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Should You Hold RCI Hospitality (RICK) for the Long Term?

Greystone Capital Management, an investment management company, released its second-quarter 2023 investor letter. A copy of the same can be downloaded here. In the second quarter, the return for separate accounts managed by the firm ranged from -0.7% to +8.0% and the median account returned +2.6% net of fees.  Year-to-date, the Median account returned +6.4%, net of fees. In comparison to S&P 500’s and Russell 2000’s quarterly returns of +8.7% and +5.2% and year-to-date returns of +16.9% and +8.1%, respectively. In addition, please check the fund’s top five holdings to know its best picks in 2023.

Greystone Capital Management highlighted stocks like RCI Hospitality Holdings, Inc. (NASDAQ:RICK) in the second quarter 2023 investor letter. Headquartered in Houston, Texas, RCI Hospitality Holdings, Inc. (NASDAQ:RICK) owns and operates clubs and restaurants. On September 20, 2023, RCI Hospitality Holdings, Inc. (NASDAQ:RICK) stock closed at $61.07 per share. One-month return of RCI Hospitality Holdings, Inc. (NASDAQ:RICK) was -6.91%, and its shares lost 5.89% of their value over the last 52 weeks. RCI Hospitality Holdings, Inc. (NASDAQ:RICK) has a market capitalization of $575.266 million.

Greystone Capital Management made the following comment about RCI Hospitality Holdings, Inc. (NASDAQ:RICK) in its Q2 2023 investor letter:

"RCI Hospitality Holdings, Inc. (NASDAQ:RICK), a top five holding since inception, continues to chug along, integrating recent acquisitions, evaluating M&A deals, and advancing new projects, all of which should have the effect of boosting revenues and free cash flow moving forward. When compared to similar businesses and peers in the restaurant space, RICK’s unit economics are tough to match. Their food/beverage mix skews significantly towards higher margin alcohol, nightclubs boast 40% operating margins, they own the real estate for all their clubs and restaurants, they earn 20-33% cash on cash returns through M&A deals, and Bombshells unit volumes remain attractive (while same store sales numbers have likely reached a trough).

Early in Q3, RICK disclosed their sales figures for both Nightclubs and Bombshells, which were admittedly weaker than I expected and represented the first same stores sales decline following nine straight quarters of positive figures. Up until this point, RICK’s operating results have been largely insulated from both the economy and broader restaurant sector, but a continuation of this trend of same store sales declines would not bode well for the stock. Projected results through 2023 may prove to be unfavorable, but I believe there are levers to pull in order to offset any softness in near term results. Short-term bumps in the road will ultimately pave the way for RICK to continue strengthening the business and setting themselves up to grow earnings power over time.

During periods of share price weakness, shareholders have been rewarded with strong capital allocation in the form of large share buybacks, and M&A deals, which typically accelerate across the industry during periods of economic weakness. As a reminder, RICK completed their largest deal to date (the 11-club Lowrie acquisition) in mid-2021, following the rough year and a half period when many operators were forced to shut down or exit the business. As another reminder, RICK is aiming to deploy $200mm per year during the next few years to continue consolidating the industry with the goal of doubling the company’s EBITDA profile from $100mm to over $200mm. These levers being pulled will serve to grow the company’s earnings power now and into the future, at which point the current valuation will look even more favorable.

We also remain invested alongside a smart owner-operator with plenty of skin in the game and capital allocation prowess. I believe there are multiple ways our downside is protected, and I continue to have a clear eye toward what the company can accomplish during the next few years."

Photo by Syed Ahmad on Unsplash

RCI Hospitality Holdings, Inc. (NASDAQ:RICK) is not on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 14 hedge fund portfolios held RCI Hospitality Holdings, Inc. (NASDAQ:RICK) at the end of second quarter which was 13 in the previous quarter.

We discussed RCI Hospitality Holdings, Inc. (NASDAQ:RICK) in another article and shared the list of small-cap stocks with the highest upside potential. In addition, please check out our hedge fund investor letters Q2 2023 page for more investor letters from hedge funds and other leading investors.


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Disclosure: None. This article is originally published at Insider Monkey.