Lately, I’ve been thinking a lot what I want from life. And the TL;DR version is ‘I don’t know and that’s ok’. The longer version is there is no ONE thing I want from life and rather, I want: family, friendship, adventure, wealth, knowledge/self-improvement, health.
I think Toni Morrison said it well,
“For me, success is not a public thing. It's a private thing. It's when you have fewer and fewer regrets.”
I’m not sure how I get everything I want, but I continually remember how lucky/grateful I am.
I’m the product of my past generations’ work, grit, and bravery. I’m fortunate. I’m privileged to have the opportunity to choose.
I’m continually reminded that life and happiness is not all about the endgame, but the struggle and journey need to be cherished.
The focused struggle is everything - this quote by James Clear summarizes it nicely:
“Life is easier when you know what you want—but most people don't take the time to figure out what they want.
It's not that we are completely lost, but our efforts are often slightly misdirected. People will work for years and ultimately achieve a lifestyle that isn't quite what they were hoping for—often, simply, because they never clearly defined what they wanted.
An hour of thinking can save you a decade of work”
James Clear is great. He’s got a great free newsletter that is short, concise, and thoughtful, and I recommend it.
These quotes from Clear and Morrison follow themes of focusing on whats important and progressing (aka struggling) towards those goals.
News from my echo chamber
The largest living tree in the world, General Sherman, was threatened by California wildfires but it looks to be in the clear.
This fire season has been relentless. Moving forward, it feels like each fire season will continue to get worse and worse. And this is unacceptable.
It’s fucked that we have politicized Climate Change and have allowed companies like ExxonMobile place the blame and solution on individuals. So FUCKED.
Climate Change is happening and it needs to be the priority for every country and company - no matter who you vote for.
I recently watched this video by Kurzgesagt – TL;DW - Climate Change is going to be incredibly difficult to solve without systemic change. It’s worth a watch:
The NBA preseason is starting up soon and I am pumped. I will be posting a NBA Season preview piece over the next few weeks.
This week we are going to be looking at RCI Hospitality Holdings Inc ($RICK). As a reminder: The Rookie wants to own businesses that 1) I like, 2) are growing, 3) generate a high amount of free cash flow, 4) have future optionality, and 5) are led by a great management team. NOTHING HERE IS INVESTMENT ADVICE. DO YOUR OWN HOMEWORK.
Step 1: Do I understand the business?
RCI Hospitality Holdings, aka RICK, is a holding company that operates in several areas of the hospitality and entertainment business through wholly owned or Franchised locations. As of June 2021, RICK operated 48 restaurants, bars, and life adult entertainment locations. They breakdown their revenue into two main segments: Nightclubs and Bombshells. They operate under several brands seen below:
In Q3-2021, Nightclubs made up the majority of revenue at ~72%, Bombshells makes up the remaining ~28% of revenue. As of the end of June 2021, RICK had ~$58M in total revenue. Breaking down their revenue streams even further, the sales of alcoholic beverages makes up the majority of revenue for both Nightclubs and Bombshells at ~44%. Here’s the latest breakdown:
RICK is a high gross profit margin business with a run rate for the last 3 years at 86.2% in FY19, 85.3% in FY20, 84.4% in 9M21. That is fantastic. Even software companies struggle with getting gross profit margin that high.
Verdict: Solid- Pass. I like the business and I can understand it.
Step 2: Moat and Future Growth/Catalyst
Let’s break this section into two sections: Future Growth and Risks
Future Growth
RICK’s management has broken their growth strategy into several pillars:
Expand their existing upscale club brand in growing and successful areas/locations that already have RICK locations (i.e. gain market share in their existing markets)
Expand into new locations/areas (i.e. open up new businesses in new areas)
Franchise the Bombshells brand and along the same lines pursue joint ventures or partnerships to reduce start-up and operating costs
Invest in R&D to create new club concepts
Control the real estate in connection with club operations (although RICK still plans to leverage leasing for some locations)
RICK is looking to expand their footprint fairly quickly via acquisition:
This is the way I see it - I like RICKs growth plan. It’s tried and true (ala Chipotle, MacDonalds, etc). Land, expand, and franchise. Rinse and repeat.
What makes their growth strategy a bit more exciting is that they are also exploring other revenue streams via their AdmireMe social media platform. This will operate similarly to Onlyfans and is looking to launch in 2022.
