretty quickly.

At $75 million, we are going to sit down and put the pencils to it, see if it makes sense, see what our stock price is. I mean, you know, if I could buy a million shares of stock back in exchange for the Bombshells segment, that's, what is that? What, $8.7 divided by 1 million divided by $8.7 is 1 divided by $8.7.

Speaker 3

About 12%.

Speaker 1

Yeah, almost 12% of the company. I think I'd have to think real hard about that. I think those are things we just, like I said, we have to put the pencils to and see if we can make it work.

Speaker 3

The $67 million includes Rowlett and Lubbock, even though they haven't, have those been reappraised at market yet or not? Or does that include the.

Speaker 1

Those are both at cost. Both of those would, it's about $65 million. That's why I said it's between $65 million and $67 million. I think both those appraised for about $1 million more than cost. They typically do.

Speaker 3

Got it. At that point, you'll sort of see how much EBITDA those things are doing. If someone, because basically those will be making money. The other ones, do you think that the other locations will start making more money? I mean, do you think that, you know.

Speaker 1

We have three locations that are pretty solid right now. Lubbock is doing fantastic. Lubbock's averaging between $190,000 and $200,000 a week right now. If that continues for the 12 weeks that will be open, you're talking 12 times, I'll say 12 times $180,000 even. It's $1.2 million plus $80,000 times 12, $960,000, a little over $2 million. I do $2 million at that point. They're probably running 20+% margins. I mean, that store alone could make $400,000, $500,000 in a quarter. Let's see how we do. Like I said, we're talking with groups. We're talking with a private equity group. We're talking with a restaurant operator. We're talking with a few, just I don't know what they want to do with their real estate, their real estate guys that we've been talking with. We'll see what comes of it.

Make it perfectly clear on the call, so maybe I won't get as many calls over the next week. We are not interested in sale-leasebacks. We know we could do that at any time we wanted. We could pull probably $30 million in equity out of the Bombshells real estate at any time if we did a sale-leaseback. It's just not something we're really interested in doing. We'd rather just hold on to the assets until we can sell everything as a whole. We believe that by owning the real estate, it makes the operations much easier to sell to someone who wants to turn around and grow the concept. What they'll do is they'll come in, they'll buy it from us, they'll turn around and do the sale-leaseback, pull their cash back in, and expand the concept is what we're told by brokers that we've been talking to.

Speaker 3

They'll do that after they fix it. The reality is they own it, they control it, they fix it, then they do it.

Speaker 1

They can do anything they want once they write me the check. I don't care.

Speaker 3

What about the club, the backlog for M&A for clubs? Are you seeing that backlog increase? I know you've done a little bit this year. You did the Detroit and those ones, but you're only, I don't know what that works out.

Speaker 1

We've got three, we've got three locations so far. I mean, we're looking, we're actually looking to sell a couple of our clubs. We've got a few clubs that we're negotiating with some local operators that are very interested in a couple of our underperforming locations, which we were talking about rebranding. We're thinking maybe instead of rebranding, we'll just sell those locations off, put some more cash on the balance sheet, take that and buy other clubs someplace else in markets that are more competitive and more profitable for us and definitely easier to operate for us. Most of the clubs we're talking about, some we picked up in acquisitions where they were not the core acquisition we were trying to buy, but they were just added, a club that was part of the deal.

Our thinking on that is that it stretches our regional management to have to travel all those extra miles for small amounts of income. Why are we holding a club that's 600 miles from any one of our other clubs that generates us $200,000 a year in income? Let's go convert that into $1 million, $1.5 million in cash and take that $1.5 million in cash and either buy back stock or go invest it in a market that's easier for us to operate that doesn't stretch our regional management teams. Those are things we're looking at. Those are things we've been working on. As you'll see, if you go back and look at 2000 and 2016, when we first started the cap allocation strategy, we were up a little bit. If you look at 2024, when we started the cap allocation, we were up a little bit.

In 2017, our revenues actually declined because we sold off and got rid of underperformers. I think you're seeing that same thing happen right now. It's just in a condensed year. We're much better at it than we were in 2016 because we've done it before. We didn't wait a full year or a year and a half to start divesting assets. We started doing that within nine months of adopting a new cap allocation strategy. As we closed the Bombshells immediately that were underperforming that we leased, now we're doing the same thing with a few of the clubs that we're looking at right now. Of course, trying to buy more clubs that make economic sense for us. Expo is in, what, 14 days, two weeks from now. We'll be out in Vegas with lots and lots of club owners. I'm very optimistic.

I have some good meetings set up to talk with a few people. I've got a couple of brokers, club brokers that want to sit down with me and go over some inventory that's supposedly not public information right now, which I find hard to believe it's not public information, but I understand that there are deals that sometimes brokers bring to us. We'll definitely sit down and talk to them. We have been looking at lots of locations around the country right now and trying to find the ones that make the most sense for us to make our next investment in.

Speaker 2

Fantastic. Thank you so much, Adam, for those questions. On behalf of Eric, Bradley, and the company and our subsidiaries, thank you and good night. Please visit one of our clubs or restaurants to have a great time.