RICK - RCI Hospitality

[awindenberger]

I remember looking at this one and being semi interested at $11, but wasn't clear on how serious the CEO was. Well, this blurb clears things up. It's so refreshing to see that many CEOs could be more shareholder friendly if they simply learned how to do it properly.

 

I wonder if theres and chance the stock falls back a bit.

[Drokos]

Bombshells location shut down after 100+ arrests, shootings, DUIs, etc. I guess this kills the Bombshells growth story:

 

https://bigrickinvest.blogspot.com/2018/06/bombshells-crime-factory-shut-down-by.html

 

 

“Harris County District Attorney Kim Ogg calls Bombshells a “crime factory.”

“This is one of the worst offenders in Harris County,” said Sean Teare, chief of the vehicular crimes unit. “Anything that you can think of in the past 3 1/2 years has occurred here.

“We are talking about a person being shot to death in the parking lot. We’re talking about a number of other shootings that have occurred here. Aggravated robbery… aggravated assaults… sexual assaults.”

The DA’s office had been monitoring the Bombshells at the I-45 near Fuqua location for several weeks after investigators noticed several DUIs, assaults and injuries were traced back to the restaurant.

“We have documented well over 100 arrests and that’s not even close to the number of calls that the Houston Police Department has received about this establishment,” Teare explained.

[Foreign Tuffett]

Bombshells location shut down after 100+ arrests, shootings, DUIs, etc. I guess this kills the Bombshells growth story:

 

https://bigrickinvest.blogspot.com/2018/06/bombshells-crime-factory-shut-down-by.html

 

 

“Harris County District Attorney Kim Ogg calls Bombshells a “crime factory.”

“This is one of the worst offenders in Harris County,” said Sean Teare, chief of the vehicular crimes unit. “Anything that you can think of in the past 3 1/2 years has occurred here.

“We are talking about a person being shot to death in the parking lot. We’re talking about a number of other shootings that have occurred here. Aggravated robbery… aggravated assaults… sexual assaults.”

The DA’s office had been monitoring the Bombshells at the I-45 near Fuqua location for several weeks after investigators noticed several DUIs, assaults and injuries were traced back to the restaurant.

“We have documented well over 100 arrests and that’s not even close to the number of calls that the Houston Police Department has received about this establishment,” Teare explained.

 

This presumably scares potential franchisees away. They have 4 more Houston-area Bombshells in the near-term pipeline. Any thoughts on how (if at all) they will be affected?

 

I owned this several years and $20 ago and, while I no longer follow it closely, have been impressed by just how far the stock has run. It's almost like investors have forgotten about all the idiosyncratic risks here. The aggressive IR campaign has probably helped.

[Jurgis]

Bombshells location shut down after 100+ arrests, shootings, DUIs, etc. I guess this kills the Bombshells growth story:

 

https://bigrickinvest.blogspot.com/2018/06/bombshells-crime-factory-shut-down-by.html

 

 

“Harris County District Attorney Kim Ogg calls Bombshells a “crime factory.”

“This is one of the worst offenders in Harris County,” said Sean Teare, chief of the vehicular crimes unit. “Anything that you can think of in the past 3 1/2 years has occurred here.

“We are talking about a person being shot to death in the parking lot. We’re talking about a number of other shootings that have occurred here. Aggravated robbery… aggravated assaults… sexual assaults.”

The DA’s office had been monitoring the Bombshells at the I-45 near Fuqua location for several weeks after investigators noticed several DUIs, assaults and injuries were traced back to the restaurant.

“We have documented well over 100 arrests and that’s not even close to the number of calls that the Houston Police Department has received about this establishment,” Teare explained.

 

They are shutting down US Congress?

 

 

...

 

...

 

Oh wait, nvm.

[Drokos]

Short report. With this plus the Bombshells news, I'd say its uninvestable and I'd be curious to hear if some of those praising the CEO will change their mind: http://bitly.com/2JsWCNC

 

RCI Hospitality (RICK): Overvalued Roll Up with Hidden Related Party Transactions, Conflicts of Interest, SEC Violations, and 50%+ Downside

 

Executive Summary: Retail investors enamored with RCI’s new capital allocation strategy have driven shares up over 300% to extremely overvalued levels and shares now trade at more than double their historic multiples. RCI’s roll up strategy uses new acquisitions to hide the fact that its base business is declining. Analysis of actual results from all 45 announced transactions since 2005 shows the average multiple paid is ~8x EBITDA, not the 3-4x that management claims. In addition, newly discovered related party transactions, SEC violations, conflicts of interest, and hidden purchases call into question the leadership of management and the board. Shares would need to fall more than 50% to trade in-line with historic multiples, even before a discount for mismanagement and poor stewardship.

