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Summary of Operations
RCI Hospitality Holdings chiefly operates in two segments: Nightclubs and Bombshells. Nightclubs is as the name implies, deriving income from hospitality services, sale of alcoholic beverages, and sale of food and merchandise. Bombshells is a restaurant-bar chain staffed by girls in military uniforms that has spread through Texas. Most of their other sites are in Texas, with other locations sprinkled in a few other states.
Following major setbacks by COVID, 2021 was a rebound year for this company. Nevertheless, management stresses that their industry is highly cyclical. Units are sensitive to the local economic trends, as adult entertainment is a luxury more likely to be discarded during times of hardship. Nevertheless, they remained cash-flow positive through COVID.
Strategy
In their annual report, the capital allocation strategy is as such:
Acquiring/developing own clubs/restaurants that have the potential to provide a minimum cash on cash return of 25%-33%, absent an otherwise strategic rationale
Disposing of underperforming units to free up capital for more productive use
Buybacks of stock if the after-tax yield on free cash flow is above 10%;
Paying down our most expensive debt if it makes sense on a tax-adjusted basis, or there is an otherwise strategic rationale.
In operations, they seek good price-value for their entertainment, dining, and service; to retain good personnel (although their adult entertainers are contractors, not employees); to focus on unit-level operating performance; and to own the underlying real estate in which they operate. Typically they operate with relatively little debt and are at their capacity to raise additional capital in this way.
Growth and the Future
Management believes the Nightclubs segment can continue to grow organically with “careful” entry into proper locations. It’s questionable if the girls that work at their nightclubs appreciate their “careers” with RCI’s location, but a YouTube search of Bombshells showed vlogs by girls who appear happy to work there. The chain has also proved that it can grow in the state of Texas, and much of the rest of the United States is open to entry. Given this, I think the most growth will come from Bombshells, which is currently about 29% of revenues.
I suspect their main competitor will be Hooters, which also has most of its locations in Texas. Bombshells has proved it can penetrate that market. Hooters has 311 stores in the U.S., while Bombshells only has 11 (again almost exclusively in Texas), and they continue to seek out new franchisees. I don’t see why they can’t triple their number of stores in the coming decade.
RCI also has a share repurchase plan. Last year, they bought back about 700K of their shares, leaving just over 9 million in circulation.
Valuation
With about $33 million in free cash flow in 2021, I assume the company can average at least $20 million each year.
Growth Assumptions: 15%
Intrinsic Value Per Share: $40
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