RCI Hospitality: Is It Time To Buy?

seekingalpha06-17

RCI Hospitality stock has dropped 30% due to falling same-store sales.The stock is now priced at under $44 per share, with a 12.22x multiple to annualized fiscal 2024 second-quarter EPS.RICK recorded ...

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The adult nightclub and restaurant owner is now changing hands for under $44 per share, a 12.2x multiple to its annualized fiscal 2024 second-quarter EPS. This was $0.90 per share, beating consensus but down a substantial 50 cents from EPS of $1.30 in the year-ago comp. I briefly owned a position in RICK in early 2023 but sold this off in response to the dip in SSS that has catalyzed a sustained fall in the company's value. Data by YCharts RICK is now trading at a $430 million market cap, its lowest level in three years, to open up the potential to build back a position at a markedly lower average cost. The company generated fiscal 2024 second-quarter revenue of $72.3 million, up 1.1% over its year-ago comp and a beat on consensus by $290,000. SSS for nightclubs was down by 5.7% with the dip for Bombshells quite material at 20.5%, around $2.7 million. Losing a fifth of SSS portends more structural headwinds to RICK from Bombshells and means the unit won't be a positive contributor to the company's value until this trend is reversed. RCI Hospitality Fiscal 2024 Second Quarter Sales Presentation Bombshells, Casinos, And Free Cash Flow RICK's Bombshells restaurants offer a similar dining concept to Hooters with a menu heavy on wings, burgers, pizza, and ribs. There are currently 13 Bombshells in operation, all located in Texas, with another two being developed and set to open in 2024. The company stated during its fiscal 2023 fourth-quarter earnings call that they were looking for external capital through a partial sale to fund the growth of the concept to between 80 and 100 restaurants. This growth has so far been funded by RICK's free cash flow, which was previously earmarked for its roll-up strategy and to fund share buybacks. Data by YCharts Critically, FCF has been dipping from its 2022 high with $3.17 million in FCF generated during the second quarter, down from $7.3 million generated in the year-ago comp. The mix of the fall in FCF and the capital expenditure required for new Bombshells and the Central City, Colorado casinos has meant RICK's prior capital return strategy of aggressive share buybacks tucked within a peppercorn dividend strategy has had to be pared back significantly. Ideally, RCI should be heavily buying its stock at these levels, but the company only bought back 27,265 shares during the second quarter. This was for $1.5 million at an average price of $55.23 per share. RICK's weighted average shares outstanding actually increased 0.9% year-over-year on the back of a prior stock acquisition of adult nightclub Baby Dolls-Chicas Locas. Data by YCharts RICK achieved an incredible feat pre-pandemic via its sustained share buyback scheme, with its capital return strategy now essentially flatlined as net profit experiences some quarter-on-quarter weakness. This margin was 1.07% during the second quarter, the lowest level since 2018 and a material dip from a post-pandemic peak north of 20%. RICK's business expansion into Bombshells has been useful in growing and diversifying its revenue base, but it has come at the cost of markedly reduced profitability. Data by YCharts Hence, with management guiding for a further expansion of a critically unprofitable and generally unremarkable business, I'm not enthusiastic about a position in the company. Bombshells does not currently occupy an advantageous position in its niche as reflected by declining SSS and broader profitability. This comes as RCI prepares for another lurch to the unknown with its casinos. The company last declared a quarterly cash dividend of $0.06 per share, unchanged sequentially and $0.24 per share annualized for a 0.52% dividend yield. Risks And Multiple RCI Hospitality Fiscal 2024 Second Quarter Sales Presentation RCI took on a $20 million loan at an 8.25% fixed rate during the quarter to expand its liquidity, with a net debt balance of $248.6 million as of the end of the second quarter. The company is now trading at a 1.37x multiple to sales, its lowest level since 2021. However, it's important to view this multiple on a 10-year basis, with the company's multiple now in line with its pre-pandemic average. Data by YCharts  This could move lower if profitability continues to dip versus its pre-pandemic average. The risk for bears here is RICK continues to generate positive free cash flow and a deal to sell a stake in Bombshells at a healthy multiple to the sales of the unit could spark a reversal of the current downtrend. An interest rate cut from the Fed would also generate more risk-off sentiment, which would be a plus for the multiple. I don't think the ticker is a clear buy here though, so will rate it as a hold.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.27.0","shortVersion":"4.27.0","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2444199012"}