Who knows if AdmireMe will catch on? But RICK has access to leverage their already existing talent from their Nightclubs on the AdmireMe platform. Seems like a win for the talent (more $$), a win for the customers, and a win for RICK. The classic “win-win-win” Michael Scott:
If RICK can execute on it’s vision of expanding their market and opening new Nightclubs+Bombshells, then AdmireMe is a free bet on growth. AdmireMe could be adding gas on the fire or lead to inconsequential growth - who knows, but I like companies with multiple bets (aka shots on target).
Risks
COVID19. COVID19 had a significant impact on RICK in 2020. RICK received approval and funding from Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) in 2020, but it seems like most of the COVID risk of shutting down again has been staved off.
As of the last few months, RICK has reached a point where “Currently, all of our locations are open except two clubs that are being renovated and/or remodeled”.
With that being said, COVID will continue to be a risk as long as the general public remains unvaccinated. Specifically, it is important to mention that RICK mainly operates in the southern region of the USA which consists of the LOWEST vaccinated populations (Source).
RICK’s other large potential risks are 1) legal changes in their jurisdictions and 2) erosion of their brand.
By the vary nature of running and operating Nightclubs, RICK will always be at risk for potential changes to local jurisdiction and law. On top of this, if RICK experience bad publicity or poor management of their talent, RICK’s brand would severely be impacted and thus, it’s ability to bring in customers.
Verdict: Slight Pass. I generally like to see more optionality from companies, but RICK’s future growth is attractive.
Step 3: Management:
Eric Langan is the CEO and Chairman of the Board. He has been with the company since 1998 and became CEO in 1999. Currently, Eric Langan, owns around 8% of RICK which is great to see. I generally want management to have a stake in the company as this helps align incentives for shareholders.
With that being said, we really need to trust Eric to make the best decisions for the company since he owns such a large part. And it seems like Eric knows what he is doing.
Since RICK went public in 2005 and under his leadership, the stock has outpaced the S&P 500 with a 18.9% CAGR.
Also, the RICK management team has a solid track record of consistent Return on Capitals of around 10-12%.
I didn’t dig too deep into management, but one red flag that popped up on Eric Langan were some inappropriate uses of company funds. Also, while looking into management I didn’t find much in terms of company culture, mission statements, etc.
These aren’t necessarily red flags, but I like to leadership/management that emphasizes ‘culture’ and industry-specific thought leadership. This usually leads to quality businesses.
Verdict: Slight Pass. I don’t feel comfortable giving a full point here with Langan’s past actions and I couldn’t really find too much information on the other management team members.
Step 4: Valuation
High Level Numbers
Market Cap: $620.27M
Enterprise Value: $743.20M
NTM EV / Revenue: 3.23x
NTM EV / EBIT: 13.90x
Gross Margins: 82.9%
ROC LTM: 11%
Revenue Growth YoY: -26.9% (COVID, 2019)
Shares Outstanding: $9.00 MM
From 2016 to 2020, RICK grew their revenue from $134M to $169M LTM, and over the same period, their Gross Profit grew from $112M to $140M with a Gross Margins of around ~84%. RICK’s top line isn’t explosive compared to SaaS companies, but they are continually growing revenues and have AMAZING profit margins.
They are free cash flow positive, and they have very little debt.
I ran a ‘rough’ DCF with the following assumptions: a discount rate of 12%, growth rate of 12% (years 1-5) and 9% (years 6-10), and a terminal multiple of 5x. With these numbers, I got a rough range of $180- $175. If you apply a 15% Margin of Safety (on the low end) you get a rough value of $152/share.
Currently, RICK trades at ~$69 which is close to the All-Time Highs for the stock. In the last ~6 months, RICK has choppily traded higher by 12%.
As with any valuation model, you could’ve applied other assumptions and ended up with different numbers. Everything is a ‘guesstimate’ when it comes to DCFs.
Verdict: Pass. RICK is trading well within the Margin of Safety and seems to be offering a good risk-reward benefit at these prices. With that said, RICK is currently trading near All-Time Highs and at historic valuation multiples for the company. NOT INVESTMENT ADVICE.
The Rookie Quick Fire Challenge - LINK HERE
Score 32.5 / 81
Overall Verdict: RICK doesn’t score well on the Rookie Quick Fire Challenge mainly because the checklist favors subscription/tech based companies. With that said, I like RICK’s business model and their future growth looks steady (not explosive though). Some things I’d dig deeper into are 1) the overall market opportunity and who RICK’s competitors are, 2) get more comfortable with the management team, and 3) see how RICK continues to navigate in a COVID world.
If you want to learn more about RICK, check out this interview on Yet Another Value Blog: