Author Topic: RICK - RCI Hospitality  (Read 14207 times)

TedKord

  • Newbie
  • *
  • Posts: 32
Re: RICK - RCI Hospitality
« Reply #10 on: August 26, 2016, 10:21:10 AM »
Has anyone else looked at RCI Hospitality (RICK). 20% free cash flow margins, buying back stock, paying dividend and trading around 10x earnings. RCI owns 38 strip clubs, primarily under the Rickís brand name. They also own 5 casual-service restaurants under the brand name Bombshells. At 10.75, the market cap is 105m and they are guiding to 19-21m FCF this year (16.7m is already in the bank). The CEO seems to be very concerned with capital allocation rather than empire building. They put their capital allocation strategy on page 5 of their 3Q Conference call presentation. There is too much long term debt for my taste, 101m, but 70m is secured by real estate and the average weighted interest rate is 7.53%. OpInc covers interest exp 3x, and frankly, how much wear and tear is there on a strip club? Adding back D&A gets you close to 4x coverage. Iím also not wild about their geographic mix. About half of the clubs are in Texas, but they seem to be trying to grow in other states. There may also be some risk due to the independent contractor status of the dancers.  I really donít have an opinion if they are forced to recognize dancers as employees; maybe someone on the board knows more about this issue. The negative current ratio doesnít bother me. It isnít uncommon in the restaurant business. But it is a real risk factor, given their relatively heavy debt.

Sales growth is also an issue. Sales are only up 1.5% yoy and same store sales have just turned very slightly positive this quarter up 0.1%. In the MD&A of the latest 10-Q, management blames ďsoft big ticket/VIP spending.Ē

Dave & Busterís (PLAY) may be the most relevant comp, in that people go to the restaurant for something other than food. PLAY has an EBITDA margin of 23% compared to 24% at RICK. But TEV is 10x EBITDA vs. RICK at 6x and P/E of 25x vs. 10x. It should be noted that PLAY is substantially less levered.

So, Rickís is hardly a perfect company, and it certainly doesnít have a moat, but it sure isnít very expensive. Itís the industry leader trading at 10x P/E If it werenít for the nature of the business this would seem to be an obvious Berkshire-style company. There doesnít appear to be any catalyst in the near term, for those who care about that.


Gordon Gecko

  • Newbie
  • *
  • Posts: 17
Re: RICK - RCI Hospitality
« Reply #11 on: August 26, 2016, 01:19:51 PM »
What % of the business is the clubs vs. their fast food chain? More interested in the clubs. Less competition.

benjamin1978

  • Newbie
  • *
  • Posts: 39
Re: RICK - RCI Hospitality
« Reply #12 on: August 26, 2016, 03:02:35 PM »
Saying a strip club is an "obvious Berkshire-style company except the nature of the business" is like saying this man is alive except he is obviously dead...
« Last Edit: August 26, 2016, 03:07:01 PM by benjamin1978 »

Picasso

  • Hero Member
  • *****
  • Posts: 2014
Re: RICK - RCI Hospitality
« Reply #13 on: August 26, 2016, 03:28:27 PM »
I have high hopes for this thread.

Meanwhile I need to go do some deep due diligence on these "clubs."

Jurgis

  • Hero Member
  • *****
  • Posts: 3812
    • Porfolio
Re: RICK - RCI Hospitality
« Reply #14 on: August 26, 2016, 03:31:08 PM »
Let's rephrase this: It's an obvious Biglari-style company.

Now, just bring this to Sardar's attention. Preferably by launching a proxy contest and doing a photo shoot in one of the clubs.
"Before you can be rich, you must be poor." - Nef Anyo

TedKord

  • Newbie
  • *
  • Posts: 32
Re: RICK - RCI Hospitality
« Reply #15 on: August 27, 2016, 04:10:03 AM »
The business currently is overwhelmingly clubs. They only have five restaurants. They are sort of like Hooters. They hope to franchise the concept eventually, but right now it's fairly small.

JayGatsby

  • Hero Member
  • *****
  • Posts: 583
Re: RICK - RCI Hospitality
« Reply #16 on: August 27, 2016, 07:09:42 AM »
I may or may not hold a decent allocation of this...

What I like about it are exactly the things you pointed out. The cash flow yield is unmatched and they have about the most disciplined capital allocation strategy I've seen. Apparently they've made mistakes in the past but since I've been following (1-2 years) they've been very disciplined. They bought an energy drink business in that time frame that hasn't worked out, but when they bought it the said they were basically just prepaying for energy drinks with an option on growth. They were also talking about a REIT ~2 years ago but they shelved it when they got access to bank financing (historically they'd had to use expensive private debt/converts, but as the CEO said people are happier to stretch their morals than stretch for yield). At the time they said there was ~$40M of equity in the real estate if I remember right. The access to bank financing is a huge help to them because they can refinance existing debt and buy new clubs with cheap real estate loans. There's a slide in their investor pres on their occupancy costs and they've continued to chip away at it. They recently bought the real estate for a club in Miami and have been actively refinancing. All excess cash flow now is going toward repurchasing stock unless they have an opportunity that exceeds 2x the yield of buying back shares.

The moat is the licenses. I don't know much about it but there's limited licenses for new clubs. It's not as tough as a casino license I don't think but the license does give you some protection.

They have had some issues with independent contractors / employees. They now require everyone to sign something saying they won't be part of a class action. I don't know how much weight that actually holds.

Potential upsides:
1. Opening a new club in NY in October. The exact figure is on the last call but they're guiding to $1M+ of EBITDA.
2. Hiring someone to help sell franchises for Bombshells (their Hooters type restaurant). So far their franchising efforts seem to have fallen.
3. Repurchasing shares. They've bought back ~6% of shares YTD i believe
4. Cheaper debt. I think they still have some pieces they want to refinance, and the access to cheap debt makes acquisitions much more attractive.

Potential downsides:
1. It's discretionary spending with a concentration in Texas. They weren't hurt too badly in '09 but Texas rode through that relatively well.
2. Seems like there's a steady stream of legal issues. They sorted out the texas patron tax (by agreeing to pay the tax) and settled a new york class action, so hopefully that's it but who knows.
3. Debt load is somewhat high. The offset is a lot of the debt is real estate backed with longer terms secured at the property level (i think).


Drokos

  • Newbie
  • *
  • Posts: 33
Re: RICK - RCI Hospitality
« Reply #17 on: August 27, 2016, 10:27:20 AM »
Steer clear. Never come across a more disfunctional and clueless public company.

Foreign Tuffett

  • Sr. Member
  • ****
  • Posts: 356
Re: RICK - RCI Hospitality
« Reply #18 on: August 27, 2016, 01:31:55 PM »
Steer clear. Never come across a more disfunctional and clueless public company.

Could you expand on this?

It looks like management has made some non core type acquisitions in the past (energy drink, etc). However they seem to be committed to cleaning up their capital allocation.

johnny

  • Sr. Member
  • ****
  • Posts: 296
Re: RICK - RCI Hospitality
« Reply #19 on: August 27, 2016, 02:04:34 PM »
I have followed this company (and shamefully traded it) for a few years.

All I'll say is this: the CEO has relationships with former dancers, and has been arrested at least once for assault against his wife. If your model template has a row to handle that combination of risks, go for it.