Report
Lynne Collier

Solid 3Q Results; Catalysts in Place for a Strong FY24/FY25; Valuation Remains Below Peers

Summary thesis. RCI reported another solid quarter, slightly exceeding our expectations. The company is well-positioned for accelerating earnings growth looking out to 2HFY24 and FY25 given the opening of new clubs, Bombshells, and its first casino properties in Central City, CO, as well as our expectation of improving same-store sales (SSS). With RCI’s industry-leading growth metrics and margins (40%+ for nightclubs), RCI’s valuation remains below peers on both an EV/EBITDA and P/E basis (see page 3 for valuation analysis). Third-quarter results were slightly ahead of our projections. Adjusted EBITDA was $22.7 million versus our estimate of $22.5 million. On an adjusted EPS basis, RCI reported $1.30, modestly exceeding our estimate of $1.29. Nightclub revenues increased 14% Y/Y. The Nightclubs segment remained strong, with revenues from the Heartbreakers, Baby Dolls, and Chicas Locas club acquisitions earlier in FY23, partially offset by an SSS decline of 7.3%, lapping an increase of 4.8% in the year-ago period. Bombshells revenues declined 8.8% Y/Y. Revenues for the Bombshells segment totaled $14.4 million versus $15.8 million in the year-ago period. Key factors were $1.8 million from the acquisitions of Bombshells San Antonio and Grange Food Hall earlier in FY23, which partially offset an 18.2% SSS decline. Consistently strong FCF drives growth + share repurchases. RCI generated free cash flow of $14.3 million, similar to the previous three quarters. This has created a virtuous cycle of growth and has allowed for opportunistic share repurchases when the FCF yield reaches 10% or higher. As of the conference call date of August 9, the company had repurchased 10,440 shares at an average price of $69.48 in 4Q23. Fine-tuning our FY23 and FY24 estimates. For FY23 and FY24, we are adjusting our revenue estimates to $295.2 million (from $294.8 million) and $333.8 million (from $336.1 million), respectively. Due primarily to higher investment spending as RCI positions itself for accelerating organic growth, we are lowering our adjusted EPS estimates to $4.99 (from $5.10) and $5.05 (from $5.72) for FY23 and FY24, respectively.
Underlying
RCI Hospitality Holdings

RCI Hospitality Holdings is a holding company. Through its subsidiaries, the company is engaged in the hospitality and related businesses. The company's reportable segments include: Nightclubs, which owns and/or operates adult nightclubs serving primarily businessmen and personnel, and also owns and operates a Studio 80 dance club; and Bombshells, which owns and operates restaurants and sports bars under the brand name Bombshells Restaurant & Bar. The company's subsidiaries own a media division, including the trade magazine serving the adult nightclubs industry and the adult retail products industry. The company also owns an industry trade show, an industry trade publication and various industry and social media websites.

Provider
Water Tower Research
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Analysts
Lynne Collier

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