Entering text into the input field will update the search result below

RCI Hospitality: A Cheap FCF Generator

Greystone Capital profile picture
Greystone Capital


  • RCI Hospitality shares have been severely impacted by management-related issues and impacts from COVID-19.
  • Operating results are set to improve following a re-opening of nightclubs and continued execution of the acquisition strategy.
  • Shares are available at a cheap multiple of normalized free cash flow, with a potential large buyback on the horizon.

I had somehow glanced over this watchlist name over the past few weeks before the current price jumped out at me a few weeks ago. Even though the stock is up about 25% from the lows over the past week, RCI Hospitality (NASDAQ:RICK) is cheap! This has been a business I've followed and wanted to like for some time now, but certain things have kept me away, including management mis-dealings, investments into non-core business segments (that have rarely worked out - Scores Las Vegas, Robust Energy Drinks, Bombshells) and related party transactions that weren't totally disqualifying but rubbed me the wrong way. However, certain assets look very good at certain prices, and I believe we've reached that point with RICK trading at near-7-year lows due to what I'd deem to be short-term issues largely now behind the company, setting the stage for positive operating results over the next 12-18 months.

Shares have been subject to the double whammy of internal control issues (more on that below) and the COVID-19 market-wide downturn (obviously impacting RICK's businesses). While I don't love the restaurant/nightclub space in a vacuum, the opportunity with RICK provides some different elements than your typical restaurant investment, as this is a well-run business with aligned ownership and a strong market position, trading at a [very] depressed multiple of normalized earnings power. At a high level, RICK is a $105mm market cap business with a growing normalized earning/free cash flow power of $25-30mm, or an $11.00 stock set to earn what I'd conservatively estimate to be $2.00/share or more for the foreseeable future.

Many of the company's past issues weighing on the share price and investor sentiment seemed to have been corrected (or maybe I've just been stuck inside too long), with RICK now in line to continue growing their club count, Bombshells

This article was written by

Greystone Capital profile picture
Greystone Capital is a long only, equity focused Registered Investment Adviser located in West Chester, PA. The firm utilizes a fundamental research process focused on identifying mispriced small and microcap securities in order to build a concentrated portfolio of high conviction investments. It’s our belief that the best investment results can be achieved by aligning interests. Greystone aims to be different from the majority of investment vehicles and large funds by providing full transparency into what we own and why we own it, and always being invested alongside clients. We strive to create value, not extract it. Greystone’s investment process is centered around patience, good decision making, and daily incremental improvement. Our aim is to compound client’s investment capital at the highest possible rates of return over long periods of time. To do that, client portfolios are managed by taking concentrated positions in small companies that are generally under-followed, misunderstood, and can be too small for large funds or passive investment vehicles to own, creating the potential for mispricings. Viewing stocks as ownership shares in businesses, we seek to own these companies for years, or until the mispricings correct. We believe this approach, executed well over long periods of time, can provide a path to stock market out performance.

Analyst’s Disclosure: I am/we are long RICK. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (31)

Greystone Capital profile picture
Q1 was great. Solid results bode well for the business moving forward. Next few quarters should be interesting.
Greystone Capital profile picture
Very pleased with the result here, and the entire club base is still yet to open. Assuming no second wave issues, still plenty of room to run. Expecting buybacks and accretive M&A as the dust continues to settle.
Greystone Capital profile picture
Just a phenomenal Q given the circumstances. Bombshells is absolutely crushing. Pleased with the results so far. Room to run.
Alex Hardman profile picture
I went into the call just hoping to hear they could limp along for a year. And yet, they are claiming they are seeing a path to thrive in this market, if they can just get the lockdowns to end in some key markets. Pretty impressive!

And ya, who would have thought Bombshells would be so important so soon.
Apparently multiple corporate entities of RICK have received approximately $5.4 million of PPP money from the U.S> government.

Recall, as long as 75% of the money is used to pay salaries for employees while their business is closed, the loan is converted into a grant.
Alex Hardman profile picture
From what I heard were the qualifications, they probably qualified. Wasn't it like less than 500 employees and at the unit level? I doubt any of their clubs were over 500 employees. If the government is going to put free money out there, RCI would be foolish not to scope up as much as they could get.
Remember the entertainers are not considered employees, so yes, none of them were over 500.
Alex Hardman profile picture
Even if they were......RCI wouldn't have over 500 at any club outside maybe Tootsie's on the Superbowl weekend. I am not even sure most of RCI locations can fit 500 people (employees, ICs and customers) in most their locations, hahaha.
Strip clubs will be terrible with social distancing. The whole appeal is the "intimate" environment. Some people like slappin' a**"or some like alking to a dancer. Either way it won't work well with social distancing. I would look closely at their assets (no pun intended), the real estate and licenses attached will hold their value. If they are able to pull enough cash together to buy a few clubs during the downturn I can see them coming back when this is all over. One last point: many Gentlemen's clubs make a lot of money off illicit means, prostitution, drugs, and money laundering. Some clubs will stay afloat on this alone. You know how easy it to throw a few $20 bottles of vodka in the trash and put it on the books at $200 a pop?
GR Value profile picture

