RCI Hospitality Holdings Inc (RICK) 2022 Q1 法說會逐字稿

Greetings, and welcome to RCI Hospitality Holdings Conference Call and Webcast.

(Operator Instructions)

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, John. For those of you listening on the phone, you can find our presentation on the RCI website, click Company and Investor Information under the RCI logo. That will take you to the Company and Investor Information page, scroll down and you'll find the necessary links.

Please turn to Page 2. I want to remind everybody of our safe harbor statement. It is posted at the beginning of our conference call presentation. It reminds you that you may hear or see forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards. Let's turn to Page 3. I also direct you to the explanation of non-GAAP measurements that we use. And I'd like to invite everyone listening in the New York City area to join us tonight at 06:00 to meet management at Rick's Cabaret, New York, Manhattan's #1 gentleman's club. You can also tour Sister Club Hoops Cabaret and Sports Bar next door. Rick's is located at 50 West 33rd Street between Fifth Avenue and Broadway, around the corner from the Empire State Building. If you haven't RSVPed, ask for Eric Langan, or me at the door. And now I'm pleased to introduce Eric Langan, President and CEO of RCI Hospitality.

Thank you, Gary. Thank you for joining us today. I'm here with our CFO, Bradley Chhay. And after the market closed, we reported our first quarter results. We want to thank our teams for delivering another strong quarter. Nightclubs and Bombshells continue to perform well. All 12 recent club acquisitions and our new company-owned Bombshells in Arlington, Texas also contributed to results for part of the quarter. We didn't experience any noticeable impact until December from the Omicron virus.

To date, it has cycled quickly through our markets. We are continuing to execute on all aspects of our growth plan for fiscal 2022. We expect to achieve further progress with our recent club acquisitions, our first Bombshells franchisee should open in San Antonio this quarter or early in next quarter, and our AdmireMe website should do a soft launch during the same timeframe. We are actively pursuing new club acquisitions as well as Bombshells' company-owned locations and new franchisees, helping us implement our capital allocation strategy as our recently announced bank loan.

Now here is Bradley to review the financials.

Thanks, Eric, and good afternoon to all those listening.

All of our comparisons in this call will be to a year ago first quarter, unless otherwise noted. We generated total revenues of $61.8 million. That is up 61% year-over-year and up 28% compared to the pre-pandemic first quarter and fiscal 2020. GAAP EPS totaled $1.12 with non-GAAP EPS at $1.10. In the year ago quarter, we reported GAAP EPS of $1.07 that included a $4.9 million pretax gain equal to $0.55 per share from the debt extinguishment of our PPP loan. Excluding that and other standard items, non-GAAP EPS was $0.39 a year ago.

Net cash from operating activities was $16.3 million, an increase of 159%. Free cash flow totaled $15.3 million, which was up 169%. Net income increased 11.1% to $10.6 million. Now on a non-GAAP basis, net income was up 193% and adjusted EBITDA increased 107% to $18 million.

Please turn to Page 5. Nightclubs segment revenues, the operating margin and income from operations were all up significantly from the year ago quarter. Revenues grew 86% year-over-year to $46.8 million. Operating margin was 40.1% compared to 33.7% and the income from operations increased 121% to $18.7 million.

This includes the benefit of our recent addition of 11 clubs since the acquisition in mid-October, and another club acquired in early November. They contributed approximately 29% of the increase in revenues and approximately 17% of the increase in operating income. This segment also reflects strong performance from all of our other clubs, which were still heavily impacted by government-related COVID restrictions in the year-ago quarter. Same-store sales were up 31% compared to the year ago quarter and up 8% compared to first quarter 2 years ago.

Revenues and operating margin also benefited from 107% year-over-year increase in high-margin service revenue. This primarily reflected the success of our Northern clubs as they continue to rebuild their VIP business. As we've explained, the acquisitions are work in progress. Our plan is to continue to improve staffing, service, revenues and margins as we move through the year.

Now if you would, please turn to Page 6. Bombshells had another solid quarter with revenues of $14.8 million operating margin of 19% and income from operations of $2.8 million. This compares to the first quarter '21 revenues of $13 million, operating margin of 20.9% and income from operations of $2.7 million. The 14% increase in revenues reflects the benefit of our new Bombshells in Arlington, Texas, since its opening to great success in early December.

Arlington set a record for its first month of revenues for our new Bombshells and contributed approximately 45% of the revenue increase. The quarter also reflects strong performance from our 10 other Bombshells. Same-store sales were up 8% compared to a year ago quarter and up 21% compared to the first quarter 2 years ago.

Operating margin and income were affected by more than 2 months of preopening costs without any sales for Arlington. Overall, we believe we've done a great job at managing the impact of food and labor inflation. As a result, operating margin stayed within the target range of 18% to 22%. Going forward, operating margins should benefit from 4 quarters of Bombshell Arlington without the effects of these preopening costs.

Now please turn to Page 7 to review items in our first quarter consolidated statement of operations. Improvements in the margins of cost of goods sold, salaries and wages and SG&A are all attributed to higher Nightclub revenues and margins during the quarter as well as some of our continuing COVID cost savings. As a result, GAAP operating margin was 25.7% compared to 17.1%. Interest expense also declined as a percentage of revenue, although the dollar expense was slightly higher due to debt associated with the acquisition of the 12 clubs in October and November. Nonoperating gains were significantly lower than the year ago quarter, which benefited from the debt forgiveness.

