Q3 PR: Another Hobby Acquisition & Club Onyx Philly Closing

 RCI Hospitality reported SSS this week. The company posted SSS growth, however it is important to remember that reported SSS growth is not the same as organic growth. Management excludes all clubs that are closed and clubs that have been reconcepted from the calculation. That means that the reported SSS will consistently overstate actual performance. The company can report positive SSS while the business is actually declining organically due to location closures.

The economy is red hot and oil prices have shot up, so it is not surprising that many of the company's clubs are seeing low single digit growth, but if you factored in unit closures and struggling clubs that were reconcepted, the actual growth would be less than the reported 5% SSS growth.

More interesting than the SSS numbers, was the news of a new purchase and a new club closure:

Peoria Club Looks Like a Hobby Purchase      

Management announced a $1.5 million purchase of the Kappa Kabanna club in Kappa, IL (Peoria MSA).  Management has repeatedly said one off purchases of small clubs in new cities do not make sense unless they are able to build a cluster of clubs that allows them to leverage shared resources, so this  small purchase was surprising.

In fact, management just recently divested its Indianapolis club for $1.8 million after only a few years of ownership because it was too small and was inefficient to manage on its own.

“Separately, Rick’s Cabaret Indianapolis was sold…..The unit performed slightly better than break even in FY16 and was too far from other units to be managed effectively.”

Indianapolis, a $1.8 million club was too small and too far away from other clubs to be managed efficiently. However, an even smaller ($1.5 million) club in Peoria is going to be efficiently managed? The new club appears to be about a three-hour drive away from the new St. Louis clubs, too far away to share employees, management, or local ad spending.

So why would RCI management waste its time on a small, relatively immaterial club in the middle of no where Illinois? All other non-Texas acquisitions have been larger clubs (or clusters) in top tier cities (NYC, Miami, Minneapolis, Charlotte, St. Louis).

I believe the answer is because Peoria is Eric’s hometown: “Langan, the son of a police officer, had spent his childhood in Peoria, Ill.” -Link 

Similar to the failed attempt to enter the California market with a small club (post here), it doesn’t seem like the small Peoria club has much strategic rationale.

Club Onyx Philly Closing

As reader’s know, one of the main points of my short thesis is that night clubs are not indefinite life assets. I backed it up with data on the post here, and I believe this week’s press release helped further prove the point as management announced that Club Onyx in Philadelphia has been closed. RCI purchased the club for more than $9 million, and tried reconcepting it before ultimately shutting it down. I will be watching closely to see how much of the investment is recouped upon sale.

The press release also stated that total night clubs in operation at the end of the quarter was 38 versus 40 in the year ago quarter (even after the inclusion of the Kappa Kabanna acquisition) meaning three clubs, or ~8% of the units, were shut down over the last twelve months in a strong economy.