RICK - RCI Hospitality

[rawraw]

^That is dedication

[jawn619]

the business is in secular decline.

[Jurgis]

the business is in secular decline.

 

Baby boomers can't get elections even with Viagra?

[DTEJD1997]

the business is in secular decline.

 

An attorney I work with is quite a "party" guy.  A week ago or so he went into a crazy, ranting, diatribe on the state of strip clubs in/around Detroit.  Evidently, they have hit rock bottom.  There is a severe problem getting good looking dancers.

 

As he put it...."I go to a strip club to escape reality, to look at hot women that I don't see in real life"...."I don't want to see everyday, broken down, busted, tatted up, overweight women.  I am just not going to pay money for it.  I go to a strip club for a smiley face, not a frowny face!" 

 

Of course, I am paraphrasing a bit for public consumption.

 

This goof admits that he can spend $200, $300 or maybe even more...but lately he says he spends $50 or much less.

 

I asked what he thinks the problem is.  He replied that heroin is a ravage.  He also was bemoaning that society is getting "too fat".  Also that quality women can get on "web cams" and make similar $ and not have to meet degenerates in person.

 

So I don't know if this is a problem limited to just Detroit, or is it nationwide?

 

If this is nationwide, then yes, I could very much see MOST clubs being in decline, shutting down.  Who wants to pay big $$$$ to see ugly, overweight, tatted up women?

 

Maybe it is like malls?  All but the highest end are collapsing, partly from competition on the interwebs?

[johnny]

Maybe it is like malls?  All but the highest end are collapsing, partly from competition on the interwebs?

 

This is the sense I've gotten from people with decades of experience in the industry. Clubs that were printing presses in the 80s and 90s are now doing numbers that makes them indistinguishable from "normal" businesses of their size. On the other hand, maybe everybody has just leveled up their tax evasion practices.

[Amitsham]

RICK reports very strong quarter. The Company reduced debt, reduced the number of shares and gave a better forecast of FCF.

 

FY16 FCF target revised upward to $19-$21M (RCI's fiscal year end in September)

Shares outstanding 9.833M (07/31)

FCF per share $1.93 - $2.14

 

Stock price = $11

5.5x multiple of FCF per share

 

I believe the Company is worth at least $16 per share.

 

If they do these things, the Company will be worth at least $20 per share:

1) Buyback more shares at this price

2) Close or sell Robust

3) Refinancing and pay off debt

 

Bouns:

1) Bombshells' franchising

2) Real estate sales

 

 

 

[johnny]

I don't think sale-leasebacks really work for Rick's.

 

A tremendous amount of the earnings power of the club can be attributed to the specific zoning of the property, and the liquor license attached to the property. -If- they have some clubs doing very good ROAs (corp ROA is mediocre, no?), the moat is entirely contained in the property.

 

With this business, if you sell the property, you're giving somebody else a tremendous amount of leverage...way more than the average REIT bulk-buying Olive Gardens or whatever.

 

Either the sale is done at a very high price and very high contracted rent, in which case the property buyer is caught pants-down if the business has trouble, or the rent is underpriced, in which case the property buyer can always think about contriving to the club shut down so that he can set up his own operation.

 

Ultimately I think this was probably what they realized when they looked into the REIT stuff a year or two ago. They were getting cap-rate offers that were substantially higher than straight RE loans. And whoever is letting them finance individual properties at 5% is really clueless about how dangerously they're living.

 

I should mention I just dumped the last of my RICK stock, so I'm officially now talking my book instead of being a self-loathing degenerate.

 

[benjamin1978]

http://www.bbc.co.uk/newsbeat/article/37057814/is-virtual-reality-the-future-of-online-pornography

 

 

 

 

[Foreign Tuffett]

the business is in secular decline.

 

An attorney I work with is quite a "party" guy.  A week ago or so he went into a crazy, ranting, diatribe on the state of strip clubs in/around Detroit.  Evidently, they have hit rock bottom.  There is a severe problem getting good looking dancers.

 

As he put it...."I go to a strip club to escape reality, to look at hot women that I don't see in real life"...."I don't want to see everyday, broken down, busted, tatted up, overweight women.  I am just not going to pay money for it.  I go to a strip club for a smiley face, not a frowny face!" 

 

Of course, I am paraphrasing a bit for public consumption.