Please turn to Page 8. On December 30, we acquired Scarlett's Cabaret Miami real estate for $7 million of cash. This left us with a cash balance of $18 million as of December 31. With the $90 million bank loan that we closed in January, we ended the month of January with approximately $32 million in cash. Now if we exclude the purchase of the Scarlet property, we would have had a cash balance of approximately $39 million. The Scarlett's property was not part of the generate bank loan. So at some point, we will finance it and get a good portion of our cash out. Free cash flow from our first quarter increased by 169% compared to a year ago. This was primarily due to a strong increase in net cash from operating activities, partially offset by a small increase in maintenance CapEx. Adjusted EBITDA increased 107%. Now as a percentage of revenue, free cash flow increased to 25% from 15% in the year ago quarter. Adjusted EBITDA increased to 29% from 23%.

Now if you would, please turn to Page 9 to review our debt and debt manageability. Debt net of loan cost was $162 million as of December 31, an increase of $37 million. This increase primarily reflected previously reported debt used to finance the October 2021 club acquisitions. We continue to reduce our weighted average interest rate. Our first quarter rate was 6.26%, 51 basis points lower than a year ago. This was primarily due to the refinancing and pay down of higher rate debt. Our rate is almost 100 basis points down from 5 years ago. Our periodic refinancing, like the one we've been in September, enables us to convert higher rate seller financing and other unsecured financing used in club acquisitions into lower rate commercial real estate bank debt. Our refinancing also enables us to smooth out our debt maturity schedule. Now as you can see, our amortization average is about $7 million a year for the next 5 years, which is very manageable with our cash flow. Occupancy costs were 6.9% of revenues. This is well within our range of 6% to 9% that we -- and we've averaged when sales weren't dramatically impacted by COVID.

Please turn to Page 10 to look at our 12/30 -- 12/31 debt pie chart. Our secured debt now consists of 62.5% of debt secured by real estate. This will be a little higher in the second quarter 2022 as a result of the January refinancing, 21.6% listed as seller financing, this is secured by our respective clubs to which it applies. And lastly, 4.9% secured by other assets.

Our unsecured debt consists of 10.8% of our debt, which is comparable to our 6/30/2021 balance sheet. As I mentioned on our last call, we have reached the end of our SBA loan through forgiveness and are left with a small amount of repayment. We are nearing the end of our Texas controller settlement as well.

Now let me turn the call back over to Eric. Thank you.

Thanks, Bradley. Please turn to Slide 11. We're continuing to talk to new investors. This is a result of our meetings through the ICR and Sidoti conferences in January to Noble's Capital Markets initiation and coverage. So I'd like to review our capital allocation strategy. Our goal is to drive shareholder value by increasing free cash flow per share 10% to 15% on a compounded annual basis. Our strategy is similar to those outlined in the book The Outsiders by William Thorndike. He studied companies that focused on generating cash per share and allocating that cash effectively to generate more cash. We have been applying those strategies since fiscal 2016 with 3 different actions, subject, of course, to whether there is a strategic rationale to do otherwise.

One is mergers and acquisitions, specifically buying the right clubs in the right markets. We like to buy good, solid cash flowing clubs at a 3 to 5x adjusted EBITDA using seller financing and acquire the real estate at market value. Another strategy is using cash to grow organically specifically expanding Bombshells to develop critical mass market awareness in sale franchises. Our goal in both M&A and organic growth is to generate annual cash on cash returns of at least 25% to 33%. The third action is buying back shares when the yield on our -- of our free cash flow per share is more than 10%.

Please turn to Slide 12. Regarding Nightclubs, we are making important progress with the clubs we acquired in the first quarter. As I mentioned on the last call, this is a COVID rebuilding effort. And as this materialize, we expect to see improving revenue and margin run rate. We anticipate reopening our rebuilt and rebranded club in Louisiana this quarter and our remodel and rebrand equipment San Antonio next quarter, step by step at Miami is coming to fruition. The mobile-friendly site is scheduled for a soft launch later this quarter or early next. We are continuing to talk with club owners about acquiring their businesses. As part of our recent investor presentation, we said there -- we said our current target is to buy clubs that can add about $20 million in adjusted EBITDA in fiscal 2023.

Regarding Bombshells, our new company-owned location in Arlington is doing very well. As Bradley mentioned, it set a record in December for the first month revenues for new Bombshells. We are under contract to purchase land for 2 new Bombshells, 1 in Sapphire Bay in the Dallas market and another in Stafford in the Houston market. We couldn't get a necessary specific use permit for another location in the Dallas area that we were looking at. And so we're looking at other sites. We continue to talk to brokers in the North, South and West Florida as well as the Phoenix market for more company-owned locations. Our first franchisee store should be opened in San Antonio by the end of this quarter or the first part of next, and we continue to talk to other potential franchisees.

Regarding capital management, as Bradley mentioned, we acquired Scarlett's/ property for $7 million in cash. This is something we've planned to do. Our $18.7 million bank loan provides us with more resources to implement our capital allocation strategy, and we still have 2 excess properties under contract for sale. This is the formal presentation. A big thank you to all our teams, night clubs, Bombshells and corporate for all your hard work and dedication. And with that, we'll open the line for questions.

