Ep. 22: Second Floor of Tootsie’s Getting Shoulder Rubs: Eric Langan (Nasdaq: $RICK)

Introduction

The hosts introduce the podcast and welcome listeners. They also provide a disclaimer that the show is not financial advice.

Hosts' Update

The hosts discuss their recent trip to the Hamptons and their collaboration with Friday Beers. They also mention an upcoming crypto conference in Austin.

Guest Introduction

The hosts introduce Eric Langan, President and CEO of RCI Hospitality Holdings Inc., the only publicly traded strip club in the country. They discuss his background and how they got paired up through Adam Wyden.

Unique Interview

The hosts highlight that this is one of their first CEO interviews with a publicly traded company. They discuss Eric's unique story of selling his baseball card collection for $44,000 to buy his first club and growing RCI Hospitality Holdings from one club to 49 clubs across the country.

Coinflex Conference

Mark mentions that he will be attending a crypto conference in Austin without Sean due to a previous engagement. He talks about how people recognize him at conferences but not Sean.

Mysterious CEO

The hosts joke about how mysterious Lit is at conferences before transitioning back to discussing Eric Langan's background as a CEO of a publicly traded company.

RCI Hospitality Holdings Inc.

The hosts discuss RCI Hospitality Holdings Inc.'s unique position as the only publicly traded strip club in the country and its subsidiary, Bombshells, which is a military-themed restaurant with 12 locations.

Interview Begins

The hosts welcome Eric Langan to the podcast and discuss their previous interactions with him during investor relations and earnings calls.

Eric Langan's Background

The hosts ask Eric about his background and how he got into the strip club industry. Eric shares his story of selling his baseball card collection for $44,000 to buy his first club.

Meeting Adam Wyden

The hosts discuss how they met Eric through Adam Wyden, the largest individual shareholder of RCI Hospitality Holdings Inc., who tweeted at Sean.

Introduction and Fintwit Community

In this section, the speaker talks about his experience in the fintwit community and how he has both lovers and haters.

Experience in Fintwit Community

• The speaker is a staple in the fintwit community.

• He has both lovers and haters.

• He enjoys being part of the community.

Verification on Social Media

In this section, the speaker talks about getting verified on social media.

Getting Verified

• The speaker hopes to get verified soon.

• Some people don't believe it's him without verification.

Positive Energy on Fintwit

In this section, the speaker talks about positive energy on fintwit.

Positive Energy

• The speaker brings positive energy to fintwit.

• The finance community can be toxic.

• Trolls don't get to him.

Starting Out at 19 Years Old

In this section, the speaker talks about how he started out at 19 years old.

Starting Out

• The speaker got married and divorced at 19 years old.

• Friends took him to a strip club to cheer him up.

• He started dating one of the entertainers from the club.

• They decided to open their own club because they thought they could do it better than others.

Selling Baseball Card Collection for Strip Club Business

In this section, the speaker talks about selling his baseball card collection for his strip club business.

Selling Baseball Card Collection

• The speaker sold his baseball card collection for $44,000.

• The collection was worth about $300,000.

• He wanted to use the money to start a strip club business.

Joe Montana Rookie Card

In this section, the speaker talks about his Joe Montana rookie card.

Joe Montana Rookie Card

• The speaker had about 180 Joe Montana rookie cards.

• He gave one to his brother which got rated as a PSA 10.

• There are not very many PSA 10 cards out there.

Roll-Up of Clubs

In this section, the speaker talks about rolling up clubs.

Rolling Up Clubs

• The true roll-up story started in 2005.

• They opened Ricks New York in 2005.

• They paid $7.6 million for the club when their revenues were only $6.7 million total revenues.

• They gutted and remodeled the property after buying it.

Location of Rick's Cabaret

In this section, the speaker talks about the location of Rick's Cabaret.

Location of Rick's Cabaret

• Rick's Cabaret is located at 50 West 33rd Street in New York City.

• It is right across from Madison Square Garden and directly across from the Empire State Building.

The Early Days of RCI

In this section, the speaker talks about the early days of RCI and how they became a publicly traded company.

Becoming a Publicly Traded Company

• In 2007, the investor community jumped on RCI and their stock traded at a higher multiple than Playboy.

