December 8, 2022, ST. PETERSBURG, FL – Water Tower Research (www.watertowerresearch.com) has published an Initiation of Coverage Report on RCI Hospitality Holdings, Inc. (NASDAQ: RICK) titled, “Free Cash Flow Strategy Provides Differentiation and Long Runway for Growth”. The report can be accessed here.

With more than 60 locations, RCI Hospitality Holdings, Inc., through its subsidiaries, is the country’s leading company in adult nightclubs and sports bars/restaurants. Clubs in New York City, Chicago, Dallas/Fort Worth, Houston, Miami, Minneapolis, St. Louis, Charlotte, Pittsburgh, and other markets operate under brand names such as Rick’s Cabaret, XTC, Club Onyx, Vivid Cabaret, Jaguars Club, Tootsie’s Cabaret, and Scarlett’s Cabaret. Sports bars/restaurants operate under the brand name Bombshells Restaurant & Bar. The company was founded in 1983 and went public in 1995. The company has three operating segments, including Nightclubs, Bombshells, and Other, which primarily includes its media group. As of the fiscal third quarter ended June 30, 2022, the revenue breakdown consisted of 77% attributable to the clubs, 22% for Bombshells, and less than 1% in the other segment category. RCI is the only publicly traded company in the adult nightclub business.

We are initiating coverage of RCI Hospitality Holdings, Inc. as there appears to be a disconnect between the company’s strong fundamentals and valuation. Shares of RCI are currently trading at 10.4x adjusted EBITDA and 15.7x EPS, below restaurant industry peers of 12.0x and 19.0x despite significant FCF generation, strong revenue and earnings growth, and industry-leading margins. The company’s capital allocation strategy, which focuses on generating free cash flow has proven successful and fuels the company’s organic and M&A growth strategy in addition to share repurchases. We forecast FCF of $60.4 million in FY23, nearly double the $33.3 million generated in FY19. Management is a strong steward of cash flow, implementing tight financial controls, and discipline around its capital allocation strategy.

Further, RCI has elevated its nightclubs by offering consumers a modern, immersive entertainment experience and a sense of community that appeals to both men and women. We expect the company to systematically acquire adult nightclubs over the next several years that meet management’s strict criteria. Of the 2,200 licensed locations in the US, management has identified approximately 500 that are attractive for purchase, with the intention of adding 150 locations over time. The clubs generate industry-leading margins of more than 40% With respect to Bombshells, the brand is poised for considerable growth, generating industry-leading average unit volumes (AUVs) in the range of $5-7 million and targeted cash-on-cash returns of 25-33%. We are at an inflection point for both businesses and could see the company potentially double its adjusted EBITDA over the next three to four years as growth accelerates and cash flow generation continues.

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