(Operator Instructions)

And the first question is coming from Joe Gomes from Noble Capital.

Excellent quarter, guys. Just a quick question first here on the acquired nightclubs. Looks that I'm doing the math real quick on the back of the envelope that for the weeks that you had acquired them, they were generating a little over $6 million of revenue. Is that kind of where we're expecting better, worse? Maybe just give us a little more color or detail about how the integration of the acquired clubs is progressing.

Sure. I mean we knew it was going to be a challenge. They were short staffed. They weren't open full hours yet when we took over on October 18. So we know there's going to be some issues there. As we brought some people in from around the country from our other clubs, we were able to fill some spaces, get some stuff going, start building momentum. We did have an issue with some of the existing staff that were very corporate and they were not used to that. So we had some turnover in existing staff as well. So that added to the -- to compound to the problem, then by late December, going into early January, we had COVID hit certain locations throughout the country. And so we've been dealing with that. But as of now, I'm very excited about going forward. The numbers are getting better and better at the locations. Some of the locations are exceeding the 2019 numbers and some are still at about 60%. So we'll continue to push and grow on those locations, get the right things in. We had some remodeling CapEx done. So we're waiting, most of that is done now. We suspect that the majority, if not 100% of that, will be done by March 1. There will only be 1 major project left that we haven't started yet, and we're still working on approvals through the landlord. It's one of the rental properties, but we want to change that property to a Rick's Cabaret and remodel and make it look more like our New York city store frontage in Downtown, Denver.

So hopefully, that will get done here as well in the next few months. And it's right across street from the convention center. So it should be a really great look and definitely help increase that property revenues and income. But overall, we're very excited about the growth potential still at the existing clubs that we just purchased. And I think that as far as our schedule is going, we're on schedule, we think it could take from somewhere between March and May to get -- to get these locations back to 100%, 110%, which is where we want to see them that. Other than that, I mean, everything else has been great with those locations.

Okay. And obviously, awesome contribution this quarter from the service revenues, partly as you mentioned the Northern clubs getting back the VIP business. Do you think there's much more upside in that? Or is that kind of played out in terms of the people are back to the full extent, we won't see that type of growth going forward.

Well, I think we're going to see more growth in that. You're going to see it return more to the mean. Service revenue used to be over 40% of our revenues, I think we're still down in the 20s right now. So I think there's considerable bandwidth there. A lot of that is going to have to do with weather, as the weather gets nicer. I think March, April, May is going to be one of our strongest periods. I know March is part of the second quarter and April, May be part of the third quarter, but I still think those 3 months as a whole are going to be very, very strong for the company. And we're going to get a very good sense of what we're going to be looking like on a go-forward basis as some of our prime time. I think that, hopefully, this last wave of COVID Omicron will be kind of gone. Hopefully, there's nothing new that comes out. It seems to be weakening, so it should just hopefully go away as they're saying. And that's going to give us a very, very strong -- we've got a great sports lineup, coming with March Madness coming up and some of the other Vince Baseball, we started back up in April, which will be great for us. Basketball season will be coming, too, and hope to be a prime spot. And I'm just -- I think a very exciting time for us during those 3 months. And hopefully, the weather gets a little better. There's a big storm last week all across the Northeast, freezing down all the way into Texas and some freezing rain and snow actually in the Dallas market again. (inaudible) inside. So last year, it hit us in the second and third week of February, which is our prime time this time in our first week of February. So I'm hoping that will kind of blow pass and we'll get a nice 6-week run as we run into the last 6 weeks of this quarter, the last 2 weeks of February and then the 4 weeks in March. So maybe even a 7-week, a nice 7-week run. So this quarter is still good. January was still a very solid quarter for us. I was thinking we would come in closer to $22 million. We're a little over $20 million in sales for January. So that will be still better than we did in October. So this quarter still ahead of last quarter on a going forward run rate for first quarter, second quarter. And we'll just have to see, like I said, how these next 9 weeks play out, hopefully, very strong for us.

Right, right. And speaking of sporting events, I know when you get a -- a Super Bowl in a location, it can really have a nice off kick. And I know the Formula 1 race is coming into Miami in April. Outside of that, are there any other big onetime events like that, that you see that will be coming this year towards where any of your club locations are?

I mean I think there's some big like Bitcoin and NFT conferences that are coming to some of our areas. We're in the process of accepting Bitcoin at our location, some of our locations, which I think will help dramatically starting in Miami with the big Bitcoin Conference coming up there in April. We're hoping to have that in place by then. We're working on some other cool things like a helicopter landing pad at Tootsie's in Miami because we've had several requests from some big VIPs. They want to land their helicopter at the club. We're like, well, we can work that out, I think. So we're in the process of doing stuff like that. I mean that location is just phenomenal right now. The numbers it's doing -- I mean, we're still running record numbers that we never even dreamed up pre-COVID that we could do the volume that, that club is doing now.

The race is going to be incredible for us, I think. It brings a lot of big money in to the area Formula 1 is very -- we know from Austin, which our clubs are still 60 to 70 miles from the track, and we still get business in Austin, Texas when Formula 1 is there. So this, I think, I'm not 100% sure of the track, but I know it's just blocks. The track literally blocks from Tootsie's there. So it should be a really big draw for us as well.