• The speaker had a standing joke that when his stock was worth $30 million, he would retire. However, even when it reached $32 million, he did not retire.

• The speaker mentions an interesting moment during an earnings call where his stock was down but then went up to $700,000. He showed his e-trade account with $38 million in it and called it "monopoly money."

Living the Dream

In this section, the speaker talks about how much fun he has running RCI and how it feels like living the dream.

Monopoly Money

• The speaker calls his e-trade account balance "monopoly money" because he can't really do anything with it.

• He says that he just has too much fun running RCI every day and considers himself to be living the dream.

Extended Family

• The speaker considers his employees to be like an extended family and takes pride in having almost 3,000 employees nationwide.

• He thinks about his employees' families as well and uses them as motivation to push harder every day.

Changing Perceptions of Strip Clubs

In this section, the speaker talks about changing perceptions of strip clubs and how people should do what they love.

Family Component

• The speaker mentions that people often have a negative connotation of strip clubs, but there is a family component to it.

• He believes that people should do what they love and success will come from that.

Web3 and Decentralization

In this section, the speaker talks about his interest in web3 and decentralization.

Doing What You Love

• The speaker loves web3 because it's about decentralization, freedom, and doing what you want to do.

• He believes that if you love what you do, you'll never work a day in your life.

RCI Compared to Competitors

In this section, the speaker talks about how RCI compares to its competitors.

Next Generation of Clientele

• The speaker is trying to build the next generation of clientele for RCI, which is currently 25 to 35 years old.

• He doesn't mention any specific competitors but talks about how he wants to embrace change.

Introduction to the Adult Entertainment Industry

In this section, the speaker talks about his experience with adult entertainment and how it has evolved over time.

Evolution of Adult Entertainment

• The speaker's sons were exposed to adult entertainment at a young age due to the internet.

• The current generation is more accepting of adult entertainment due to civil rights movements.

• The industry has faced legal battles since its inception, but there are fewer issues now compared to before.

Legal Battles in the Adult Entertainment Industry

In this section, the speaker discusses his experience with legal battles in the adult entertainment industry.

Legal Battles Faced by the Speaker

• The speaker was arrested 14 times in three weeks for operating too close to a house when he opened his first club.

• Despite facing many legal battles over the years, he believes that things are improving for the industry.

Future of Adult Entertainment

In this section, the speaker talks about how technology is changing adult entertainment and what it means for the future of brick-and-mortar clubs.

Symponomics: Digitalization of Clientele

• The digitalization of clientele is changing how people consume adult entertainment.

• While younger generations may not be as engaged with traditional strip clubs, they still enjoy them once they visit one in person.

Web 3 Strategy and Brick-and-Mortar Clubs

• Strip clubs offer a unique opportunity for one-on-one conversations that can't be replicated online.

• The web 3 strategy is being used to bring people into brick-and-mortar clubs.

Acquisition Opportunities in the Adult Entertainment Industry

In this section, the speaker talks about acquisition opportunities in the adult entertainment industry and how they are being approached.

Challenges of Opening New Strip Clubs

• It's difficult to open new strip clubs due to regulations.

• Many owner-operators are getting older and looking to sell their clubs.

Future Acquisition Opportunities

• The company is taking a thoughtful approach to acquisitions, focusing on managing existing operations before expanding.

• Best practices for treating guests and entertainers are a top priority.

Acquisitions and Evaluation

In this section, the speaker talks about the acquisitions they made in 2008 and how they evaluate potential acquisitions. They also discuss their use of investment bankers and appraisers.

Evaluating Potential Acquisitions

• The company is receiving many calls from brokers and club owners interested in selling.

• The director of operations is working on creating a preferred acquisition list based on metrics such as cost savings and revenue growth.

• The speaker has knowledge of what other industry leaders are willing to pay for acquisitions, which helps with evaluation.

• If an acquisition is less than five times trailing EBITDA or adjusted even a number, it's hard to go wrong.

Use of Investment Bankers and Appraisers

• The company used Merriman for capital raised in 2007 and 2008 but hasn't used them since generating too much cash.

• An auditing firm was hired to evaluate the business but most of the report was based on information provided by the speaker.