I always viewed RICK's as more nightclubs than strip clubs. Most of their entities are night clubs a few years ago unless that changed. The last thing people should do at this point is spend money at a strip club, rather save money for a rainy day and spend on actual important stuff. I have to think that way because as an investor do I think long term this will continue to sustain itself, I don't know.

To me RICK's is an intangible generator. It has nothing but intangibles and promises. At the same time I'm not going to bash a stock that fell 70% and could bounce 5 or 10 bucks for a trade, but I don't want it at any price. I also have a rule that any SEC or filings issues makes me stay away for good. Other articles have pointed out there have been such issues, whether small or large I haven't checked.

Way better quality stuff out there than some ghetto nightclubs and growth via acquisitions that leads to intangibles or questionable long term viability (ie Bombshells or night clubs in general).
Alex Hardman profile picture
@GR Value

What people should do and will do are two different things. If only investments based on what people should do made good returns, the stock market would look a whole lot different. Just take one of the best stocks out there, Apple......nobody really needs an iPhone, especially 10 years ago. A $100 candy bar phone back in the day was good enough for general communications. Granted, there are productivity apps on iPhones, but we all know 95% of iPhone usage is purely for entertainment. It is the same with Amazon or Costco, if they only sold the stuff people actually needed to get by, both would have a lot lower revenue streams.


That is clearly the question for RCI, how do they survive if people really must stay more than 6 feet apart? Granted, this is not a new issue for the industry, as many cities have put in place from time to time 6 foot rules for various reasons over the decades. RCI could transition to this model at there clubs if need be. Probably will impact service revenues, but they could probably remain functioning and bring in FCF. Might be some remodeling opportunities to convert private rooms to additional floor space if needed to increase foot traffic and alcohol sales. In 2009, RCI changed their strategy to focus on foot traffic over the preferred VIP customers while things were down. RCI will do the same this time around, the question is when can they get the clubs back open?

I don't think RCI is laundering money, selling drugs or pimping, an auditor would hopefully catch that pretty quickly. Laundering money would require large cash withdraws and likely hurt margins. How does one even invoice street drugs.....so if someone is selling, they are likely doing it without RCI's knowledge or participation in the profits. And it is the same with prostitution. These activities would also be parasitic to RCI's general business, as they would take on additional liability with little upside. ODing customers or entertainers is never a good thing for business. And when it comes to prostitution, the economics are far better for the girl and guy if they move that outside the club. So ultimately, RCI just becomes the place where the two parties exchange numbers.
Well, in this case, customers apparently will need to stay 6 feet away from each other. How's that work?
AdamCooke profile picture
I'm a little concerned about the 'near' term too and all noted above in re. to social distancing. I don't particularly see face masks as an issue - i think this could quite easily be 'themed' in - but the social distancing may be an issue? The other question that continuously bugs me also - which has been mentioned many a time (and aside from managements shady-ness) is the cam-girl fiasco. I have seen some speculation as to the 'quality' of employee's/contracts lessening over time. If this is the case, it could obviously be due to many things, but i do question whether a performer would bother/want to go physically to work if the same or similar money is on offer through web-based cam shows. Granted, i'm not sure if the money is comparable, or not and i also assume cam-shows are much more 'competitive' and whether the same 'tips' are up for grabs with presumably some of the 'personal connection' aspect removed.

Good write up though. Thanks - I've certainly had my eyes on this one.
Uhhh...what is the "cam-girl fiasco?" Got any links?

Had your eyes on this one....lol
Alex Hardman profile picture
Camming has to be quite the grind for most girls out there. I would guess a handful make the bulk of the money. A club environment allows for a more democratized result due to the inability to scale up and fatter margins for each entertainer.

I also don't see how camming is any different than the threat of easy access to pornographic material online since the founding of the internet. The two are not quite comparable. A club environment allows you to actually interact with the entertainer and have their focus. In fact, this comment kind of shows a complete lack of understanding on why people go to gentlemen's clubs in the first place. Everyone seems to think the only function of these clubs is so one can view naked women. But that is quite far from the truth, a lot of the repeat business and bulk of the profits come from patrons wanting a more personal connection to that girl. A lot of guys will pay over a grand for a private room, and just sit their drinking a bottle of champagne with the entertainer for a hour and talk.

It is the same thing on the entertainer side, too. A lot of women think they can enter the business relying on their looks. But the women who do the best ultimately have focus, a great personality and start building up regulars who come back each week. During the NYC labor suit, the class was 1,900 women, but only 100 of those women actually worked at the club for a long time. I think half of the women didn't even make it a month. And that is because it isn't as easy as just taking one's clothes off. I bet camming is even worse on these dynamics. Since cammers can scale up, someone who figures out the formula can aggregate a lot more business. But it has to be a lot harder, too.....since now you have to create that personal connection with 100s of people in a group setting. And eventually the cammers sessions will leak out onto the internet so future customers can just watch for free, too. A real small group of cammers probably make a lot more outside a club.....the rest would likely do better in a club than online or will find out the industry isn't really for them.

The internet hasn't been an issue for adult clubs and won't be anytime soon. The threat has always been regulations that reduce that personal connection to the entertainers.
AdamCooke profile picture
Very valid points.
To clarify, I'd certainly agree i don't have a great understanding as to the lure of these clubs and to be honest, that doesn't worry me in the slightest. If people enjoy them and people continue to do so and that continues to show up in their financial results, then the 'why' is largely irrelevant.
Thank you for the article.
I've been waiting for a few years for this stock to shine.
I'm guessing, I'll have to wait for a few more.
But, I'm willing to do that.
Thanks for the article. You are definitely looking at the bright side. Too many unknowns for me to buy at this time. It appears to me that the virus has accelerated the demise of underperforming companies. This will likely apply to some of Ricks clubs as well. I would not be surprised to see Eric close more than a handful of clubs that were borderline performers over the next 12 to 24 months. Let’s see what Eric has to say next week. More information and time is required before investing in this company.
In what way has the business been "underperforming" prior to the doors being locked shut?
Guess he has nothing to say. Not good.
Well, that's not short.

An employee (not of RICK, but of a local place) recently told me that when clubs reopen there will be
1) No lap dances, and
2) "Entertainers" and patrons wearing masks.

If you add in "social distancing" or percentage of capacity allowed to be utilized being limited, it seems as if most of the rationale for being a patron has evaporated. That's the short run.

In the short run, that is not a strong argument for the clubs returning to anywhere near the kind of cash flow the have had in the past.

In the long run, your contention that they can/will return to a normalized level of business is more reasonable, but it assumes that Covid-19 becomes a non-issue and it assumes there os no Covid-20 or Covid-21 or 22.

The discount rate implied by those risks starts getting pretty high in my mind.
Gregg Sterling profile picture
Thankfully pandemics don't tend to happen every couple of years.

I agree short term there won't be a normal level of business but that goes for a large amount of businesses in the country. The likelihood of a vaccine by in about a year and a half or sooner is pretty high from everything I've been reading. No guarantees but early results are quite promising. But hopefully once things start opening up they can at least start seeing some kind of profits or at least minimize losses until a vaccine gets us back to normal.
Do you think that with facemasks and no dances they can generate enough cash flow to service the debt? Dancers pay RICK to "appear" in their venues. they get paid via dances. Why would they show u and pay if there is little to no dance revenue? Their dancer payments are a major revenue stream along with alcohol and admissions revenue, likely followed last by food.

I am more dubious at this point.

I really need to do a detailed model that I can play with.....

My question is whether they can get to the long-term normal from the intermediate term abnormal from the short term completely closed.

The uncertainty will demand a very high discount rate on the CF's of the return too normal distant future.
Gregg Sterling profile picture
I didn't say theyll be able to service their debt. Honestly I can't predict how that will pay out. My point was some revenue is better than no revenue.

Can they get a private dance without it being a lap dance? I'm assuming the dancers want to get back to work since they aren't making money either. Maybe the clubs will let the dancers work there for free and just make money off of drinks. Heck some clubs set up enclosed areas where people can drive through to pick up food for takeout while dancers perform. I don't know what the model will be. They will have to adapt in the short term.
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!

About RICK

SymbolLast Price% Chg
Market Cap
Yield (TTM)
Rev Growth (YoY)
Short Interest
Prev. Close
Compare to Peers

More on RICK

Related Stocks

SymbolLast Price% Chg
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.