 

This goof admits that he can spend $200, $300 or maybe even more...but lately he says he spends $50 or much less.

 

I asked what he thinks the problem is.  He replied that heroin is a ravage.  He also was bemoaning that society is getting "too fat".  Also that quality women can get on "web cams" and make similar $ and not have to meet degenerates in person.

 

So I don't know if this is a problem limited to just Detroit, or is it nationwide?

 

If this is nationwide, then yes, I could very much see MOST clubs being in decline, shutting down.  Who wants to pay big $$$$ to see ugly, overweight, tatted up women?

 

Maybe it is like malls?  All but the highest end are collapsing, partly from competition on the interwebs?

 

I think part of the problem is that some of the women who would be working at strip clubs are now working as nude internet cam girls. Unlike regular pornography -- but similar to strip clubs -- male customers can perceive that they have a "relationship" with a cam girl.

 

I don't see pornography per se as a replacement for strip clubs as, at least in its current form, there's no real interaction between the porn stars and the customer. Video pornography has been around for decades and strip clubs have thrived during that time.

 

[TedKord]

I am absolutely unconcerned about technology/cams as a risk factor. There have been dirty movies as long as I've been alive. I also don't think RICK will ever trade at a premium valuation. There are always going to be investors who wouldn't want to own this sort of business at any price.  I think the risk factors are the amount of debt that RICK's carries and their capital allocation. RICK is too levered. The overwhelming amount of their debt is secured by properties, but one doesn't tend to situate strip clubs in the best parts of town, though I must admit a big location two blocks from Madison Square Garden must have some alternative use value. As to the capital allocation, I have my fingers crossed. They talk the talk in their presentations and conference calls, but they just announced the opening of a sports bar gentlemen's club in Manhattan. "Key attractions will include a bevy of beautiful ladies dressed in sexy sports themed jerseys and cheerleading outfits." I'd rather have seen them buy back shares.

[JayGatsby]

to the capital allocation, I have my fingers crossed. They talk the talk in their presentations and conference calls, but they just announced the opening of a sports bar gentlemen's club in Manhattan. "Key attractions will include a bevy of beautiful ladies dressed in sexy sports themed jerseys and cheerleading outfits." I'd rather have seen them buy back shares.

They gave the projected numbers for this earlier in the year to explain why it fit within their strategy. Projected returns were something like 100% IRR assuming it all goes at least as well as planned.

[TedKord]

Oh no, I get it. And I've heard the calls. I will feel more comfortable when I see it.

[DTEJD1997]

I am absolutely unconcerned about technology/cams as a risk factor. There have been dirty movies as long as I've been alive. I also don't think RICK will ever trade at a premium valuation. There are always going to be investors who wouldn't want to own this sort of business at any price.  I think the risk factors are the amount of debt that RICK's carries and their capital allocation. RICK is too levered. The overwhelming amount of their debt is secured by properties, but one doesn't tend to situate strip clubs in the best parts of town, though I must admit a big location two blocks from Madison Square Garden must have some alternative use value. As to the capital allocation, I have my fingers crossed. They talk the talk in their presentations and conference calls, but they just announced the opening of a sports bar gentlemen's club in Manhattan. "Key attractions will include a bevy of beautiful ladies dressed in sexy sports themed jerseys and cheerleading outfits." I'd rather have seen them buy back shares.

 

The more I think about it, the more I think cams/interweb COULD be a real problem for RICK.

 

Apparently, all the good looking women in the Detroit have vanished?  Have they vanished, or are they just on the interweb?  I might have to do some investing on this...

 

If I were a hot woman, why would I go to a smoky, sleazy strip club?  I could get $ on the interweb without meeting sleazy dudes in person.  Plus, when you are working in a club, you've got to leave the house, take a shower, do your hair & makeup...not required with a web cam.

[BTShine]

 

Will webcams and FaceTime make it less appealing for regular people to go out to dinner or nightclubs/bars?

 

If it's cheaper to eat at home and chat online with friends will that hurt the restaurant/bar industry?

 

There might be similarities between SOBs and Bars/Nightclubs

[Foreign Tuffett]

I think the below is germane to the discussion:

 

http://www.tennessean.com/story/money/2016/02/14/strip-clubs-fade-booming-nashville/80295468/

 

 

[DTEJD1997]

Hey everybody!