 

Numerous governance red flags have been uncovered, including management’s use of the company as a personal piggy bank: RCI has been known for poor corporate governance due to its fleet of corporate jets and excessive car allowances, but numerous new egregious actions have been uncovered, including:

• RCI made loans to its CEO that were not disclosed in SEC filings.

• CEO funneled RCI corporate business to a lawyer that he was personally indebted to.

• One of RCI’s Independent Directors is the brother of a senior executive, a violation of SEC requirements for independent director.

• One of RCI’s Independent Directors frequently takes on legal work for RCI, but RCI has never disclosed the related party transaction.

• CEO was arrested for domestic assault.

• CEO’s relative defaulted on a loan received from RCI.

• RCI’s failed Los Angeles club was partnered with a convicted criminal who had partied with RCI’s CEO at the Super Bowl & Mardi Gras in months ahead of the formation of the JV.  RCI’s partner was already behind on rent before RCI joined the JV & the club was shut down within a year of opening.

• RCI inexplicably owns 3 residential houses in Houston

• RCI sent donations to CEO’s children’s private school through a shell company.

• RCI owned (and may still own) a 338-acre ranch in Texas.

• RCI Board allowed the CEO’s employment contract to lapse until his divorce was finalized.

 

Business Analysis: RCI’s roll up strategy masks its declining base business, and actual acquisition multiples are double management’s claims.

• Valuation – Shares are worth $13-17 and have 50%+ downside. The stock is currently trading at more than double its long-term historic average on a P/S, P/E, & P/B ratio.

• M&A Strategy – A detailed analysis of all transactions since 2005 shows that RCI’s pretax return on investment is less than 13%, no where near the 25-33% that management claims.

• Bombshells –Management has previously attempted 10 non-strip club ventures. All have ended in failure. After 3 years Bombshells has yet to land a single franchisee, Head of Franchising left after one year, & food sales are already declining.

• History Repeats – Last time RCI drew this much retail attention the shares crashed from $28 to less than $4 within a year.

 

 

[johnny]

I think there's a seriously lack of understanding, both in retail investor land AND pro investor land, about what the strip club industry actually is like. If "shooting in the parking lot" is something that you've not been factoring into your assessment of business risks, you should zero out your position right now, because it can get about a thousand times worse.

 

If you're going to be invested in this space, you need 100% absolute confidence in the character and wisdom of the CEO, because it is 100% guaranteed that substantial aspects of the business are going to, out of legal and practical necessity, be substantially mischaracterized in every documentable instance. Again, that's not necessarily a deal-breaker, but I think there's enough smoke here around the person of Langan to make such confidence misplaced (unless you personally know him, and even then, probably still).

 

 

[Gregmal]

Short report. With this plus the Bombshells news, I'd say its uninvestable and I'd be curious to hear if some of those praising the CEO will change their mind: http://bitly.com/2JsWCNC

 

RCI Hospitality (RICK): Overvalued Roll Up with Hidden Related Party Transactions, Conflicts of Interest, SEC Violations, and 50%+ Downside

 

Executive Summary: Retail investors enamored with RCI’s new capital allocation strategy have driven shares up over 300% to extremely overvalued levels and shares now trade at more than double their historic multiples. RCI’s roll up strategy uses new acquisitions to hide the fact that its base business is declining. Analysis of actual results from all 45 announced transactions since 2005 shows the average multiple paid is ~8x EBITDA, not the 3-4x that management claims. In addition, newly discovered related party transactions, SEC violations, conflicts of interest, and hidden purchases call into question the leadership of management and the board. Shares would need to fall more than 50% to trade in-line with historic multiples, even before a discount for mismanagement and poor stewardship.

 

Numerous governance red flags have been uncovered, including management’s use of the company as a personal piggy bank: RCI has been known for poor corporate governance due to its fleet of corporate jets and excessive car allowances, but numerous new egregious actions have been uncovered, including:

• RCI made loans to its CEO that were not disclosed in SEC filings.

• CEO funneled RCI corporate business to a lawyer that he was personally indebted to.

• One of RCI’s Independent Directors is the brother of a senior executive, a violation of SEC requirements for independent director.

• One of RCI’s Independent Directors frequently takes on legal work for RCI, but RCI has never disclosed the related party transaction.

• CEO was arrested for domestic assault.

• CEO’s relative defaulted on a loan received from RCI.

• RCI’s failed Los Angeles club was partnered with a convicted criminal who had partied with RCI’s CEO at the Super Bowl & Mardi Gras in months ahead of the formation of the JV.  RCI’s partner was already behind on rent before RCI joined the JV & the club was shut down within a year of opening.

• RCI inexplicably owns 3 residential houses in Houston

• RCI sent donations to CEO’s children’s private school through a shell company.

