RCI Hospitality: Why Does Everybody Focus On Bombshells, The Least Important Segment?

Konstantin T.

RCI Hospitality (NASDAQ:RICK) is chiefly an usability and acquirer of man clubs, much commonly known arsenic portion clubs successful nan USA. I covered nan banal successful nan past and it is 1 of my largest holdings, but many investors get it incorrect and don't attraction connected what matters.

Performance since my past sum of nan banal (Seeking Alpha)

Last net telephone focused connected Bombshells again

I went done nan past net call:

• 9 Analysts and Investors asked questions
• just 3 of them did not inquire a mobility astir Bombshells
• In total, complete 16 questions were asked
• Throughout nan Q&A, nan word Bombshells fell 37 times

Adam Wyden, 1 of RCI's largest shareholders, summed it up good during his questions:

So again, I benignant of look backmost and I opportunity to myself, I don't cognize why we spent 2 hours aliases an hr talking astir Bombshells erstwhile this casino nightclub portion nine point could beryllium 25%, 30% of EBITDA, it could beryllium doing 4x nan magnitude of EBIT that each of Bombshells is doing. So -- and not to mention Baby Dolls unsocial astatine maturity is $15 cardinal of EBITDA. That's double. That 1 acquisition is double nan magnitude of Bombshells.

Why aren't Bombshells that exciting?

First off, let's reappraisal RICKs operating segments. Right now, they only person 2 segments: Nightclubs and Bombshells. Below we tin spot that Nightclubs are nan overmuch larger and overmuch much profitable segment.

Nightclubs are nan amended business and what nan institution should attraction on. Let's reappraisal nan Capital Allocation Strategy nan institution laid out: Three parts of it should lead to betwixt 10-15% FCF/shares CAGR; I judge this estimate to beryllium conservative, but we'll get to that successful nan adjacent segment. The nightclub conception tin only beryllium grown by M&A because municipalities successful nan US mostly don't springiness retired caller licenses for clubs. Overall location are astir 2000 clubs successful nan US, pinch 500 gathering nan acquisition criteria defined successful nan image beneath and complete 50 clubs already successful nan company's portfolio. Nightclubs are nan attraction if location are deals disposable and correct now, nan woody pipeline is full. Bombshells should only beryllium pursued if location are nary awesome clubs to bargain astatine desired prices; nan aforesaid goes for Buybacks, which nan institution only does if nan FCF output exceeds 10% and location are nary amended alternatives.

RICKs Capital Allocation Strategy (RICK Q1 presentation)

The three-year plan

The institution talked astir its three-year scheme of deploying $200 cardinal yearly, for a full of $600 cardinal invested into clubs astatine 4x EBITDA and different opportunities for illustration bombshells. They are already good connected way to present successful 2023 (see image below) pinch $93 cardinal of superior deployed and much deals successful nan pipeline, to quote CEO Eric Langan:

I americium being a small pickier, because we spell truthful overmuch connected our sheet correct now

We tin spot that astir of this superior deployment was towards nightclubs, particularly pinch nan 5 Baby Dolls and Chicas Locas deal. The Casino woody besides is attractive. The full finance to bargain nan licenses, do remodeling and bargain machines will extremity up location astir $10 million. On nan upside, Analyst Adam Wyden expects EBITDA of location betwixt $10-25 cardinal if each goes well. This would beryllium a very asymmetric stake and I'm looking guardant to nan improvement here. Overall astatine $10 million, it is not a precocious commitment. Meanwhile, nan $5.2 cardinal nutrient hallway acquisition, which will beryllium a improvement of nan Bombshell concept, gets astir of nan attraction from what I person seen successful nan media and sum of RICK.

FY 23 Capital Allocation (RICK Q1 Presentation)

I made immoderate projections successful excel to spot really acold this scheme if executed well, could get nan company. I utilized an FCF/EBITDA conversion of 70% based connected FY 22 numbers. I besides assumed a 5x EBITDA aggregate for acquisitions to beryllium conservative. Based connected Eric's remark I shared above, we could beryllium optimistic and return 4x, but let's beryllium conservative! I assumed that each FCF would beryllium deployed and nary stock buybacks. The excess superior to get to $200 cardinal a twelvemonth is divided 70/30 betwixt indebtedness and equity successful this model. I judge that RICK will deploy much equity now that shares are trading astatine a fairer multiple. If they tin get astatine 5x EBITDA pinch shares weighted astatine 10x EBITDA, that's a value-accretive transaction. If we tally this model, we would exit FY 25 astatine >$140 cardinal FCF and >$200 cardinal EBITDA pinch >$380 cardinal successful indebtedness and very flimsy dilution. This would time off nan institution good wrong its leverage ratio. This would make nan banal waste and acquisition astatine 5.6x FY25 EBITDA and a 12.4% FY25 EV FCF yield. I judge this is still a very charismatic value for nan banal and I precocious purchased much shares astatine $80 aft nan institution sold disconnected nan Q1 results. In my opinion, I deliberation that nan sell-off was owed to concerns astir Bombshells, which are not really captious for nan finance case. RICK banal remains a beardown bargain and a halfway position successful my portfolio.

RICK superior deployment scheme exemplary (Authors model)

'Heavy Moat Investments' is 24-year-old self-taught investor Niklas based successful Southern Germany, who precocious vanished his bachelor of Science successful Business Informatics and now useful arsenic a Software Developer, too penning astir his investments connected Seeking Alpha and Twitter. Niklas formerly wrote nether nan 'Stock Metal Investment' username but changed it to bespeak his finance style better.The main finance themes successful Heavy Moat Investments are awesome superior allocators, Spawners and companies pinch deep, widening moats. The only finance sky discussed connected this transmission is semipermanent investments, preferably pinch decades of maturation runway. Follow Niklas connected his travel to Financial Freedom.