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Strip clubs/RCI: surge raises ethical issues

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An offshoot of the sex industry is responsible for one of the biggest turnrounds of the past year. Shares in blandly titled RCI Hospitality have jumped by more than 700 per cent since late March 2020. RCI is best known as the owner of strip club chain Rick’s Cabaret. Its sales are surging.

The company’s chief executive has noted an “exuberance” among American customers. It is matched by exuberance in RCI investors. These include funds of BlackRock, Vanguard and State Street, according to S&P CIQ and Bloomberg.

Three quarters of RCI’s revenue comes from selling food and alcohol. The remainder is classified as “entertainment services” which captures customers paying, say, $5,000 for a private room. For roughly every dollar of total sales, 20 cents drops to the bottom line as free cash flow.

In the US there are some 2,200 strip clubs mostly owned by single proprietors. RCI has the firepower to absorb many of these.

Investors goggling at potential returns should consider the widely held view that the industry is exploitative. The objectification of women is one concern. Pay has been another. In 2015, the company settled a $15m lawsuit with 2,000 Rick’s Cabaret dancers who claimed that they had been cheated out of earned wages.

RCI hopes customers and investors will see its military-themed sports bar format, Bombshells, as more family friendly. But its core business is the one that drives profits. With debt financing lined up and on the shelf, RCI can acquire individual strip clubs for what it says is a modest three to five times ebitda.

M&A is the only way to grow consistently. Zoning regulations prevent organic growth for adult entertainment. RCI is well placed as a consolidator. Last month, the $81m cash-and-stock acquisition of a Denver-based chain sent RCI shares up by 15 per cent.

RCI’s enterprise value remains under $1bn with average revenue of just $5m of revenue per week. Investors indifferent or reconciled to the big ethical issues raised by the sex industry are engaging in an arbitrage on public morality.

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