RCI Hospitality Holdings, Inc. (NASDAQ: RICK) is a leading nightclub consolidator in the United States due to its favorable capital structure and management’s extensive nightclub operating know-how. Bombshells, his sports bar catering business, has an operating margin among the best in the industry compared to some of the well-established publicly traded catering companies. Bombshells continues to grow by building more units and franchising. Both businesses are extremely cash-rich, which is best represented by the company’s high and growing free cash flow. With over 500 clubs in the United States, RICK has a long track. The valuation remains attractive.
RICK recently announced 4Q22 revenue of $70 million, which is in line with my internal guidance. And I view the recent stock price as good news for the company, as it is an important currency when it comes to accelerating acquisitions. Additionally, a quick look at CEO Eric Langan’s Twitter shows that Nightclub is a pretty resilient business, as Tootsies Cabaret and Scarlett Cabaret traffic is strong. Based on my validation model, RICK remains undervalued and I believe it is a compelling investment for investors to consider.
4Q22 results and valuation
Total RICK sales in 4Q22 were $70 million, up 27% year-on-year. Nightclub revenue increased 39% year-over-year to $56.1 million and Bombshell revenue increased 3.5% year-over-year to $13.9 million. This brings FY22 total revenue to $266 million, which is in line with my internal guidance. Unless there’s a change, like a faster than expected growth drop in Bombshells, I’ll continue to stick with that forecast. Recall that in 3Q22, management expects 30% year-on-year growth in free cash flow (“FCF”) by FY23, and that guidance is largely based on management guidance. .
Ahead of the upcoming 4Q22 results, I scoured CEO Eric Langan’s Twitter to get an idea of the club’s foot traffic. For example, 2 of RICK’s biggest clubs, Cabaret of the Tootsies and Scarlett Cabaret, recorded relatively high traffic volumes. With recession fears lingering, this seems to indicate that RICK sees no impact from inflation. There was also a recent conference hosted in August by CEO Eric Langan on how they are attracting younger audiences to nightclubs. If you haven’t watched it already, I strongly encourage you to do so.
On top of that, RICK also gave a presentation recently, and I think this slide best sums up the overview of what the company does and why it’s worth looking at. As a new investor, I will definitely appreciate this slide.
Stock price is an important currency
Since my first coverage of RICK in August, the stock price is up 13% to $78.77 at the time of this writing. With a higher share price, management can accelerate the roll-up strategy by financing large acquisitions with a mix of debt and equity, such as the purchase of Lowrie. Furthermore, management has always refrained from issuing shares to avoid diluting shareholders.
Here’s also a past comment from Adam Wyden on the 2Q22 earnings call on why the stock price and multiple issues:
“I think a lot of die-hard value investors are like you know, the stock should – let the stock trade extremely low and you can buy it all back and blah blah blah. It’s all good in theory. But I mean I think it might be important to explain to people that part of the underdogs is yes being able to buy back stocks when it’s cheap but also being able to create arbitrage multiple. I mean, what we saw with Lowrie was that you were able to trade, I think, with a pick of 500,000 shares at $60, 30 million. I mean you couldn’t have executed this trade if the stock hadn’t traded at a higher multiple than what you are acquiring.
Therefore, it’s really great to see the stock price go up, although I would still say the stock is still undervalued.
RICK recently published its sales of the 4Q22 and there were no surprises because they are in line with my expectations. A little research on CEO Eric Langan’s Twitter would also show that foot traffic at RICK’s nightclubs is still relatively strong, further confirming that they haven’t seen the impact of inflation. More recently, investors have also seen an increase in RICK’s share price, which is critical as it allows management to accelerate acquisitions using a combination of equity and debt. As the stock price and multiples become more attractive, I think we could see a similar deal like Lowrie, which is RICK’s biggest acquisition to date. To date, RICK remains undervalued and I believe it is a compelling investment for investors to consider.
Do you agree with my analysis? Let me know in the comment section below!