Throughout my investing career, one lesson I've learned is that so long as a business remains viable, there's probably a price that you can own it at. RCI Holdings (NASDAQ:RICK) has a management team with a track record for doing both bizarre and value destructive deals. However, with the ability to generate close to $1.50 per share in earnings, a declining legal expense, and commitment to avoid making baffling decisions, I think investors can dip their toes into shares of RCI Holdings as shares now trade at nearly a 50% discount to their intrinsic worth.
Q1'16 results were not great
Same-store sales at RCI dropped 6.3% y/y while total revenue declined 2.1% y/y to $33.5m. The positive takeaway: most of the decline in nightclub sales can be attributed to service revenue. Patrons are still coming in the clubs, though absent are large tabs and VIP room visits. CEO Eric Langan noted that the behavior looks much like that of consumers in 2009-2010, but not to the same extent. I suspect Q2 and Q3 sales comps will be similarly poor, but Q4 will be an easy comp, so I do not expect the same type of decline.
Bombshells results were so-so. Sales declined 3.4% y/y to $4.4m, and the segment generated an operating margin of just 11.1%. Franchising remains the key initiative to drive value in this segment, but as I've written before, there is not a lot of reason for RCI to own a chain of restaurants. Higher margin franchising fees should be positive overall, and I am hopeful that management will eventually refranchise the locations it owns.
As for earnings, RCI generated $0.29 per share in operating earnings (I don't special out stock-based comp). While off 29% y/y, I think RCI demonstrated that it maintains robust earnings power even in the event of weak comps. Margins in the club space are incredibly durable, and I suspect they will remain that way for the foreseeable future.
Q1 capital allocation plans-the real highlight
I must give credit to Eric Langan-while he makes some questionable decisions, he truly wants to deliver for shareholders. With plans to pay out a $0.03 quarterly dividend, buyback stock, and open a new club in New York City, I think RCI will create value for shareholders in 2016. Management is also focused on reducing high interest rate debt, and they are changing their way of financing acquisitions to generate a more efficient capital structure.
The newest New York City club is exciting. The company has performed well in the market, and it caters nicely to high-end clientele. Launch timing could be a key risk, as the club is likely to open in the midst of stock market turmoil which will negatively impact demand. However, I'm confident in management's ability to navigate troubled waters in the club business. Operations are what RCI does best.
$15-20M in annual free cash flow ability, shares are worth $13-15
Although I have seen RCI Holdings' management team explore bizarre businesses with little overlap like an adult auction website, an energy drink company, and restaurants, CEO Eric Langan is unhappy with the share price, so I do not expect him to pursue side projects. Rather, I think RCI will aggressively buyback shares and increase the per share value of the company.
On a DCF-basis, I think shares are worth $13-15, with the higher end representing higher real estate values than what is carried on the books. The next few quarters could be pretty poor, but short-term headwinds do not determine the value of a company. I am likely to accumulate shares now, and I suspect a rebound once markets improve and RCI has dramatically shrank the share count.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in RICK over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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