• For standalone buildings, the company uses bank appraisers to determine fair real estate value.

• If there is disagreement between buyer and seller over appraisal value, a third appraisal may be done to determine an average value.

Real Estate Value

In this section, the speaker discusses how they think about real estate value when acquiring new properties.

Real Estate Value

• When buying an adult business with real estate, they pay three to five times multiple for the business but only bank appraisal value for the real estate.

• The company charges rent based on an eight percent cap rate and adjusts it based on appraisal value. They own the New York club property.

Unique Aspects of RCI as a Company

The CEO of RCI discusses the unique aspects of the company, including its seller finance model and lack of equity research coverage. He also talks about how his role has evolved over time and emphasizes the importance of hiring specialized people to take over tasks.

Seller Finance Model

• RCI has a unique seller finance model that allows them to avoid taking out large loans.

• This makes the company stand out from others in the industry.

Evolving Role as CEO

• The CEO's role has evolved post-COVID, with an emphasis on working himself out of a job by hiring specialized people.

• He gives an example of how he hired a CFO who was able to improve their internal accounting systems.

Importance of Hiring Specialized People

• The CEO emphasizes the importance of hiring specialized people who can do a better job than him in certain areas.

• He gives an example of how his CFO was able to build systems that made it easier for him to manage finances.

Misconceptions About Strip Clubs and RCI

The CEO addresses misconceptions about strip clubs and RCI, emphasizing that many women in the industry are empowered rather than exploited. He also shares a personal story about one manager who started as a waitress and became happier after moving into management.

Empowerment vs Exploitation

• Many people believe that women in strip clubs are exploited, but the CEO believes that most are actually empowered.

• He shares a story about one manager who started as a waitress and moved up to become happier than ever before.

Importance of Teamwork

• The CEO emphasizes the importance of teamwork in building a successful company.

• He credits his managers, entertainers, and waitresses for helping RCI grow from $6 million in revenue in 2003 to an expected $300 million in 2023.

Empowering People to Make Their Own Money

In this section, the speakers discuss how OnlyFans is empowering people to make their own money and how this is often misunderstood by society.

Misunderstandings about OnlyFans

• Not everyone is born with a silver spoon in their mouth, and many people are in abusive relationships. OnlyFans empowers people to make their own money.

• ESG (Environmental, Social, and Governance) criteria can exclude companies like OnlyFans that empower sex workers. This is controversial but necessary for change.

• The next generation views things differently. Sex work is real work and should be viewed as such. Marijuana was once illegal but is now being legalized.

Impact on Stock Ownership

• ESG scores affect who can own your stock. Institutions like endowments may not be able to invest in companies like OnlyFans due to ESG criteria.

Management Changes After Discovering Fraudulent Accounting

In this section, the speakers discuss management changes made after discovering fraudulent accounting in 2015.

Discovery of Fraudulent Accounting

• In 2015, fraudulent accounting was discovered when considering buying a club.

• Financial advisors were fired due to the discovery of fraudulent accounting.

Impact on Company Growth

• The company had three years of growth before discovering fraudulent accounting.

• The stock price went from 18 to 6 due to the discovery of fraudulent accounting.

Book That Influenced Management Changes

• A book called "The Lean Startup" influenced management changes in 2016.

• The book helped the company focus on growth and customer satisfaction.

Evolution of Capital Allocation Strategy

The speaker discusses how he evolved the capital allocation strategy of his company, which led to increased revenues and free cash flow.

Investment Group Offers to Buy Up to 5% of Company

• An investment group from California offered to buy up to 5% of the company if the speaker publicly stated a capital allocation strategy.

• The speaker read "The Outsiders" by William Thorndike and adopted a capital allocation strategy.

• The company publicly put out the three things they were going to do.

Realization that Capital is More Than Physical Money

• The evolution of the capital allocation strategy was when the speaker realized it's not just about physical money capital, but also property.

• They had properties where the real estate was worth more than what the club operating on it was making.

• They sold off underperforming assets and reinvested in better capital allocation for that capital.

Applying Capital Allocation Strategy to People

• They applied their capital allocation strategy to people, including staff, management, and regional management.

• They evaluated ROI for each person based on their salary and performance.