• RCI owned (and may still own) a 338-acre ranch in Texas.

• RCI Board allowed the CEO’s employment contract to lapse until his divorce was finalized.

 

Business Analysis: RCI’s roll up strategy masks its declining base business, and actual acquisition multiples are double management’s claims.

• Valuation – Shares are worth $13-17 and have 50%+ downside. The stock is currently trading at more than double its long-term historic average on a P/S, P/E, & P/B ratio.

• M&A Strategy – A detailed analysis of all transactions since 2005 shows that RCI’s pretax return on investment is less than 13%, no where near the 25-33% that management claims.

• Bombshells –Management has previously attempted 10 non-strip club ventures. All have ended in failure. After 3 years Bombshells has yet to land a single franchisee, Head of Franchising left after one year, & food sales are already declining.

• History Repeats – Last time RCI drew this much retail attention the shares crashed from $28 to less than $4 within a year.

 

This is nice, but I don't think many would be surprised by this type of stuff going on at a company like RICK. I don't own the shares any longer for the simple reason that the valuation is no longer compelling. At $7-$12 a share, you've got little to no downside barring some catastrophe. You'll get buried from all the FCF this business spits off. At $30? Its probably slightly overvalued like pretty much everything else in this market. Which you could argue means it's more overvalued because something like RICK should naturally trade with a bit of a built in discount.

[Drokos]

I think there is a distinct difference between industry risks ("shooting in the parking lot", allegations of over-serving, etc) and shady/unethical management actions such as loaning money to the CEOs relatives, related party transactions, purchasing residential houses, etc. Investors signed up for the first risk, I am not sure they knowingly signed up for the second.

[johnny]

Investors signed up for the first risk, I am not sure they knowingly signed up for the second.

 

Actually, I think it's the opposite. Even average investors are generally aware that there can be conflicts, related party transactions, and general light embezzlement. Obviously they hope there aren't, but the category is understood. The industry-specific risks are exactly what most investors are completely ignorant about, and there's really no way you could say they "signed up" for any of them.

 

I really like the work you've done here, but I think you're actually underselling how much category risk exists and how likely it is that it's simply not being incorporated because the finance dorks investing here are patsies that drop a grand for a night of no-contact dances and assume that's what the strip club experience is for everybody.

 

[johnny]

filing delay!

 

In mid- and late 2018, a series of negative articles about the registrant was anonymously published in forums associated with the short-selling community. Subsequently in 2019, the SEC initiated an informal inquiry. In connection with these events, a special committee of the registrant’s Audit Committee engaged independent outside counsel to conduct an internal review. The registrant and its management are cooperating with both the internal review and the SEC inquiry. Because the internal review is still ongoing, the registrant will be delayed in filing its Form 10-Q.

[Foreign Tuffett]

I am shocked and flabbergasted at this development! Who would have ever thought thot that this could happen to such an upstanding company!? Clearly management is right to blame those devious short sellers!

 

 

[JayGatsby]

Getting crazy cheap on a FCF yield basis. Down about 50%. The allegations in the short report were all related party / using the company as a piggy bank type stuff, so all factored into cash flow. Delay is odd nonetheless.

[johnny]

The problem isn't the exact bad acts the report revealed--its that it speaks to his 1) character and 2) clumsiness when doing naughty stuff.

 

This is a business with more-than-normal opportunities to do naughty things. You don't know what is going on in the clubs, you don't know what systems are in place to prevent the bouncers from selling drugs to the girls, to prevent the girls from selling sex to the customers, to prevent the managers from coercing sex from the girls, to prevent the girls from using sex to extort the managers, to prevent clubs from trying to find wiggle-room around various beverage control issues, etc. You have to hope that the guy at the top setting the agenda recognizes all of these problems AND is capable of designing systems that control for these risks.

 

The problem isn't that he stole shareholder cash to pay his kid's tuition--the problem is that he was stupid enough to get owned by some Seeking Alpha incel over it. Close your eyes and imagine what sort of deranged horny boomer texts he and his managers are sending to the strippers and try to figure out the correct discount to apply.

[DooDiligence]

The problem isn't the exact bad acts the report revealed--its that it speaks to his 1) character and 2) clumsiness when doing naughty stuff.

 

This is a business with more-than-normal opportunities to do naughty things. You don't know what is going on in the clubs, you don't know what systems are in place to prevent the bouncers from selling drugs to the girls, to prevent the girls from selling sex to the customers, to prevent the managers from coercing sex from the girls, to prevent the girls from using sex to extort the managers, to prevent clubs from trying to find wiggle-room around various beverage control issues, etc. You have to hope that the guy at the top setting the agenda recognizes all of these problems AND is capable of designing systems that control for these risks.

