Igor Sinkov
I am recommending RCI Hospitality Holdings, Inc. (NASDAQ:RICK) as a buy because I think that the share price is currently undervalued at $55.83 versus a price target of $64.80 a share when considering its normal business operations. I believe the stock could be worth substantially more than this once cashflows from RCI's two new casinos in Central City, CO begin to roll in. Right now, RCI is investing a lot of money into this new business venture and once these building start to bring in money it should greatly improve RCI's margins.
RCI Hospitality Holdings Business Model
Nightclubs
RCI Hospitality Holdings, Inc. makes most of its revenues from operating an assortment of adult nightclubs. According to RCI's latest 10-Q the company owned a total of 55 adult nightclubs and one dance club under various names including Rick's Cabaret, Jaguars Club, Tootsie's Cabaret, XTC Cabaret, Club Onyx, Hoops Cabaret and Sports Bar, Scarlett's Cabaret, Diamond Cabaret, Cheetah Gentlemen's Club, PT's Showclub, Playmates Club, Country Rock Cabaret, Temptations Adult Cabaret, Foxy's Cabaret, Vivid Cabaret, Downtown Cabaret, Cabaret East, The Seville, Silver City Cabaret, Heartbreakers Gentlemen's Club, Kappa Men's Club, Baby Dolls, and Chicas Locas. The nightclub segment made up approximately 80.6% of RCI's total revenues in 2023.
RCI's Night Club and Bombshells Locations (RCI's 2023 10-K)
Bombshells
RCI's other major business segment is its sports bar restaurant chain called Bombshells. This segment of RCI currently has 13 locations, all of which are in Texas except for their Denver, CO location, which is a food hall. Bombshells has been struggling with slipping sales figures over the past couple of years. Bombshell's revenue is down -7.0% YOY from $59.9 million in 2022 to $55.7 million in 2023. Bombshell's $55.7 million in revenue for 2023 is currently sitting at 1.6% below their 2021 revenue of $56.6 million, despite having 3 additional locations. In 2022, Bombshells made up 22.4% of RCI's revenue, dropping to just 19% in 2023.
Other
RCI runs a media company it uses to promote the adult nightclub industry. Included in the other is RCI's ED (Exotic Dancer) Publications company, which is the only national business magazine to be distributed in 2,200-plus adult nightclubs in North America. ED Publications also publishes an annual VIP Guide of adult nightclubs, touring entertainers and industry vendors, as well as producing the Annual Gentlemen's Club Owners EXPO, which is a national convention and trade show.
This Media Group also produces two nationally recognized industry award shows for the readers of both ED Club Bulletin and StorErotica magazines. The other main source of revenue that falls into RCI's other category is sales from their energy drink company called Drink Robust. RCI's other segment made up just 0.44% of the companies total revenue in 2023, down slightly from 0.54% in 2022.
Drink Robust Home Page (Drink Robust's Website)
RCI Hospitality Holdings Going Forward
Nightclubs
2022 was a particularly strong year for consumers and RCI saw a 10.1% increase in their same store sales as compared to their 2021 figures. This impressive year of growth was hard to beat and in 2023 RCI's YOY same store sales decreased by 3.5%. RCI's revenue for their nightclub segment still showed a YOY growth rate of 14.8% due mostly to the company's aggressive acquisition strategy. During 2023, RCI spent $75.5 million to acquire six nightclubs, which in turn contributed $18.2 million to the RCI's nightclub revenues. In 2022, RCI's nightclub segment included $41.9 million in revenues related to club acquisitions.
RCI Segmented Revenues For Their Nightclubs And Bombshells (RCI's 2023 10-K)
CEO Eric Langan recently said on an earnings call that while RCI is always looking to acquire new adult nightclubs, they wouldn't overpay. It wasn't only RCI who had an impressive 2021 and 2022. Other adult nightclub owners also saw an impressive spike in revenues over this period and are trying to sell their businesses based on those figures. However, Eric believes that once the live entertainment industry as a whole settles back into normal growth figures, the cost of acquiring new clubs will come down.
Management believes they have bottomed out on the decline of same store sales, as their nightclubs saw a 9.8% decrease YOY in Q1 of 2024. Even with this same store sales decrease, RCI still saw its nightclub segment revenue increase by 5.6%.
Even without further acquisitions, RCI will increase their nightclub segment revenue further because they have multiple clubs that had been shut down last year for remodeling, one club that had to be rebuilt elsewhere due to eminent domain reasons, one club is awaiting building permits, and another club is currently pending a liquor license approval. All of these improvements are currently costing RCI money while subsequently not producing any cashflow. Once these locations open this year, they can stop bleeding money and start producing value, further adding to RCI's nightclub revenue.
Bombshells
The 2023 revenue for RCI's Bombshells segment decreased YOY 7% while its same store sales decreased by a much more alarming rate of 14.6% between 2023 and 2022. Bombshells YOY same store sales had actually decreased from 2021 to 2022 as well with sales dropping 4.6% despite the rest of the business segments all having a phenomenal year. RCI had plans to open up two new locations in 2024 in Rowlett and Lubbock, Texas. Eric and the rest of the management have also been trying to open up a franchise in Alabama. Eric has hired a new Assistant Director of Operations, and it looks like management is getting serious about making major changes to the way Bombshells operates.
RCI Segmented Same Store Sales For Their Nightclubs And Bombshells (RCI's 2023 10-K)
On RCI's 2023 Q4 earnings call Eric Langan said, "For Bombshells, I'm currently exploring with private equity groups, sale -- partial sales of the concept, partnerships or mergers, basically, all strategic operating -- all strategic opportunities out there that we can use to maximize the value of this asset and basically accelerate our growth." Eric seems to be in favor of bringing in capital from somewhere else and in the same call also said, "And I'd like to see us do that with capital outside the company's capital because I think we just have too many acquisition opportunities coming up, the expansion of the casinos, and I'd like to keep our capital more focused on those operations rather than expanding Bombshells."
Bombshells had another bad quarter to start off their fiscal 2024 with their YOY segment revenue decreasing by 5.2% from $13.4 million in Q1 of 2023 to $12.7 million in Q1 of 2024. This decrease in revenue is driven by a shockingly disappointing quarter for same store sales, which saw a decrease of 20.3%.
Bombshells Segment Sales Q1 2024 vs. Q1 2023 (RCI's 2024 Q1 10-Q)
While Bombshells has still managed to be annually profitable in 2023 that profitability is slipping. CEO Eric Langan has really displayed a lot of enthusiasm over the years for Bombshells and on RCI's last earnings call, Eric finally seemed to be growing impatient with the restaurant chain's inability to find financial success, saying in regard to Bombshells "As for future developments, we have decided to list our Aurora, Colorado, site for sale or lease and to put our second Austin location on hold. Both moves are intended to help us better focus on other opportunities. The Huntsville franchisee is still awaiting his building permits." Eric also stated that "The bigger issue is Bombshells' performance. After we've seen the results from the quarter, we have made major structural management changes in Bombshell's team, and we are also considering any and all options to improve performance that potentially includes seeking an operational partner or selling the business." Both of these statements sound like management might be taking their eggs out of the sports bar basket to put them somewhere else more valuable to shareholders.
As will be discussed a little later in this article, RCI is planning on opening two casinos in Central City, CO. Casinos have much better margin potentials than sports bars and with both of these establishments set to open in 2024, RCI will likely fare better by turning their attention to this endeavor instead of trying to expand a company that is seeing its profitability slip even when the rest of the business is doing remarkably well. RCI management had also talked about the potential for some large acquisitions of several adult nightclub chains in the coming years that they intend to have ample cash to pay for. Pausing the expansion of Bombshells or even possibly selling off the entire segment would definitely free up capital resources that could be put to use in much more profitable ways.
Other
RCI's other segment posted a $1.4 million loss in income from operations in 2023 while in previous years it had nudged out a small profit $57,000 in 2022 and a $35,000 profit in 2021. Their 2024 Q1 income from operations had a $196,000 loss compared to a $185,000 loss in Q1 of 2023.
Currently, RCI is working with a strategic partner to relaunch a website it owns called AdmireMe. AdmireMe was a basic monetization website that sold adult content to consumers similar to an OnlyFans model; however, the website was outdated and didn't provide things like video. This new strategic partner RCI is working with has an existing platform which can provide a website fully up to date with all of the modern features consumers expect when visiting a site like this.
According to Eric's statements on RCI's 2024 Q1 earnings call, this partner brings to the table "domestic and international traffic, safety controls, credit card processing, all necessary technology we need at a far less cost than if we did it alone." This partnership is costing RCI a 25% stake in AdmireMe and this service is set to be relaunched in June 2024. Currently, RCI is spending about $40,000 a month on programmers getting this website up and running, so once it is launched RCI can save about $500,000 a year on expenses and begin generating revenue.
AdmireMe plans to run its revenue share at an 80%/20% split like OnlyFans does, with 80% going to the content creator and 20% going to the AdmireMe platform. The increased online visibility RCI could gain from AdmireMe should be useful for promoting and driving business into the company's adult nightclubs. Beyond that, AdmireMe could become a meaningful source of revenue for RCI in the future and if it does become a large direct competitor with OnlyFans, I would be unsurprised if OnlyFans tried to purchase AdmireMe from RCI.
RCI Hospitality Holdings Casinos In Colorado
RCI is planning on opening two Casinos this year, Rick's Cabaret Steakhouse & Casino and Bombshells Sports Casino in Central City, Colorado.
Central City, CO In Relation To Denver, CO (Google Earth)
Central City is a very small town with a population of 779 people that sits about 45 minutes outside of Denver, CO. The town legalized gambling there in the 1990s and since then, this small town has become a center for gambling in the Denver area. The only three places that allow gambling in the Denver area are Black Hawk, Cripple Creek, and Central City, but strict limits were put on the amount of money that could be placed per bet.
Central City, CO In Relation To Black Hawk, CO (Google Earth )
Thanks to the elimination of the $100 betting limit and the addition of baccarat when voters approved Amendment 77 in 2021, these areas have seen an influx of gambling activity. Denver is the number one feeder market into Las Vegas, so opening up a casino in a growing market like Central City a couple of years after the town eliminated gambling limits sounds promising. Central City is also a prime location for tourism as the town sits within a one-hour drive from five ski resorts and during the summer the area is packed with a ton of outdoor activities like white water rafting, fishing, hiking, and hunting.
Daily Adjusted Gross Proceeds or Daily AGP from Central City slots from July 2023 to February 2024 averaged $122.03. Blackhawk, a town that sits very near to Central City, had an average daily AGP of $361.04 per slot over that same time period. Eric Langan attributed this to the fact that the Black Hawk's Casinos operate 24/7 as Eric says he plans to do with his casinos. RCI plans to install 400 slot machines between the two casinos and up to a dozen gaming tables, as well as sports betting. If you use the daily AGP numbers from Central City, you would be looking at gross proceeds of around $17.8 million. If RCI can pull off AGPs that resemble Black Hawk's Casinos, then we're looking at $52.7 million a year just off of RCI's slot machines.
Table games brought in a daily AGP of $283.95 in Central City from July 2023 to February 2024 and during that same time period Black Hawk saw a daily AGP of $2,306 for their table games. Assuming RCI only has 9 tables available for gambling (which is the low end of their table count estimate) they would still bring in annual gross proceeds of $932,776. If they can pull off daily AGPs similar to Black Hawk next door, then you're looking at annual gross proceeds in the ballpark of $7.5 million. A combined Gross proceeds between slots and tables, if RCI can pull off daily AGPs similar to the Central City Casinos that don't run 24/7, adds up to be about $18.7 million. If RCI's 24/7 business operations can bring in numbers similar to the Black Hawk Casinos one town over, then RCI might be looking at gross proceeds of over $60 million.
Rick's Cabaret Steakhouse & Casino Location (Google Maps)
RCI Plans to open up both Casino's in fiscal 2024 and hopes to have all of their licensing done by May. It is estimated that from that point it will take another 90 to 120 days to get all of the slot machines installed, tested, and approved by the state. RCI's fiscal year ends at the end of September and if RCI can get these casinos up and running before the end of their fiscal year it would really do wonders on turning around RCI's income and cashflow statements.
Eric also noted that the company had purchased a third property in Central City right on Main Street for a possible future expansion of one of their casinos should business do well. Eric said he had applied for a gaming license on this property too, but had also said on RCI's Q4 2023 earnings call "We're going to keep those tenants in place, keep those storefronts open so that Main Street continues to stay busy. We're going to get the existing casinos open first and then decide what we want to do with that property. But we also -- it allows us -- because that's the last vacant -- those are basically the last vacant spaces on Main Street to basically control that entire corridor there between our other 2 casinos and anyone else coming in and competing."
Business Risks
The Casino Business
With RCI's many new opportunities comes many risks. Their two new Central City casino permits could still get denied. Once and if their permits do get approved, RCI still has to pay for, install, and get approved all of their slot machines. The company plans on spending about $20 million total to open these two casinos and so far, according to Eric Langan, they have spent about $10.5 million. Delays during any of this could cause RCI to spend more of their capital and devote more of their human resources to this project than they had originally anticipated doing.
Bombshells
Bombshells may not make a turn around and may, in fact, begin to start actively losing money on an annual basis. With the opening of more locations this year, I think that revenue from Bombshells may pick up slightly, but their store to store business model needs to show some major improvements. Bombshells are the kind of restaurant chain that has seemed to do just alright during the best of times and underperforms other times. I am really hoping that management does end up selling off the sports bar business in lieu of other more profitable ventures.
Other
RCI's venture into the internet space with their relaunch of AdmireMe may not take off and become profitable. If the app is able to offset this risk by bringing in traffic to RCI's adult nightclubs, then this won't be a large issue, however if it fails to do this as well, then RCI will be stuck with an app that does nothing but generate administrative costs.
Nightclubs
The adult nightclubs portion of this business does include risks in general business downturns, but not to the extent the other segments of RCI's business do. The beauty of some of the entertainment and hospitality companies on the market today is that they generate an impressive amount of cash while generating a limited amount of interest from the investment community. In the adult nightclub industry, there are very few people looking to buy up more clubs and expand, which leaves companies like RCI more room to negotiate good prices for businesses with strong cash flows. While these nightclubs produce cash through operations, the land underneath of them will appreciate in value. Should down the road RCI look to liquidate its nightclub segment, the values of these properties could be worth substantial amounts of money as RCI owns nightclubs in some of the country's fastest growing cities like Houston, Austin, Dallas, Denver, Miami, and Chicago to name a few.
Discounted Cash Flow Analysis
I ran a discounted cash flow analysis assuming a 10% WACC, a 7% increase in working capital as a percentage of revenue (as this business requires very little working capital), a 3% perpetual growth rate, and a 21% tax rate. I assumed their average revenue growth rate to be at 13% as this is a little lower than their average YOY growth rate since 2019. I put their average EBIT margin at 23% as this is their average EBIT margin from 2019 to 2023, excluding the year 2020 because of Covid-19 related shutdowns which dropped the EBIT to an unusually low 10.1% that year. D&A expenses I put at $15 million a year and I put capital expenditures at 9.6% of revenues, which is in line for RCI's normal operating activities. From this, we get a 16.0% upside from the current stock price of $55.83 a share to $64.80 a share. Keep in mind, this is not factoring in any possible future revenues from RCI's casinos.
RCI DCF Excluding Revenues From Casino Operations (Leland Roach)
If we add in the estimated future revenues for RCI's two casinos, assuming daily AGPs similar to the other casinos in Central City, our share price target continues to rise. For the sake of being conservative, I didn't add in any revenues for the casinos until RCI's fiscal 2025 just to factor in any worst-case scenario delays. By adding in these additional casino revenues starting in 2025, RCI's DCF price target moves up to $72.83 per share, a 30.4% price increase from its current price of $55.83 a share.
RCI DCF Including Revenues From Casino Operations (Central City Averages) (Leland Roach)
If we add in RCI's potential future revenue from their casinos using the averages of the Black Hawk Casinos that operate 24/7 we get an impressive 57.5% increase in RCI's price target to $88.03 per share.
RCI DCF Including Revenues From Casino Operations (Black Hawk Averages) (Leland Roach)
Reasons To Sell
I would sell my stock in RCI if the company's ventures into the casino business turn sour. Central City is itself a rather small community and if a large pandemic or a recession were to hit the country again, the mass influx of tourists visiting Central City could dwindle rapidly, hurting the casinos immensely. Since the town is so small, if RCI's casinos gain a dissatisfactory reputation around town, they may see a significant drop-off in business. RCI has never run a casino before, and behind every business there are unforeseen challenges, many of which could have an adverse effect on RCI's casinos. If management seems to be hitting too many bumps in the road and these casinos start losing money annually, I would unload these shares from my portfolio.
If RCI's Bombshells Sports Bars don't make some sort of tremendous improvement in the next year or at least start making more significant contributions to RCI's net income, I would also strongly consider selling my shares of RCI. I would also strongly consider selling off all of my RCI shares if management, having not seen progress in Bombshells after their fiscal 2024, hadn't made any statements about being in talks with potential buyers of their restaurant chain.
Summary
Essentially, even if RCI continues to conduct its operations as normal, keeping its Bombshells segment at least profitable with same store sales on their clubs stagnant, leaving them to just grow their revenue via club acquisitions, I think there is still a 16.0% upside in the value of the stock compared to current prices. That upside is likely to grow to a 30.4% upside in price value just by adding in the average gross proceeds of the other Central City Casinos that are not even open 24/7 as RCI's establishments plan to be. That upside is also not factoring in the proceeds from sports betting, which I could not find statistics on from the Denver area. If RCI's gambling proceeds can replicate anything near what the casinos in Black Hawk pull in, then the per share value of RCI's stock could rise as much as 57.6% above the company's current share price of $55.83.
Since Bombshells adds so little to RCI's net income, any turn around in its business performance would help add a lot of value to RCI. Selling part or all of the Bombshells segment of RCI could help the company either pay down debts or acquire other nightclubs with cash to avoid high interest rates. The sale of the Bombshells segment could also help management focus more on their strengths of managing and acquiring clubs. Management could also focus much more closely on getting their casinos operational once their permits clear. The installation, testing, and approval process of slot machines sounds like a fairly in depth process and any extra attention Eric Langan and the rest of management can spend on getting those up and running the better.
For the reasons mentioned above, I am giving RCI Hospitality, Inc. a BUY rating. As long as the company can continue to conduct its operations normally, including a reversion in same store sales back to historically normal growth rates, the stock should see a significant increase in value of 16.0% to possibly 57.6% if their venture into operating casinos goes well.
