RCI Hospitality Stock: My Single Largest Investment (NASDAQ:RICK)


RCI Hospitality (NASDAQ: RICK) is the only publicly listed company that specializes in the ownership and management of strip clubs:

Strip club owned by RCI Hospitality

Strip club owned by RCI Hospitality (RCI Hospitality)

I’ve previously highlighted RICK as my largest non-REIT investment, but never included it it is in our core portfolio in the high-yield landlord because it only pays a dividend yield of 0.4%, which is too low for our yield-oriented strategy.

But recently, the company announced that it would buy back ~5% of its capitalization, which is basically just another way to return capital to shareholders. As such, the adjusted yield is now ~5.4%. The CEO has noted that they buy $100K of stock every day on autopilot and will continue to do so as long as their share price remains below $65, which represents a 10% FCF yield. Today, the share price is $49, and earlier this year, the share price was briefly above $90.

I have accumulated more stocks in my company account and we recently added it as a position in our core portfolio as well.

RICK Purchase from High Yield Landlord

High Yield Landlord Acquisition of RICK (Interactive Agents)

Why am I so positive about RCI hospitality?

I encourage you to read our full investment thesis to understand why I love it so much, but here is the thesis in 10 points:

  • Deep Discount Rating: The company is currently generating about $6.5 per share of free cash flow per share, valuing it at 7.4x. If you adjust for their recent club acquisitions, ongoing acquisitions, the opening of new Bombshells locations and the impact of Covid, the company’s largest shareholder, Adam Wyden, estimates free cash flow per share to be around $10 per share, valuing the company at 4.8 times its free cash flow. Management has a clear capital allocation policy that prioritizes buybacks whenever their free cash flow yield exceeds 10%, and therefore, they are buying back shares today.
  • Related assets: Strip clubs are bare assets that enjoy a high barrier to entry because it is almost impossible to open new ones. They require licenses that are extremely difficult to obtain and no one wants a new strip club in their backyard. As a result, existing clubs are kind of grandfathered in and enjoy a quasi-monopoly on their local market. Furthermore, RICK only targets the highest quality strip clubs that are thriving. A good example would be Tootsie’s in Miami, which is the largest strip club in the world, or Rick’s Cabaret in Manhattan. While the profitability of these clubs will change over time, it is likely to remain strong and grow in the long term as everyone wants to party, but the supply of such venues is strictly limited. Therefore, I believe the earnings quality of the business is higher than that of restaurant chains such as BJ’s ( BJRI ), Olive Garden, Texas Roadhouse ( TXRH ), and Cheesecake Factory ( CAKE ).
  • Extremely profitable summary game: Despite being bare assets, strip clubs sell for low multiples of 3-5x. EBITDA, allowing RICK to target 25-33% cash-on-cash returns on its new club acquisitions. The reason multiples are so low is simply that there are no natural buyers for these assets. If you run a public company, you probably don’t want to buy these as it would hurt your ESG ratings. If you’re a private equity fund, you probably have at least a few limited partners who don’t want you to buy strip clubs. If you’re a wealthy local entrepreneur, your wife (or husband) probably doesn’t want to buy the local strip club… And even if you could, the expertise needed to run a successful strip club is highly specialized. be able to sniff out things like drug dealing, prostitution, blackmail, etc. Most investors don’t want that headache and as a result, there are few potential buyers and RICK is the only one with access to public capital and a great reputation for closing deals with large cash or liquid components.
  • Access to public capital: As previously mentioned, RICK is the only buyer of strip clubs with access to the public capital markets. This is a huge advantage because it greatly accelerates the growth story. RICK can take his shares and sell them to buy strip clubs with huge positive spreads. In the REIT world, you’d be happy with a 200-300 basis point spread over your cost of capital, but RICK typically gets a multiple of that. Just earlier this year, it was priced at 10x FCF, which together with debt put its cost of capital at ~8%, and could buy clubs targeting a 25-33% cash-on-cash return . The spreads are massive and RICK has a huge pipeline of potential club acquisitions. Today he owns about 50 of them and bought 13 this year alone. RICK has identified at least 500 clubs it could target for acquisition in the US.
  • Seller Financing: Because RICK is the preferred buyer of strip clubs and there are few competing buyers, RICK enjoys strong bargaining power with potential sellers and is able to negotiate attractive terms beyond the price itself. As an example, it will often provide only a small cash component as part of the deal and structure a large portion of the sales price as seller financing with interest rates of 6-8%. Sellers like it because it allows them to unlock the value of their clubs, exit operations and still earn a return on their club while deferring some of the taxes. And for RICK, that’s great because it increases his returns on equity even further and allows him to grow even faster if he has to put up less money to buy these assets.
  • Owns real estate: RICK owns almost all of his real estate, which provides a hedge against inflation as well as an additional margin of safety. The value of this real estate is substantial and growing as much of it is in the growing markets in Texas and Florida where people are moving. As an example, Tootsie’s is over 75,000 square feet of space.
  • Clear capital allocation policy: RICK is strictly focused on growing its free cash flow on a “per share” basis. Management always remembers this on every conference call and in its investor presentation. Their policy is to buy back shares whenever the free cash flow yield exceeds 10%, and they only target new purchases if there is a significant difference.
  • Possible Bombshells Spin-Off: RICK also owns a military themed sports bar restaurant concept called Bombshells. It works especially well in markets like Texas. Today, they have 11 locations and expect to at least double that in the next 2-3 years. The returns on invested capital are even stronger than those of strip clubs and are now starting to be franchised as well, generating fees and royalties. Today, Bombshells already generates 30% of RICK’s revenue, and eventually, RICK could potentially spin off Bombshells into a separate entity to unlock its shareholder value. It has been speculated that the Bombshells alone could be worth all of RICK’s market cap.
  • Skin in the game: Insider ownership is nearly 8% and most of it is owned by the CEO who continues to buy the shares to this day. He has publicly noted that he has ~95% of his net worth invested in stocks and has no plans to sell. On the contrary, he keeps buying more and more.
  • Fast growth at a very low price: The attractiveness of an investment is primarily a function of its valuation, risk and growth. RICK is cheaply priced, owns entrenched assets and has rapid growth prospects ahead. Since the company implemented its capital allocation policy in 2016, it has grown free cash flow per share by 16% annually, even including the pandemic, and may continue to do so for a long time to come. However, the company is priced at 14% free cash flow, which is cheap for a company growing at this rate. Its valuation multiple could be doubled, and it still wouldn’t be expensive. Do you know what his share price will be in one year? I have no clue, and a recession could certainly hurt his business temporarily (although strip clubs enjoy some resilience to recessions). But do I think RICK will be trading much higher 5 years from now? I have a lot of faith that it will happen, and that’s all that matters to me.

You can read our full investment thesis by clicking here. This is my largest position overall, and now I’m going to start picking up stocks for our core portfolio as well.

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