Strip Club Owner RCI Hospitality's 'Extremely Attractive' Business Model

The sole public company in the gentleman’s club sector has room to grow — $1 at a time.

RCI Hospitality Holdings, Inc. RICK, the owner of franchises such as Rick’s Cabaret, Club Onyx and Bombshells, was initiated Friday by WestPark Capital with an Outperform and $29 price target.

RCI owns 37 adult entertainment venues and is actively looking to buy more of them, according to WestPark.

With RCI having the access to financing that a public company enjoys and the ability to acquire properties in a “highly fragmented” industry, WestPark analyst Ishfaque Faruk is projecting a 75-percent upside to the company’s shares in the next year.

RCI’s management is seeking to purchase clubs at a valuation of three-to-five times their EBITDA, Faruk said in a note. About 500 clubs out of the 4,000 in existence in the United States fit RCI’s M&A profile.

Due to the restrictions municipalities place on adult entertainment venues, many of the clubs owned by RCI’s enjoy “locational monopolies,” Faruk said. This barrier to entry in the sector gives RCI a “durable competitive advantage,” he said.

A Reason Not To Charge Lap Dances

RCI’s revenue drivers include alcohol — 56 percent of its revenue in 2016 — as well as convenience fees, which include charges as high as 20 percent to pay for a lap dance using a credit card, Faruk said.

The entertainers at RCI venues are independent contractors, with the exception of one location in Minnesota, freeing the company from numerous overhead employment costs, Faruk said.

“We believe this to be a key advantage of RICK’s adult entertainment business, one that makes its business model extremely attractive for shareholders.”

Dancers at RCI venues typically pay a stage fee between $70 and $120 for the right to entertain at the venues, Faruk said.

At the company’s 13 BYOB clubs, cover charges range between $20 and $50, and RCI generated 38 percent of its income last year from service-oriented revenues, according to the WestPark note.

Management Focused On Cash, Share Count Reduction

RCI Hospitality CEO Eric Langan’s objective of growing free cash flow by 10–15 percent annually will be “extremely beneficial” for long-term investors, Faruk said.

RCI bought back more than $7.3 million in shares in 2016 and is expected to continue reducing share count using its free cash flow, according to WestPark — and in turn driving EPS growth.

A Growth Story In The Lone Star State

While 85 percent of RCI’s revenue comes from topless venues, the company has started a restaurant/sports bar chain in Texas, Bombshells, that “can be a key contributor to the company’s long-term revenue and EPS growth,” Faruk said.

The first of the military-themed restaurants opened in Dallas in 2013, according to WestPark.

Three new Bombshells locations are planned in fiscal 2017. RCI plans to open 100 of the restaurants — both company-owned and franchised — nationwide in the next five to 10 years.