One more, if I may, and then I'll get back in queue. Just -- are you talking about a soft launch of the AdmireMe site in the second quarter, maybe early third quarter. What kind of the metrics are you looking for in the soft launch?

I want to get 1,000 girls -- or creators on the site. That is our initial goal, to put 1,000 creators -- new creators on the site from our clubs and our partners' clubs. So combined, there's about 70-some clubs around the country that are going to be involved in the initial launch. Hopefully, we'll add other clubs as time goes on through our acquisitions through their expansion and through maybe partnerships with other club owners as well to continue to build the site. But I think our first metric has to be hitting the goal of 1,000 creators. At 1,000 creators, I think that it has enough momentum on its own that we can just let it build on its own from there with, then we can convert to more of a promotion mode where we're really trying to bring in more customers and guests for those creators. And then, of course, then we'll need more creators and then we'll be more customers and just the chicken and egg effect and just balance and build and balance and build, try not to let either get ahead of the sales, where we have too many customers and not enough creators or too many creators and not enough customers. I think that's the delicate balance for us. So I think we'll have a really good handle on that, how that's looking by the May call is what my personal thoughts on that.

(Operator Instructions)

The next question is coming from Anthony Lebiedzinski from Sidoti.

Certainly a very impressive start to the fiscal year, even with some headwinds with the Omicron. Eric, is there any way you can perhaps take a shot at estimating what the impact of Omicron was on sales for the quarter?

For the quarter, it is difficult, but I would say it probably affected us around 10% in December. In January, probably about the same. I don't think we'll see any effect in February from it. I think February, I think it's kind of -- it's kind of ran its course in our markets for the most part, at least our major markets. Texas is kind of done now. I mean, it wiped out our corporate office. I mean we were very skeleton staff getting this queue finished up, and we were actually a little worried about it at a couple of points, like are we going to be able to get all this work done because every other day, somebody else was, Oh, I'm positive. I can't come in now. So Bradley did a great job of getting that all handled and take care of and went through the COVID himself. So he knows. I mean they all was just -- Luckily, it was very short. Most of them were sick, yes, out for 2 to 3 weeks total with all those. And that's with all the precautionary hold times. They won't really sick for more than about 5 days or so. But we did a 10-day hold before the -- most of this was before they changed it to 5 days, so we're making them 10 days, get negative tests, all that type of stuff before we got people back in our offices because we couldn't afford to keep losing people, especially the key people that were there. We have people coming in at night to avoid each other, whatever we had to do to get this close out done for the quarter and get the [Q] out on time.

Got you. Okay. Well, I'm glad that everyone is healthy now. It sounds like a net corporate office and you guys were able to finish up the 10-Q and so on. So looking forward here, as far as the segment operating margin, so obviously, the Bombshells did take into account some of the preopening expenses for the new Arlington locations. So is it safe to assume that sequentially, you should see better operating margins there? And if you can just comment on Nightclubs as to how we should think about this segment up margin there.

Yes. I mean, the Nightclubs are -- I think we're kind of maxing on the nightclubs. I would think, but then again, I don't know, as the service revenue continues to grow, and Tootsie's is doing the numbers it's doing. If the Denver market really picks up for us as the guys are saying they expect it to between March -- for the month of March. We could see a little bit better there. As far as the Bombshells, I think we're going to stay in the 18 to 22 and maybe occasionally, we're going to have some big events that blow us up to that 24%, 26% margin rate. But if we say 18% to 22%, I'm going to be very, very happy with Bombshells segment in that range. That's a very, very good healthy range for Bombshells. It's been our targeted for many years. That was a target to get to. And if we can stay in that range, I'm not going to be unhappy. Obviously, I love the new locations running 30% plus. It's nice that helps expand the margin for the -- a couple of the underperforming, very older locations that we did before we really had the demographic markets figured out the way we do today. But -- and as we add more of those locations, those first 2 locations or so, 3 locations that were underperforming, we'll have less and less weight on the brand as well. But I don't see any issues with that staying in the 18% to 22% at this point. We've been able to pass on costs. I've talked to some of the guys, management there. We are -- our labor issues that we were having were kind of through. Those most -- for the most part, I mean, obviously, everyone is having some short-term effect. But it was really tough when Omicron came through. We're already short and then a sudden you're missing people, you're missing cooks, you're missing management, you're missing bartenders. I think that all had a little bit of effect, some in December and some of that effect we'll see in January. But I think March will more than make up for what January did -- or January is going to be -- I mean, our March is going to be much, much stronger, I think, than our December was. And we already know that January beat the October. so it's really -- we'll see how February does against November, and then we'll have a really good idea of where we're going.

And then that will give us our April through, September kind of run rates, and we'll kind of get an idea I think how close will be between $260 million and $280 million in total revenues, which is our goal. And then as we add, I think, new projects and new clubs through acquisition, as we get through the later part of that year, we'll have to see how all that plays into the numbers as well.