 

I was recently working late and drove down 8-Mile road to get home.  It was a Friday night.  My car accidentally pulled into the "Penthouse" club.  This is allegedly the premier Detroit strip club.  The time of night was around 10 PM.  The valet parking charge was $8.  Cover was $15.

 

I figured I would go in and see what was going on.  The club was crowded but not excessively so.  Lots of the patrons looked kind of grungy.  However, a lot of the strippers looked even more so.  Most of the people didn't look like they were having a good time, same thing with the strippers.  Most of the strippers had more than one tattoo.  A couple had shaved heads.  Several were dangerously thin, looking strung out on drugs.  Most of them did not look appealing at all.  They looked even more dangerous than the patrons.

 

A waitress did not ask me if I wanted a drink.  I stayed for maybe 15-20 minutes.  A total waste of time & money.  I guess my compatriot at work is right.

 

If this is the premier club in Detroit, I shudder to think what the others are like.  Perhaps this is problem limited to Detroit?  Or if not, a problem with the industry?

 

All I know is that I wasted 20 minutes of my time and $23.  I won't be back.  I would not recommend it to friends...

[TedKord]

RICK will be holding a 4Q & FY16 conf call on 10/13 instead of waiting for their regularly scheduled 12/14 call. They claim that they want to share exciting developments now rather than wait and they are appearing at a couple conferences and want to be able to speak freely. RICK doesn't trade with the kind of volume that magnifies short term news, but this sounds like a positive development.

 

[Foreign Tuffett]

My overall take on the conference call was mildly positive. It is good to hear that they're moving away from Robust, refinancing debt, and continuing the share buybacks. Ditto for selling two under performing clubs. I am somewhat neutral on opening more company owned Bombshells. It would have been great to hear of a contract being signed with a Bombshells franchisee.

 

 

[TedKord]

For all the noise generated today on coal, steel, pharma or hospitals, I think RICK could be one of the real losers. Any short term actions to stem the flow of immigrants will negatively affect RICK. I don't know what percent of RICK's independent contractors are here on various visas, but I'll bet it's pretty high. I think I'm going to trim my position.

[DooDiligence]

For all the noise generated today on coal, steel, pharma or hospitals, I think RICK could be one of the real losers. Any short term actions to stem the flow of immigrants will negatively affect RICK. I don't know what percent of RICK's independent contractors are here on various visas, but I'll bet it's pretty high. I think I'm going to trim my position.

 

What's your position on trim?

 

(sorry couldn't resist - our new president says it's OK)

[TedKord]

10k, sold 2k yesterday

[TedKord]

There's a lot I like about the stock: low P/E, good capital allocation, decent margins. It is a strip club. There's only so much money you can invest in a company like this.

[JayGatsby]

Bit from their call yesterday I thought people might find interesting:

 

Darren McCammon

 

Fantastic okay good. Okay. So I have a little bit of an off-base question here. I also would like to congratulate you on your focus and management's focus on capital allocation and free cash flow. You've been doing a great job. I wonder -- I heard that to book the Outsiders, had something to do with your -- I don't know change in views. Is that true?

 

Eric Langan

 

Certainly. I've read the books a couple of times. I even have an audio -- an audio book in my phone. I guess the big thing was -- I'm from the strip club business. I'll be honest. I started out as a manager of strip clubs, and we went public and we built into this company and we've kind of grown and grown. And so we have financial advisors that were telling us you have to have the growth, you need to get the top-line growing keep this going. And so we are focused on those things. And I think we did well with what our focus was. And the difference in that book has really taught us that the top-line is really not important. What's important as how much cash can we generate? And how are we reallocating that cash? How are we either returning to shareholders or creating more value for the shareholders with that cash? And what it really taught it me, we were always told, our paper is cheap, you can write stock checks all day long. Well of course, the investment banks love that, because they’re making fees. And we were learning as I start looking at it -- wait a minute, this is the most expensive money and outsiders look really taught me how expensive those stock checks were.

 

And so now we use the formula and it really turned every decision into simple math. We know what our return is buying our own assets. So why would we pay more and I looked at some of deal we’ve done. Some of them were great deals. In 2008 we were making some fantastic deals. And some of the deals in 2011 and 2012 weren't so great, because our stock was so low, but we had gotten caught up in that write those paper checks, write those paper checks, the market will catch-up, the market will catch-up. And that book really kind of brought the thinking around to figuring out, okay, this is why -- that and -- another shareholder out of California, who got involved in the company, that really helped with that a lot, and got us to read the book. So it really helped. It’s made a big difference and basically all of our decision making.

