RCI is NOT the Only Buyer in Town

One of the many false narratives that new investors continuously repeat is that RCI is the “only acquirer” of strip clubs, and that is why they are able to find a continuous supply of clubs at bargain prices.

“RCI is the only buyer with the wherewithal to make the deal happen”  -Investor report

“As the only publicly traded company in the industry and the only entity with significant access to bank financing, we are the acquirer of choice.” –RCI quarterly conference call

As I recommend doing with every claim made by management or the uninformed bulls, look at the facts and data, not what management tells you.

The Facts: In a single recent issue of ED Magazine alone, there were four different chains that took out advertisements to highlight their interest in clubs: Spearmint Rhino, Penthouse, Déjà vu, and RCI. Plus Scores was advertising its services to manage and turn around owners' struggling clubs. With RCI’s recent acquisitions of only $1.5 million (Kappa) and $3.2 million (Hollywood), those sellers had many potential buyers. Clearly buyers are not nearly as scarce as management and bulls claim, especially on the small and medium sized clubs.

Bulls will say but what about the mega-clubs? There are definitely fewer buyers for the mega clubs in the $20 million+ price range, but RCI is still not the only buyer, and this reduced buyer pool has yet to translate into a clear benefit for RCI shareholders.

First, it is important make it cleat that RCI is NOT the largest club operator. Management repeatedly calls itself the only publicly traded strip club operator, implying that it has a big advantage in acquisitions, and many investors mistakenly take that to mean they are the largest operator. However, Déjà vu is the largest club operator in the world, with a reported 100+ units and more than $400 million in annual revenue (vs $145 million for RCI).

Secondly, RCI is only batting 50% on mega-deals. The $20+ million Las Vegas club was an absolute disaster, but the $25 million Tootsies acquisition was a success. The latest mega-deal, Scarlett’s in Miami, was only acquired last year and it is too early to evaluate.

Mega-deals pose their own challenges, as the sellers are receiving the mega price tag for a reason. They are large, very profitable clubs with high earnings that are run by sophisticated operators. There are going to be fewer expenses to cut and operational improvements for RCI compared to a small mom and pop club. As we saw in Vegas, when a club is already optimized and earning at high levels, there is a lot of downside risk and only minimal upside. At these mega-clubs throwing off $5m+ annually in earnings, you aren’t going to find many cash-strapped desperate sellers, instead the sophisticated operators are likely to be opportunistically selling into a hot market, or foreseeing challenges in their club or region.

Here are some of the club ads from ED magazine: