RICK - RCI Hospitality: The Dip In Same-Store Sales Is Of Concern

2023-08-31 09:32:04 ET

Summary

• RCI's sales multiple has fallen to trade close to a 3-year low as market fears around flagging same-store sales drive underperformance.
• The company recorded a beat on revenue for its recent fiscal 2023 third quarter, but operating margins continue to experience pressure.
• RCI's expansion of the lower-margin Bombshells is driving a broad repricing of its overall risk profile.

RCI Hospitality ( RICK ) is down 28% year-to-date in a long pullback from recent highs that have dragged down the company's price-to-sales multiple to just over 2x, amongst 3-year lows. The sustained dip has seemingly been strange, with RCI recently reporting dual beats on revenue and earnings with its portfolio of adult nightclubs and Bombshells, its military-themed chain of restaurants and bars. Is the ticker a buy? It depends. RCI reported revenue of $77.1 million for its recently reported fiscal 2023 third quarter, ending on June 30. This was a 9% growth over its year-ago figure and a beat by $149,800 on consensus estimates. However, bears would be right to flag that revenue growth is largely acquisition-driven and that same-store sales dipped markedly.

The Houston-based company flagged the Texas summer heatwave as hurting sales during its third-quarter earnings call. Management also flagged an uncertain economy and vacation travel as culprits for what was a 9.6% decline in consolidated same-store sales. Bombshells led the dip with a huge 18.2% fall, whilst same-store sales for nightclubs fell by 7.3%. This drove weakness in GAAP earnings, which fell to $0.96 per share , a $0.52 decline from $1.48 per share in RCI's year-ago quarter. However, non-GAAP EPS which excludes several line items including stock-based compensation, amortization of intangibles, and impairment of assets, came in at $1.30 per share. This beat consensus estimates by $0.04 but still fell by $0.30 from its year-ago comp.

Operating Margins Dips

RCI currently trades at a $616 million market cap and a 12.36x price to trailing 12-month non-GAAP EPS multiple. This is around 4.5% lower than its peer group median of restaurants in the consumer discretionary sector. The collapse of same-store sales for Bombshells has not come as a shock for bears. Breastaurants are fundamentally a niche, and whilst not inherently incompatible with a wider business that owns strip clubs, Bombshell is not nearly as profitable as RCI's nightclubs.

RCI's third quarter operating margin was 20.1%, down 890 basis points from 29% in its year-ago comp. This dip was led by Bombshells, whose operating margins have been in decline since the third quarter of 2021. Nightclubs have also seen a weakening of margins, but this still sits at around 3x the operating margin of Bombshells. Critically, Bombshells saw total revenues fall by 9% year-over-year to $14.4 million from $15.8 million in the year-ago comp, despite two more Bombshells locations contributing to revenue.

Hence, the market is not entirely confident about the continued expansion plans for Bombshells, which is set to see three new clubs open in RCI's fiscal 2024. What's the bullish rebuttal here? That RCI's year-over-year weakness was mainly driven by extreme one-off factors, and the Bombshells segments should stage a recovery next year. The company also continues to generate positive free cash flow, with this figure coming in at $14.3 million for the third quarter. Whilst down from $18 million in its year-ago comp, RCI was able to use this to power its repurchase of 10,440 common shares. The company has $18 million left on its stock buyback program and intends to purchase shares when its FCF yield is in excess of 10%.

RCI's Capital Return Strategy Slows

The pullback of RCI's common shares has overlapped with a reversal of the marked decline in its average diluted shares outstanding. This figure was 9,430,225 as of the end of the third quarter, up from 9,389,675 in its year-ago period, with the company's issuance of shares for the buyout of adult nightclubs driving the increase. RCI also pays a dividend and last declared a quarterly cash dividend of $0.06 per share , in line with its prior payment and for a 0.37% annualized forward yield. This token dividend is not entirely aligned with their capital return strategy and was initiated for the ticker to be included in relevant dividend-based indexes. Hence, shareholders should not expect major movement with this.

Whether or not RCI is a buy will depend on the strength of its segments going into the comedown of the most aggressive period of monetary tightening in decades. Whilst the US is expected to skirt a recession, the company's already flagging year-over-year sales comps heighten the sensitivity of its operations going into a more uncertain macroeconomic period. RCI has a strong pipeline of new locations coming online through to the end of its fiscal 2024 with a Rick's Cabaret Steakhouse & Casino and a Bombshells Sports Casino set to open in Central City, Colorado. Fundamentally, the ticker has opened up operational risk beyond the core business of rolling up highly cash-generative nightclubs. RCI is a hold against this.

For further details see: