Unlock: Ricks Cabaret (RICK) – Night Clubs is Great Business
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December 4, 2016
Rick’s Cabaret (RICK) – I came across RCI Hospitality Holdings late last week after seeing the company was initiated with a $27 price target by Sidoti. I should warn you that RICK is not a very liquid name (Average Volume is around 46,000 shares per day), but its fundamentals and technicals made me take a closer look.
RCI Hospitality’s two primary lines of business are adult nightclubs and bars/restaurants. However, the adult nightclub business is the clear driver of cash flow and earnings as it makes up 84% of F2016 revenues. According to a 2016 study done by IBIS World, the adult nightclub industry is estimated to be $6B in annual sales. IBIS World projects low, but steady, single-digit growth. Nationwide, there are about 4,000 adult nightclub units, which only gives RICK a market share of only 1%. However, RICK only views about 500 of the current stable of clubs as suitable based on criteria such as size, quality and location. Therefore, on this smaller base, RICK has about a 7% market share. There are also no other publicly traded companies that compete with RICK’s adult nightclubs. Some of RCI’s venues are listed below:
Due to the business model, adult nightclubs generate strong margins. Cost of goods sold, which is food, beverages (alcoholic and non-alcoholic) and tobacco products, averaged less than 13% of revenue for the past three years. The most significant fixed costs for operating night clubs are occupancy costs (leases and payments for mortgaged properties, including interest, principal and real estate taxes) and wages for non-entertainers, such as club managers, bartenders and other wait staff.
Importantly, the adult night club industry is highly regulated on a local governmental basis. Zoning regulations make it extremely difficult to construct a new adult nightclub due to multiple factors such as distance to schools, houses of worship and other local preferences. This factor generates a solid “moat” for existing players and, thus, should enhance the intrinsic value of a company like RCI Hospitality.
The other line of business for RCI Hospitality is its restaurants. More specifically, it has 4 successful restaurants/bars in Texas under the “Bombshells” name. Bombshells is a militaryinspired sports restaurant/bar that attracts younger diners looking for a vibrant atmosphere to watch a sporting event or attend happy hour. This concept also features young, attractive waitresses, initially made popular by Hooters restaurant chain. Recently, the company hired an experienced franchising executive, Shannon Glaser, and completed the legal filings to begin franchising the concept in all 50 states. According to Sidoti, “The franchising and growth of this concept will greatly enhance shareholder value over time and view Bombshells as a buried “gem” in RICK’s stock valuation.”
*Please note that the company will be presenting at the LD Micro Investor Conference on December 7th, 2016.