Got you. Okay. That's great to hear. And then the general corporate expense was a bit higher than what we estimated here. Just wondering if there are any notable maybe non -- I don't know if it's nonrecurring, but any sort of items there, obviously, as you were integrating the expenses -- I'm sorry, the acquisitions, just wondering if there was anything meaningful to call out there? And then just how should we think about the quarterly run rate for corporate expenses going forward?

Yes. That quarter, especially our first quarter is always impacted by the year-end audit, which requires a lot of internal control work, a lot of year-end stats work and you couple that with the due diligence work as well as any third-party work for the acquisitions of the 12 clubs. So you're going to see it ramp up a little bit higher there.

On a normalized rate, I'm saying about $4.5 million for that segment on a normalized run rate.

(Operator Instructions)

The next question is coming from Adam Wyden from ADW Capital.

Eric, congratulations on a great quarter. This is my favorite time of the year. I only get to do this 4 times a year. So I won't let all of our listeners not get a show. But look, obviously, you've made some real progress in terms of improving your cost of capital relative to what it was. Now that was a very low bar, you were trading at 1 point, I don't know, some stupid number. I mean I remember there were people shorting the stock during COVID and it was $8 a share, and we were like this thing is going to do $10 a share of free cash flow. I mean, look, you obviously are trading still at a big discount to the rest of the restaurant and hospitality space. I think it might be helpful for the new people to kind of talk about your history with Bombshells and kind of the fact that you had to tinker with it a little bit and perhaps give people a sense of the cadence in terms of your store opening schedule beyond '22? I mean when I look at the business today, I say, well, you've got 12 locations. They're doing $6 million or $7 million. That's -- call it, $75 million, $80 million. You say 22% margins when you give credit for the real estate, right, your booking real estate through that, it's really more like 30% margins because you've got like 7% of sales on real estate. So you basically got a business that's like $25 million of EBIT or whatever, between $20 million and $25 million of EBIT. I mean if that was floated publicly, that would be worth more than the entire market cap. Now of course, that's a subscale public company, pop, pop, pop, but I mean that's worth $1 billion. And so my question is, you basically built this really amazing brand of Bombshells. It took you some tinkering to fix it. You -- how many -- can you walk people through kind of what you think the unit cadence is over the kind of the intermediate term and what you think that could be? Because obviously, the strip clubs are hard for some people to invest in, and we can agree to disagree on that. But I mean, I think it would be interesting for people to really understand the long-term growth potential of the restaurant opportunity.

Well, the idea is for 2023 to open a store every 2 months. And by the end of 2023, be to the point where we're actually opening a store every 8 weeks and possibly even every 6 weeks. And that by the end of '24, going into '25, if our franchising picks up the way we think it's going to, we're talking with people now. We're getting more and more questions. We're getting more solid interest from qualified people. We've always had the interest. It's just getting qualified people interested, but we're seeing that now. So we're talking with them. I would like to see in 2025 us being able to open 12 or 16 locations a year by 2025 with 2 separate opening teams. So you get 2 separate opening teams that can do a unit every 6 weeks or every 8 weeks. So really, you do probably like a unit every 14 weeks between the opening teams.

Okay. So let's do some math for a second.

10, 12, maybe we have to have 3 opening themes, I don't know.

So let's just the math for all the idiots that are shorting the stock after hours because these guys are -- I mean, I don't know, maybe they don't have COVID anymore because COVID's over, maybe they're maybe they're doing drugs or bitcoins or something. But this is the back of the envelope map I'm doing. And you tell me and the rest of the viewers, if I'm on some other stuff. Okay. So you got 6 stores in 2023, right? And you're talking calendar '23, correct?

Yes. Yes.

All right. So the newer stores are running higher AUVs because you've got the geographies, right? And all these new stores -- I mean, some of your new stores are doing close to $10 million. But let's just -- let's say, make the math simple and say, 6 stores gets you $40 million of sales, fully ramped, and maybe it's more than that. At a 30% operating margin with the real estate income, that's $12 million of EBITDA, organic, right, just from Bombshells, fully funded off of organic, right? And then when you think about the following year, if you do 1 every 6 weeks, that's 50% growth, that'd be another $18 million of EBITDA the following year. So you think you can grow your Bombshells cadence can basically grow 50% every year. So 12, 18.

For a couple of years. I don't know we can do it every year, but for the next 2 to 3, possibly, yes. That's the plan.

Okay. So what I'm saying is you've got a business that's can be 20 of EBITDA, that could be 32 the following year and 50 the year after that. I mean this is going to be a meaningful part of the operations. Now that precludes you growing on the Nightclub side. But I mean, you -- it is your intent, I guess, in the near term to build a $50 million EBITDA business out of Bombshells.

I think that Bombshells has to be taken seriously. $50 million is to us the magic number. That's when we have the option, the 2 side of Bombshells could be a stand-alone entity or if Bombshells continues to fit into RCI, the way it currently -- the current setup is or even looking at an acquirer that would be willing to pay us the big money for this fast growth restaurant chain. So there's a lot of options that open up to us when we hit that number.

So we know Hooters is up for sale and they've got that stipend wings concept puts around and who knows if they're going anywhere. I mean, who does it on the down. I mean, could this be -- I mean, could this be 100 locations at 7 -- I mean the math I'm doing is if we can get to 100 locations at some point at $7 million a box, right, which isn't that crazy if you think about Buffalo Wild Wings and whatnot, you're talking about $700 million at a 30% operating margin, including real estate. That's $200 million or something.

Even if your 6.5% you're close. I mean, if it's $6.5 a box, so you need a couple need a few extra stores. So I mean, yes, I think that's not an issue. 100 Bombshells, now we're looking at Florida, we're looking at Arizona, I don't think 100 locations is difficult at all.

So 100 locations is a $200 million EBITDA business, well, right? Because we're doing 20 on 12 or 10, right? So 20 to 25. So if we get to $100 million, that means it's a $200 million profit business.

It's going to be very significant question, we can't ignore those points.

Well, the interesting thing is you look at Bitcoin, Bitcoin went from $0.03 to $1,000 and every thought it was high and it went to 50,000. And right? I saw -- I don't know if you've ever studied restoration hardware and what Gary Friedman did. Have you thought about doing a massive tender offer? Or -- I mean -- because remember, like you're generating so much cash flow now. Have you thought about maybe doing like a big share repurchase or something to -- I mean, because -- I mean, look, I don't like to quote Donald Trump, but when he said he wanted to go wash, you want to drain the swamp. I mean we got to swamp here and we've got to drain it because there's all these guys sloshing around. I mean, if we're not going to get our cost of capital and we're going to grow like this. Have you thought about doing something more aggressive on the capital allocation front. I mean this is absolutely insane this math.

I mean we were getting prepared as stock was down to 67 again. We were prepared to start buying stock again. In the last few days, it ran up over $10 a share. I mean we're watching it. When it gets into our 5 range, we will be buying stock. It just hasn't hit our buy range of 65 because -- and I say that's our -- that's when we -- at that point, we're going to buy stock because it just makes sense. Even though we have enough cash on hand now again to do the deals that we're working on. So the cash were generated on each week basis, we don't need to just continue to build it up. We have enough in the war chest to do the things we have on our plate right now, at least through May or June as we develop and get further into some of the acquisitions, that could change, but that's where we're at today. And we're generating cash. Our cash balances keep going up. This quarter, I think the second quarter of the cash flow will be a little less. We're going to pay significant income taxes this quarter where we had a nice credit in the last quarter, we didn't have to pay as much in tax. So maybe our $18 million in cash flow this quarter ends up only being $16 million on the same revenue, but we could also do $2 million more in revenue, $3 million more in revenue and bring it right back up.

So the fourth quarter was -- it is kind of not your seasonally strong, which kind of brings me to your second question. If you think about $240 million of sales in the fourth quarter and then you obviously had preopening costs and some other stuff that was burdening the margins, as you said. When I think about this business, I say, okay, you did $72 million of EBITDA effectively annualized in that quarter. right? Now you didn't have a full quarter from Lowrie, obviously, you can get the synergies, obviously, you had preopening costs. So maybe you back that out and maybe you get back up to $75 million to $80 million, right, plus or minus. And then when you layer on the next $40 million in sales from the return in New York, Lowrie getting fixed and kind of continuing, getting to where you want to be in terms of -- you're looking at another -- at least -- I mean, on the nightclubs, you're getting huge incremental margins, right? Bombshells less, but most of the return on growth is going to be from nightclubs anyway. So when you think about the extra $40 million on clubs, because Bombshells are basically where they are. They've been running hard at the whole way. So you say another $40 million, if that's -- I don't know, it could be as much as 80% incremental, but let's just be conservative and say $60 million. That's over $25 million of EBITDA. I mean this business will be in excess, assuming no additional M&A. We're going to be well in excess of $100 million of EBITDA exiting calendar '22. I mean I would think by middle of this year, we are well in excess of $100 million of run rate EBITDA, right? I mean...

On a forward, we're going to be close to that. I think right now, we're looking at probably -- I was saying we were going to be close to 82%. I think we got hit for a couple of million in this quarter. I think we're going to get a hit in a couple of million, January, February, March or just -- well, January really is when we got hit about $2 million in December, about $2 million in January, call it, 60% or 80% incremental margin, so that's like $1 million in EBITDA in each of those. So we're missing about 2. We were at 82%. So maybe we're at 80%, maybe 78%. So we're somewhere between 78% and 82% right now on a run rate type basis. But I just really don't know for sure until we can see what March does. And we need to see what a real clean month -- we shouldn't have much weather effects. We should have -- we've got the March madness going. We've got the spring fever type stuff gone and that's when we're going to really see, I think, the demand for our product and for the clubs and just people going out more, the Omicron scare will be over. And hopefully, the whole COVID scare is over, and we can get back to more normalized more normalized operation.

Also on the [Loule] front, I mean, you lost -- you had a huge amount of employee turnover. I mean that there's going to be a huge jump up on utilizations.

I think in December I mean, I think by March, yes, by March, like our Denver market.

I know, what I'm saying is, by the middle of the year -- I don't care about January, February, right? Because you're...

By the end of May. I'm thinking by the end of May. I said, March, April, May is going to be huge for us because -- and that's when we're going to be able to see by May, we're going to know exactly what I think it's going to look like for the next 12 months. That's -- we're going to get a really good feel of, okay, (inaudible) now we're at $110 million. I mean we're going to know that, I think, in the next 3 months. That's when we're going to see that come to fruition.