 

Darren McCammon

 

Thanks for that color there. That actually helps quite a bit from a long-term point of view?

 

Eric Langan

 

I mean, we’ve always been consistent with our philosophy. We just had to change the philosophy. That was the problem. We had our own philosophy I think there for a long time when we were just looking for that top-line growth. I mean, if you look -- I laugh you know, [indiscernible] I said this is the first year that we had top-line growth was negative $500,000, and our stock's performing better than it’s ever performed. So it’s like okay hold on a second. Just don’t approve that focus on the cash and as they say, cash is king. And I think it's going to open up a lot of opportunities for us. There is a lot of acquisitions out there, that are available to us right now, and we’re negotiating and slowly and surely, we're teaching owners that this is what the market's going to pay you. You can either keep operating your club, or you can sell to us.

http://seekingalpha.com/article/4044636-rci-hospitality-holdings-rick-ceo-eric-langan-q1-2017-results-earnings-call-transcript?part=single

[Gregmal]

Bit from their call yesterday I thought people might find interesting:

 

Darren McCammon

 

Fantastic okay good. Okay. So I have a little bit of an off-base question here. I also would like to congratulate you on your focus and management's focus on capital allocation and free cash flow. You've been doing a great job. I wonder -- I heard that to book the Outsiders, had something to do with your -- I don't know change in views. Is that true?

 

Eric Langan

 

Certainly. I've read the books a couple of times. I even have an audio -- an audio book in my phone. I guess the big thing was -- I'm from the strip club business. I'll be honest. I started out as a manager of strip clubs, and we went public and we built into this company and we've kind of grown and grown. And so we have financial advisors that were telling us you have to have the growth, you need to get the top-line growing keep this going. And so we are focused on those things. And I think we did well with what our focus was. And the difference in that book has really taught us that the top-line is really not important. What's important as how much cash can we generate? And how are we reallocating that cash? How are we either returning to shareholders or creating more value for the shareholders with that cash? And what it really taught it me, we were always told, our paper is cheap, you can write stock checks all day long. Well of course, the investment banks love that, because they’re making fees. And we were learning as I start looking at it -- wait a minute, this is the most expensive money and outsiders look really taught me how expensive those stock checks were.

 

And so now we use the formula and it really turned every decision into simple math. We know what our return is buying our own assets. So why would we pay more and I looked at some of deal we’ve done. Some of them were great deals. In 2008 we were making some fantastic deals. And some of the deals in 2011 and 2012 weren't so great, because our stock was so low, but we had gotten caught up in that write those paper checks, write those paper checks, the market will catch-up, the market will catch-up. And that book really kind of brought the thinking around to figuring out, okay, this is why -- that and -- another shareholder out of California, who got involved in the company, that really helped with that a lot, and got us to read the book. So it really helped. It’s made a big difference and basically all of our decision making.

 

Darren McCammon

 

Thanks for that color there. That actually helps quite a bit from a long-term point of view?

 

Eric Langan

 

I mean, we’ve always been consistent with our philosophy. We just had to change the philosophy. That was the problem. We had our own philosophy I think there for a long time when we were just looking for that top-line growth. I mean, if you look -- I laugh you know, [indiscernible] I said this is the first year that we had top-line growth was negative $500,000, and our stock's performing better than it’s ever performed. So it’s like okay hold on a second. Just don’t approve that focus on the cash and as they say, cash is king. And I think it's going to open up a lot of opportunities for us. There is a lot of acquisitions out there, that are available to us right now, and we’re negotiating and slowly and surely, we're teaching owners that this is what the market's going to pay you. You can either keep operating your club, or you can sell to us.

http://seekingalpha.com/article/4044636-rci-hospitality-holdings-rick-ceo-eric-langan-q1-2017-results-earnings-call-transcript?part=single

 

What an awesome and honest answer. This was one of my best performing positions last year. Was actually a little disappointed exiting the position because everything was saying "this time its different" although history says this is a dud at these levels. Hearing this guy talk like that really reinforces what an open minded, shareholder friendly management can do. Kudos to him for that.

[BTShine]

Thanks to their proper capital allocation it's been a fantastic investment.  Current FCF yield to equity is around 11%.