 

The problem isn't that he stole shareholder cash to pay his kid's tuition--the problem is that he was stupid enough to get owned by some Seeking Alpha incel over it. Close your eyes and imagine what sort of deranged horny boomer texts he and his managers are sending to the strippers and try to figure out the correct discount to apply.

 

Excellent read (that should cool anyones jets on this issue.)

 

The piano player could answer all these questions.

 

So could a chatty cocktail waitress but I doubt it’d be worth the time to find out.

[Foreign Tuffett]

BDO has resigned as RICK's auditor:

 

"BDO notified RCI’s Board of Directors on July 12, 2019 that, due to certain concerns relating to the procedural aspects of the review process of the Special Committee and Special Counsel, it was providing notice to the Board in accordance with Section 10A(b)(2) of the Exchange Act and resigning effective immediately. Specifically, BDO stated that it believes the company has not performed sufficient investigatory procedures and has not taken timely and appropriate remedial action in response to certain deficiencies that BDO thinks exist in the way the internal review has been conducted, including: (i) undue restriction on the scope of the internal review; (ii) failure to initiate certain forensic procedures; (iii) refusal to provide BDO access to pertinent interview summaries and other documents; (iv) lack of assessment as to the impact of the matters identified to date on existing and future regulatory filings, including financial statements related footnotes; and (v) restrictions, based on privilege, hindering BDO’s ability to properly shadow and evaluate the adequacy of the internal review."

[Foreign Tuffett]

Can RICK's accounting issues be fixed with glitter, pasties, and clear stiletto heels? The world wonders...

[Jurgis]

(vi) undue restrictions of access to the company's employees  :-*

[Drokos]

Unfortunately there are no real investors (all insiders, retail investors, and index funds) in the stock, so no one is going to force management and the board to clean up their act. Will be interesting to see what the internal review says, but I expect the board to protect management (and themselves) and not disclose anything major.

[JayGatsby]

hahaha, fair assessment johnny.

[Gregmal]

https://seekingalpha.com/news/3540323-rci-hospitalityplus-6_6-after-10m-buyback-boost

 

This just got interesting again. Especially with the size of the Q1 activity, these guys could do some damage. Buybacks are the only way for companies with limited followings, no obvious go private partner, and significant perceived valuation discounts to do anything about it.

[Foreign Tuffett]

https://seekingalpha.com/news/3540323-rci-hospitalityplus-6_6-after-10m-buyback-boost

 

This just got interesting again. Especially with the size of the Q1 activity, these guys could do some damage. Buybacks are the only way for companies with limited followings, no obvious go private partner, and significant perceived valuation discounts to do anything about it.

 

How are you factoring in managment's indefensible past capital allocation? Did anyone ever figure out who was living in the three Houston single family houses they owned? I wonder if management still has a corporate jet fetish?

 

 

...owning residential houses, private plane fetish, etc?

[Gregmal]

https://seekingalpha.com/news/3540323-rci-hospitalityplus-6_6-after-10m-buyback-boost

 

This just got interesting again. Especially with the size of the Q1 activity, these guys could do some damage. Buybacks are the only way for companies with limited followings, no obvious go private partner, and significant perceived valuation discounts to do anything about it.

 

How are you factoring in managment's indefensible past capital allocation? Did anyone ever figure out who was living in the three Houston single family houses they owned? I wonder if management still has a corporate jet fetish?

 

 

...owning residential houses, private plane fetish, etc?

 

There's not really going to be a way to get rid of those things, or at least one should assume. However I do think there's been a better effort with respect to capital allocation the past few years, which has a lot to do with the improved share price. That said, "better" here, is like comparing a 10 year old car with a 12 year...obviously not ideal but the hand thats dealt. I mean they still cant even get their financials out on time. Something that probably bothers newer investors, but something that anyone who's followed RCI over the years just looks at and goes "that's RICK".

 

All the said its not like this is trading at 25x...its trades where it does for a reason. But the business does spit off enough cash that should they continue to be serious about buybacks, its impossible not to have it translate to the share price. Probably just as much, if not more so a math trade as it is a fundamental one.

[johnny]

coronavirus wouldn't rank in the top ten of my epidemiological concerns here, but im happy to see this totally overrated thing beat down a bit

[Nell-e]

coronavirus wouldn't rank in the top ten of my epidemiological concerns here, but im happy to see this totally overrated thing beat down a bit

 

Isn't the entire business model about groping women and stuffing dollar bills in bikinis?  With COVID19, people are being asked to socially distance themselves.  I would imagine this to be extremely disruptive to business.

 

And if they stay open, what's the legal liability if an employee contracts the virus?

 

 

 

 

 

[johnny]

I'm just saying that more people die of herpes encephalitis than coronavirus-contracted-from-US-strip-clubs, bro.