Well, you know me, I'm pretty consistent. I've been pretty good at modeling. I think my guess is by the end of May or early June, you'll be in excess of $100 million of EBITDA. That's where I'm at. I think they'll be $100 million to $110 million.

I've done everything I can do to meet your numbers every time. And even when I thought they were crazy and we keep doing them. So I hope you're right. And it's definitely a high possibility or probability that that's where we'll be at, and we're definitely going to keep working for that.

Okay. Let me shift here. So we did Bombshells. We talked about that. That was helpful. We talked about the bridge on the sales. Okay. Can you talk about that $20 million of inorganic M&A? Obviously, Lowrie was kind of a shot across the bow, right? I mean for those of you that haven't been on this call, you buying Lowrie was basically -- I mean, I wouldn't say it was as crazy as David Tepper buying John Corzine's house after John Corzine blew up all his money in the Hamptons. But I mean buying Lowrie, I mean you had a lawsuit with him in '08, you bought the VCGH stock. I mean, this was really a cool for you. This is an asset you've been at for 15 years. I mean, you got Lowrie, it's got a great metropolitan market. You're going to get the [20] EBITDA on that. Other large owners obviously see that a sophisticated owner was willing to sell to you. I mean, how do you think about these large multi-club multi-MSO acquisitions? And how do you think about -- because now you're at scale, right? I mean as you said, the last time you had your Hoorah in 2008 when you actually had some equity cap, you're only about $20 million of EBITDA. But now you're a far more diversified business geographically, where you're at $100 million of EBITDA pro forma for Lowrie. I mean, how do you think about taking on another Lowrie a year? Just 1 big deal or 2 big deals?

We'd love to do it. I mean -- and we're talking with some guys out there that have the ability to bring us not 12 clubs, but 4 clubs, 6 clubs, 3 clubs, deals that we're working on right now. We may have to close 2 deals to bring in the same type of EBITDA as we did with the Lowrie transaction, but they're out there, and we're working it. And there's some pretty decent one-offs that we're working on right now as well as.

I remember we you were working on Boston (inaudible)

$55 million on a single acquisition.

Right. Boston was a big club. I mean, that fizzled , but that was a $4 million, $5 million or $6 million EBITDA deal. I mean.

I think that would have very, very big one for us. And it was just -- COVID just killed that deal with what happened. The owners got desperate and then they sold the real estate and we're not interested in the club without the real estate. So you shouldn't be.

So do you think -- I mean you think you could do to -- I mean, look at -- I mean, you can do the math on Tootsie's and Scarlet. I mean those assets right now, I don't know what Tootsie's is, Tootsie's grew 20 EBITDA, I mean 25. I mean those are big -- I mean those are unique assets, right? I don't know if could there be another Tootsie's in the United States that's not in Vegas that would be -- I mean, are there other out.

I recently found a club that's another Scarlett at least. Another (inaudible) in New York that we're talking with the owners on. I'm going to go take a look at it. And I was very surprised. I didn't -- the problem with the private club, you don't know what their numbers are until you get under NDA, and they actually really give them to you. and you get tax returns and you go through and go, wow, you guys are doing those kind of numbers, had no idea. And so those are the things we're finding right now and I'll say on the call all the owners out there that might be listening. We're very interested in larger acquisitions. That takes us just as much energy and effort to buy one club as it takes to buy 12 clubs. I mean our...

I'll send a message to all the club owners themselves, which is -- I can personally attest to the fact that Eric Langan is a super talented capital allocator. And any club owners should look at short Lowrie and look really, really hard because the stock is still trading at a very low multiple. And there is going to be a time hopefully, in the next 2 to 5 years, where we're going to trade at a multiple instructive of our ability to allocate capital and grow Because, look, the reality is that a business of this scale I mean, look, the guys at Noble put on an interesting report. I mean, there's 2,200 clubs in the United States, we only are at 49. So we're 2% penetrated. I mean, it's just math, right?

There are another 98% clubs. You tell me there isn't another Tootsie's out there, there's got to be. And so it's an incredible opportunity. I mean, because of ESG and private equity and this and that, we are the only game in town and I am convinced that at some point, we are going to trade at a multiple instructive of our ability to allocate capital and growth. So look, I encourage you to keep hitting these investor days and getting in front of people and keep doing the great work and we'll go from there. Last thing. Can you talk a little bit about the financial metrics of environment? I mean if you get -- I almost forgot about this. If you have 1,000 people, have you guys done any work on if the average girl is $10 a month, have you thought about kind of penciling the paper? I know you guys get like some revenue share of the subscriptions.

The average girls are going to be a much lower number. I think with -- because of the fact that you can come see the girls and girls is going to be working through the clubs to increase their presence on the Internet through the clubs and bring (inaudible). I mean, I think the average girl, maybe it's $200, maybe it's $2,000. I don't know. But if it's 200, and I get 1,000 girls on there, all of a sudden, I'm doing my $200,000 a month or $2.4 million a year to kick off. And if I can get that done in the first 60 to 90 days, and that's my ramp-up, that's where I started out of my ramp-up.

