RICK - RCI Hospitality

[orion]

I´ve just started to look into this, but I found this comment from the CEO in their latest Conference Call quite interesting. Maybe another possible jockey stock?

 

This brings me to a very important thing that I think needs to be said: I own a very large portion of the company. Not in terms of, you know, 50% or anything, but my 12.4% holding is still over 90% of my personal net worth. My personal net worth is basically tied to the success of Rick’s and what Rick’s does.  I’ve continued to buy stock.  I’ve never been a net seller of Rick’s stock, and I will continue to buy additional stock, because I believe it’s the best investment I can make, especially at the current price levels.

[dcollon]

I would suggest that the Corner of BRK & FFH take a bus tour to do some on sight due diligence. 

[giofranchi]

I would suggest that the Corner of BRK & FFH take a bus tour to do some on sight due diligence.

 

I don't think one day will be enough... At least one day and one night... Hard work!!!! ;D ;D ;D

 

giofranchi

[Palantir]

Yes, it is important to closely study their assets, prior to taking a long position.

[ASTA]

I am already long but might need another injection off inspiration to get 100% long 8)

[krazeenyc]

Lukai on VIC wrote a pretty decent writeup. I remember the criticism being that maybe everything wasn't completely on the up and up (don't hold me to this -- this is just from my memory).

[Libs]

I've looked at this one for a while. I can't remember where I read it, but I recall

commments about management being sleazy. 'Sampling the goods', etc.

 

Totally unsubstantiated, but hard to dismiss in this  'industry.'

 

 

 

 

[Palantir]

If anything, I have heard the opposite, management is serious and ethical, but they're playing in an industry where others aren't. AKA their competitors offer things like prostitution and etc. and they do not.

 

I don't see much of an economic moat on this, growth is nothing great....

[Parsad]

I would suggest that the Corner of BRK & FFH take a bus tour to do some on sight due diligence.

 

No thanks!  I lose too much money at those places when I go to Vegas with friends.  I'd rather stay home and read a 10-K!  Cheers!

[Drokos]

Tremendous potential in this business, however it is uninvestable until it gets a new CFO and/or CEO. Great cash flow, but some of the worst capital allocation decisions you'll come across. And that's ignoring the plethora of litigation issues (some of their fault, others just industry issues).

[TedKord]

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 Rick’s 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. I’m 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 don’t 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 doesn’t bother me. It isn’t 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 “soft big ticket/VIP spending.”

 

Dave & Buster’s (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, Rick’s is hardly a perfect company, and it certainly doesn’t have a moat, but it sure isn’t very expensive. It’s the industry leader trading at 10x P/E If it weren’t for the nature of the business this would seem to be an obvious Berkshire-style company. There doesn’t appear to be any catalyst in the near term, for those who care about that.

 

[Gordon Gecko]

What % of the business is the clubs vs. their fast food chain? More interested in the clubs. Less competition.

[benjamin1978]

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...

[Picasso]

I have high hopes for this thread.

 

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

[Jurgis]

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.

[TedKord]

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]

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]

Steer clear. Never come across a more disfunctional and clueless public company.

[Foreign Tuffett]

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]

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.

[TedKord]

I hadn't seen that Langan had been arrested. I just did a quick Google search and couldn't find it. On the other hand, I'm not shocked he's had relationships with dancers. His third wife was a dancer. This slightly older story goes over some of his background.

 

http://www.forbes.com/forbes/2008/1027/142.html

 

His personal life is not something I'd want to emulate or even approve of. I think the stock trades cheap because people don't want to be associated with he business, and I doubt that will ever change. On the positive side, that will make it easy for Langan to do buy backs at below intrinsic value.

[arcube]

If your model template has a row to handle that combination of risks, go for it.

 

Johnny - you crack me up.

[johnny]

I hadn't seen that Langan had been arrested.

 

yeah, they didn't file an 8-k. it was also such a non-surprise for me that i didn't bother bookmarking or saving the site.

[johnny]

If you do a modest amount of work you can find references to it in legal documents. Specifically, documents about the divorce from Jante, who was a former dancer and is now an attorney (ruh roh!).

 

Here are some quotes that should get you started:

 

However, after being arrested following a domestic dispute with Jante, Eric again filed for divorce on August 2, 2011. Eric was eventually charged with certain criminal offenses stemming from the dispute.

 

While she did not do so in the trial court, Jante contends here that there are several different methods for determining how to value stock options during a divorce, including the “intrinsic value method” and the “Black/Scholes method.” Jante complains that, instead of using a recognized valuation methodology, the trial court simply accepted as true Eric’s unreliable testimony that the stock options were worth $300 or nothing.

 

At least he hangs out with the smarter dancers!

[johnny]

Due diligence update: I have friend requested Jante' (the court documents omitted the apostrophe). I'll let you know when she accepts.