• This helped them get rid of underperforming locations and focus on top locations.

Effect of Cost Cutting Measures

• COVID taught them a lot and leaned out the company by cutting costs drastically.

• Operational costs were reduced from $14 million per month to $2.8 million per month.

• Despite revenue declining due to selling off underperforming assets, free cash flow increased drastically.

Catalysts for Growth

The speaker discusses catalysts for growth in his company, including the Recovery Play and settling a two-and-a-half-year SEC investigation.

Recovery Play

• Recovery Place Wall Street Ventura got into recovery place, which led to increased interest in the company.

• They realized that small mom and pop restaurant chains were getting closed down, and the same thing was going to happen to strip clubs.

• This led to increased investment in their company.

Settling SEC Investigation

• The company settled a two-and-a-half-year SEC investigation that was brought on by a short attack in 2018.

• Their stock was depressed due to the amount of cash they were making and the investigation.

• Settling the investigation helped increase investor confidence.

The Strip Club Industry and the Recession

In this section, the speaker discusses the strip club industry and its relation to the recession. He also talks about how some entertainers are charging high rates, which is not sustainable.

Strip Club Industry and Recession

• The speaker mentions that they have already bought 13 clubs this year and plan to buy several more in the coming months.

• A tweet from @botticelli_bimbo on Twitter suggests that strip clubs are a leading indicator of a recession. However, the speaker disagrees with this statement.

• The speaker explains that their clubs are experiencing record traffic despite the pandemic. He attributes this to people returning to work after quitting during the pandemic.

• While normally a recession would lead to an increase in quality of entertainers, this time it's different because people are returning to work.

Entertainers Charging High Rates

• The speaker mentions that some clubs are full of entertainers again, but new girls who haven't been in business for long want to charge high rates (upwards of $1200-$1500 per hour).

• The average rate nationally for entertainers is $400-$600 per hour. Some top girls may still get up to $1000 per hour.

• Customers may not see value in paying such high rates when they can spend time with other girls at lower rates.

• The speaker compares it to buying meat at a store - customers will likely choose the cheaper option if there isn't much difference between them.

Fed's Role in Soft Landing

• The speaker mentions that the Fed has a delicate juggling act to do in terms of managing inflation and raising minimum wage.

• Many major companies are raising their minimum wage, which is putting more money into the system and causing inflation.

• The Fed needs to play it fast enough but slow enough on these rises to get us into a soft landing.

Stock Price and Analyst Perception

In this section, the speaker discusses the stock price of their company and how analysts view it. They also talk about whether there is a disconnect in the market and if they are getting fully valued based on their cash flow.

Stock Valuation

• The speaker talks about whether their foray into web three and tech would change the perception of their company being valued as a pure restaurant and nightclub ownership to something like multiple expansion for owning tech.

• The speaker explains that almost all cash flow is being discounted right now because of what analysts are betting. The short thesis on their company is that revenues will go into recession, margins will drop from 30 to 20, free cash flow will drop tremendously, and EBIT will drop tremendously because they will lose high margin service revenues.

• However, the problem with this thesis is that there has been no decline yet. Service revenues are increasing right now still.

Business Performance

In this section, the speaker talks about business performance in terms of revenue growth, customer behavior at club levels, seasonality trends, and expectations for summer.

Revenue Growth

• The speaker mentions that service revenues are increasing right now still. They give an example of how they were lucky if they were getting one ten thousand plus dollar tab in February but in May they were averaging for a week of 10 to 25 thousand taps.

• Even if they just stay the same or continue going up by two to three percent per month, it's going to be some big numbers since they're running record numbers right now.

Customer Behavior at Club Levels

• The speaker talks about how their blue-collar clubs are still doing very well even with gas at five to six dollars a gallon. People want experiences, they want to go out, they want to party, and they don't want to sit at home on a Friday or Saturday night.

• They mention that when Mondays and Wednesdays start getting weaker and weekends actually get busier, it's the first thing they always see go. However, right now every day is just continuing to increase.

Seasonality Trends

• The speaker mentions that June, July, August are typically when they start to slow down but expects a big summer this year. They expect college students who are not having to worry about class will go out on the weekends and party.

