RCI Hospitality (RICK) going in the right direction (Q3 sales update)
Shares of RCI Hospitality RICK 0.00%↑ jumped 14% on Thursday after the company released a better-than-expected Q3 sales update and lower-than-expected inflation, indicating rate cuts. Let’s quickly review the update and why I liked it so much. This post will be entirely free and shorter than my usual reviews. This is just a revenue update, with full Q3 earnings out on 8 August.
Back to growth
RICK saw nightclub sales flat; however, same-store sales (SSS) finally returned to growth at 1.7%, the first positive SSS figure since 2Q23. Sequentially, SSS increased by 5.9%. However, we must remember that 3Q23 saw a hefty SSS decline of 7.3%, so we have easy comparables here. Last week, one of RICK’s Baby Dolls clubs burned down. There was no mention in the report, but it’s covered by insurance. I’m not sure if they will be compensated for lost revenues, but regardless, it’s something I would’ve liked addressed.
Bombshells saw another strong decline of 8.9%, with a 16.2% SSS decline but an increase of 2.7% sequentially. 3Q23 saw an 18.2% SSS decline, so again, we are against easy comps. Last quarter, we saw a 20.5% SSS decline. So, while we see some positive sequential development, Bombshells is still hurting a lot and, in my opinion, should be divested. There is no competitive edge in this business and tough competition.
Casino - Game over
RICK also announced that it withdrew its pending casino application with the Colorado Division of Gaming and plans to operate its locations as regular clubs and steakhouses without a casino component. However, RICK had already spent millions getting the place renovated and fitted. They planned on buying 400 slot machines, but I’m unsure how many were already purchased. We’ll see how much impairment RICK will incur due to all this CapEx that did not work out. They can resell equipment and purchase land at least.
On the positive side, RICK announced a new $25 million buyback authorization, which allows them to redeploy some of the cash they get from selling the equipment and land. The shares have fallen a lot, and if they can return to growth, these buybacks will be very lucrative.
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Going forward and valuation
RICK laid out its plan to go back to basics last quarter. I hope this means divesting bombshells and that we won’t see more future distractions like the food hall, brewery or casino. Spin bombshells and focus on acquiring clubs if the opportunity presents itself. If the company has additional cash, let it build on the balance sheet for future deals or opportunistically use it for debt paydown or buybacks. To me, that sounds better than growth initiatives in areas where they don’t have a competitive advantage, like Bombshells or Casinos.
RICK trades at a $665 million enterprise value compared to trailing twelve-month revenues of $300 million. If the company really starts to focus on the clubs, it will improve the margin profile closer to the clubs' 30% operating margin. Assuming a 20% FCF margin (higher than historically excluding 2021), we get around $60 million in FCF or a 10% EV/FCF yield.
That’s a compelling valuation if they can remain disciplined in deploying their capital. The capital allocation framework is great, but they need to walk the talk, and in my opinion, the past had too many distractions. With the Casino component gone, RICK might be investable again for me from a moral POV, but right now, I’m not interested in jumping back into the stock.
I also included an IRR model. RICK still doesn’t trade at incredibly cheap multiples and needs to show revenue growth alongside margin improvements to give us a good return. Due to the anti-ESG nature of the business, I don’t expect multiples to rise too high. The future can look bright for RICK, and we’ll see how they manage to turn around.
Well written and informative article.
The company is not familiar and seems to go under the radar, so it was nice to read something completely different.
It was good to see them cleaning up bombshells today. Closing two leased locations and selling a third. I would love for them to eventually be 100% focused on the clubs.