And the next thing I have 10,000 girls on there. I think that it's going to be a very, very powerful and significant sight for us plus it's going to increase our brick-and-mortar, I think, frequency because a lot of guys are intended. We have a lot of really pretty girls are working for us and you guys get intimidated but they can find them on the Internet, they can chat with them, message back and forth, maybe get a little more comfortable and then be able to come into the club. In fact, I was talking with the guy last night who said, man, I'm really shy I said, well, you want me to go get that on talk to -- when we go talk to for you have come over the table, No, no, no, don't bring her over. Don't bring her over. I'm like, okay. So he wanted to -- what as if I could get to know her first. I don't -- I want to know more about it first. I said, well, that's what AdmireMe is all about, is you'll be able to do that. And so it kind of gave me a little bit of an insight to seeing it work.

So I think that -- I think it's going to work very, very well. We just -- we got to get it up and get it running, and we're very close. The credit card processing should go to live on the site here in the next week or so, everything is approved. They're just working on all the APIs and all the security, with a security company and all that right now. So that should all be up and operating here in the next, say, week or 2 weeks. And probably we'll do some quick testing of it and do a very soft launch within 2 weeks of that, I think. So by the 10th of March or 15th of March, we'll definitely have a basically a beta site running where we're allowing customers in, it will be password protected, it will be invite-only where the girls that are -- we're loading on to the site and can invite their customers in. They'll be the first ones on the site. And then once that's running smoothly, we'll open it up to general public.

Good stuff there. Keep fighting the good fight, and we appreciate the hard work.

(Operator Instructions)

John, this is Gary. We've got a couple of questions that have been e-mailed while we're waiting to see whether anybody else has any questions. Eric, what's the significance of the $7 million acquisition of Scarlett's Cabaret Miami property. It's a question from Jonathan Hollander of Chesapeake Advisory.

Sure. That's 8% cap rate based on the rent at the time of closing. The rent goes up by CPI every year. So we just had a 6% increase in January that would have went effect into January. If you consider a 3% -- if you just consider a 3% CPI over the next 10 years, it becomes a 10.74% cap rate on what the rents would be. And we own the property. So now we control our destiny at that location forever. There was 30 years left on the lease, that we weren't in a real risk. Originally, they wanted $9.5 million for that property. We told them we'll wait, we'll stick with the lease. Last year, they came down to 8. This year, they came down to 7, and we could turn down 7 with an 8% cap rate and almost 11% return over the next 10 years on that property, we couldn't turn it down. We had to buy it. We believe the property appraised for about $7.8 million or $7.9 million. So it's worth probably about 10% more than we paid in cash. The main reason need discount so quickly is we literally closed that deal in 2 days and then escrowed part of the money until we got actual title clearance. So it worked out very well. That deal is completely closed now. We have full [title] insurance and everything else. So -- but it's a significant pickup for us in that it feeds very well into to what we pay for the real estate normally.

Great. And one last one from Antonis Potapapas in his family office. For our high-margin service revenue, is there a story behind that pop or just the reopening? What was the driver mostly cover charges, executive rooms, et cetera.

It was mainly New York being back open full time and customers coming back in. And we saw that through October and November. And then by probably the second week of December, as Omicron hitting New York very hard, especially in our staff and -- and that, we started to see that decline a little bit again through about the second week of January. And since the second week of January, we're now starting to see that revenue back into the club again in New York. Also, Minnesota did very well through November and December. They had a slowdown at the end of December, early January, similar to Texas, where the virus hit those markets. Those markets are now recovering. We have had some weather issues this first week of February, but I'm very optimistic on -- between -- we have a barter reservation system that we use. And if I look at some of the numbers there, those numbers are getting better for reservations going through the end of February. So I think we're going to see that service revenue bounce back and get back on course to where it was through October, November and actually, in March, I think we're going to see all of that exceed. I think service revenues will grow to over 30% of revenues again in a short period of time (inaudible) online. Yes.

We just got another question from Steve Martin, "has the competitive landscape changed in New York City post COVID?"

It's gotten better for us, 2 major 10,000 corporate clubs did reopen. The Executive Club on 49th and the scores on 28th Street did not reopen. So that's 20,000 square feet of adult space that basically went away in New York City. But that's probably good because I think half of our hedge funds managers and stuff, I'll move to Florida. So Tootsie's is doing very well in New York Smith or a few customers, but it's nice when they come back to visit, when they come back to work in the city, they're here for typically 3 to 4 days, and we're seeing it for 2, 3 days in the club. So -- it's working out very well for us in that regard. And that's what I think we need to see as the weather gets better and the ice and snow, we get past that in the next few weeks. I know the Ground Hawks shadow. So we're supposed to see a little more winter here. But I think by March, we're going to be in great, great shape.

John, it looks like we have no more questioners and we're almost hitting an hour. So why don't we wrap up?

So thank you, Eric and Bradley. For those of you who joined us late, you can meet management tonight at Rick's Cabaret New York starting at 06:00 at 50 West 33rd between Fifth and Broadway. If you have an RSVP, ask for Eric or me at the door. We'd like to welcome Noble Capital Markets, which is now following RCI, along with Sidoti & Company will be at Noble's Small Cap Conference in Hollywood, Florida, April 19 through the 21st. On behalf of Eric, Bradley, the company and our subsidiaries, thank you and good night, stay safe, stay healthy. And as always, please visit one of our clubs or restaurants.

Thank you.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.