Remaining Profitable During COVID-19

Eric talks about how his clubs have remained profitable during the pandemic and how they are starting to see increases as hotel rates go up in downtown Minneapolis.

Staying Profitable

• Despite not being as profitable as before, the clubs have remained profitable throughout the pandemic.

• The hotels rates going up in downtown Minneapolis is leading to an increase in business.

• The Chicago market has seen significant improvements since the club reopened.

• Tootsie's in Miami has been extremely popular, with people waiting in line for hours even during the pandemic.

Tootsie's: America's Largest Club

Eric talks about Tootsie's, which is probably the largest club in America. He describes its size and features, including a full metal shop and wood shop.

About Tootsie's

• Tootsie's is probably the largest club in America.

• It was formerly a BJ's wholesale warehouse that was purchased and retrofitted.

• There are 385,000 square feet under the roof, with some of it leased out as warehouse space.

• There is a full metal shop and wood shop on site where they make furniture for the club.

• They used to blow all their neon signs but now use LED lights instead. However, they still have all the tools to blow neon if needed.

Web 3 Strategy: Tip and Strip

Eric discusses his web 3 strategy with Tip and Strip. This involves creating a loyalty program using NFTs with different rarity levels that offer various benefits.

Loyalty Program Using NFTs

• The website is called tipandstrip.io

• They are creating a loyalty program using NFTs with different rarity levels that offer various benefits.

• The rarity levels are random, so everyone pays the same flat price for a chance to get rare NFTs.

• Benefits include getting in free with friends, VIP access, and free bottle service tables.

• There will be 10 ultra-rare NFTs that offer a birthday party in the holder's birth month every year.

• They are also working on some one-of-a-kind NFTs with special deals.

NFT Holders Party

In this section, the speaker talks about a party that will be held for NFT holders only. The party will have a huge budget for celebrity guests, feature entertainers, and influencers.

Details of the Party

• The party will be held every July at Tootsies.

• It is exclusively for NFT holders.

• There will be a huge budget for celebrity guests, feature entertainers, and influencers.

• One of the one-on-one experiences will be sitting at the owner's table with a friend.

Ethereum and NFTs

In this section, the speaker talks about how they are using Ethereum to sell their NFTs. They also discuss how they got into NFTs through their son.

Using Ethereum to Sell NFTs

• The speaker mentions that they are selling their NFTs on Ethereum.

• Customers can pre-buy the NFTs with a credit card and an email address.

• Once the mint goes live, customers can provide their actual wallet to transfer it into their wallet.

Getting Into NFTs

• The speaker's son brought up the idea of getting into NFTs.

• They joined Twitter to research more about it.

• They now have an official account on Twitter and use it to promote their brand.

Parties in Denver

In this section, the speaker talks about throwing parties in Denver during conferences. They mention Diamond Cabaret as one of their venues.

Parties During Conferences

• The speaker mentions throwing parties during conferences in Denver.

• Diamond Cabaret is one of their venues for these parties.

• They plan on having big-name DJs perform at these events.

Excitement for Blockchain

Eric talks about his excitement for blockchain and how it can be used to give someone ownership of something anonymously.

Ownership and Verification

• Eric got excited about blockchain because he realized that he could give somebody ownership of something anonymously.

• He wanted to verify the person's identity every time they came to his club, so he started thinking about what he could give them.

• He talked with developers and programmers to write smart contracts that would allow him to give people a bottle of liquor or table every 30 or 60 days.

Annual Renewals and Rarity Levels

Eric discusses annual renewals and rarity levels for his blockchain project.

Refills and Utility

• The items will be annual, so people will have to renew at the end of each year.

• Every time someone renews, they'll have a chance to move up in rarity levels and gain more benefits.

• The longer someone has an item, the more utility it will have. They plan on adding more utility based on feedback from holders.

Conclusion

Eric concludes the interview by thanking the hosts for having him on their show.

Final Thoughts

• Eric thanks the hosts for having him on their show and says he's happy to come back anytime.

• The podcast is called "Big Swinging Decks by Liquidity" with hosts Lit and Mark Moran.

• For more information, follow them on Instagram at liquidity and it's Mark Moran or visit the official website liquidity.com.