On Wednesday, Benzinga had the opportunity to sit down with RCI Hospitality Holdings Inc RICK CEO Eric Langan to discuss the business, strategic visions, and the company’s outlook.
Before we get into the discussion, here’s a little insight.
Founded in 1983, RCI Hospitality and its subsidiaries own and operate around 40 upscale gentlemen's clubs and restaurants. After a successful merger in 1998, Langan was named vice president of operations and would eventually take over the company as CEO.
Some of the major brands under RCI’s umbrella are,
Rick's Cabaret - nine total locations across five states
Bombshells - 11 total locations
Tootsie's Cabaret - one location in Miami, Fl
Tootsie’s is the most recognizable brand due to mega-rapper Drake and his fondness for the club.
So, Eric, tell us how you got here.
The real story starts around 2004 — I decided the only way this company would work as a public company was to open a location in New York. We opened that location in September of 2005, and that’s when we started getting attention from Wall Street, that’s when we started becoming a real play.
In 2007, we bought Tootsie’s cabaret –– a $25 million acquisition that was one of the largest [our] industry had seen. We bought $8.8 million in EBITDA for $25 million, a very well-priced acquisition for us. We made 11 acquisitions that year, mainly using equity; this drove the growth story.
Later in 2015, a group from California came out and said, ‘look, we’ve got a plan for you, we want you to check it out and see what you think.’
The plan turned into a renewed capital allocation strategy named 'Project do nothing.'
When I looked into it, [project do nothing] it was basically a much shorter version of our existing allocation strategy, it said,
‘Your free cash flow yield was +20% on your stock, why are you making acquisitions? Why aren’t you just buying back your stock? You’ve generated all this cash and not allocating it properly, so the market is punishing you.’
This made a lot of sense to me; we adopted this strategy and built on top of it.
How much more successful do you see RCI in the next five years?
Our goal is to grow 15% per year; obviously, we’ve been exceeding that, so my personal goal is 20% yearly. This year, we’ve got around 30% growth. With all the acquisitions in front of us, I think we can also exceed 30% growth in 2023.
I don’t see a slowdown until maybe the end of August of this year. I think people are going to party through the summer no matter what; I think people are going to travel no matter what. We’ve been locked down for too long with Covid. I don’t care what the Fed does, or inflation does, I think people will spend now and worry later.
Did you see a boost in sales/growth after Drake’s song came out?
It’s made Tootsie’s very popular, [the club] is doing very well because of it, for sure. We have a big sign on the second floor VIP that says 'shoulder rubs at tootsie's' – anytime a big star like Drake mentions our clubs, it definitely helps. It’s publicity you can’t buy, it’s natural.
What does RCI do well right now?
Well, I’d say it's the management of our capital, but the best thing RCI does is take care of our people, and they take care of the business. We ask our people to [ask themselves] what is best for the company? And we ask our upper management to say, what is best for the people?
When we combine those two things, it creates a powerhouse in our industry. A lot of other club operators are learning and mimicking our policies — they have to, though. Otherwise, they’d be working for us.
What can RCI do better right now?
With 2,900 employees, we have to stay quick and nimble. We have to stay open to change, which is one of the problems larger companies have.
If there is anything that we can do better, it is staying open-minded to new ideas. Make sure as new ideas are made, they’re passed up the chain of command, paid attention to, and listened to. We’ve got to make sure great ideas aren’t lost in the bureaucracy of a large company.
How did you gain buy-in from stakeholders as the organization evolved?
Through traditional investor relations is how we’ve always done it. It’s been somewhat of a rocky road for us — what happens is, we get all the value guys to come in and buy our stock, they think it's cheap. We’ll start making some acquisitions, and then we get the momentum guys who run the stock way up, then the value guys start selling, and the momentum guys get bored. The stock goes down, value guys come back in.
Now, we’re using Twitter spaces, basically taking our story directly to the people. Forget the financial advisors, forget the investment bankers.
I’d like to make sure our stock goes to a nice steady price, so we have a real currency for acquisitions. If we can get the currency right, we can use that to purchase other large operators and build solid consolidations.
There are about 500 out of the 2,200 clubs that fit in our wheelhouse. We currently own 50 of them, so about 10% — if we can bring that up to around 40%, you’re talking about a multi-billion dollar hospitality company.
Is there anything that you can break to me here?
We’re hosting four parties during NFTNYC [June 20-June 23]. Every night, at Rick’s on West 33rd Street from 10:00 pm, to 1:30 am. We’re going to pick a mint date for our new NFT coming out, which will act as a benefits program that will basically get you and a friend access to any of our 36 liquor locations in the country.
They’re randomly generated and have different rarities. You could even win a trip with me to the next Super Bowl in February. There is a unique utility behind this NFT.
Do you think your stock is undervalued?
Well, look at it this way — our stock traded around $25 while we were doing about $130 million in revenues and about $30 million in free cash flow.
Today, we’re right around $50, and we’re doing $260-$280 million in revenues, and between $50-$60 million in free cash flow, maybe even more than $60 million. We’re buying back stock, we’ve got a stock buyback plan in place, we’re in the markets every day these days and probably will be unless the stock exceeds $65 per share.
Price action: Shares of RCI Hospitality Holdings Inc were up 3.91% at $51.87 on Wednesday, according to Benzinga Pro.
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