Rick’s Cabaret (RICK $8.32) announced FY 2010 results last week. On the surface, it was not good, but behind the scenes, business is improving. RICK could get back to its winning ways as the economy, and consumer discretionary income, recovers in 2011.
RICK operates a chain of 21 upscale “strip” clubs in major cities, such as NYC, Miami, Philadelphia, New Orleans, Las Vegas, and seven core locations in Dallas. Management utilizes a roll-up business model to expand its locations. The only other publically traded competitor, VCGH , is being taken private by its CEO. While sin and vice are uniquely profitable sectors, the recession hit Rick’s hard on several fronts. An expansion into the Las Vegas market just as the economy peaked has proven to be ill-timed, but the balance of their business plan seems to be moving ahead.
Management took a $20 mil write-down of assets in the most recent quarter, mainly due to revaluation of the Las Vegas club after two years of operating losses. However, without the write-downs, ongoing earnings for the 4th quarter were $0.19/shr.
Revenues for FY2010 came in at $83 mil, up 10% from $78 mil in 2009. Without the write-down, eps were $0.66, down slightly from $0.69 last year. Gross margins were stable in 2010 at 68.1% and EBITDA was $18.4 mil, up 8% y-o-y.
2011 should bring improvements to both top line growth and bottom line expansion. October and November were reasonably stable for revenues and profits. 4th quarter revenues were up 10%, with alcohol and food revenues leading the way. After 2 years of losses, the Las Vegas club is starting to be EBITDA neutral, or a bit positive, as the local economy slowly improves. The number of Dallas clubs continues to expand with the opening of a much-anticipated location, and its close proximity to DFW Airport and the sports complexes. Management has a goal of acquiring one club a quarter, and recently announced the addition of Indianapolis to its stable. Indianapolis was acquired at about 5.5 times earnings.
After over-promising and under-delivering for several quarters, management stopped offering guidance. Consensus for FY2011 is $88 to $90 mil in revenues and $0.75 to $0.78 in eps. The surprises in 2011 should be to the upside as Las Vegas’ profitability begins to reverse course, as the Dallas clubs expand, and as more locations are added over the year. Same store sales increased by 7% in 2010, and should be reviewed as acceptable growth for a high-margin retailer in these economic times.
RICK has a nice pile of cash for continued expansion after a secondary offering earlier this year. On the balance sheet, the company has $19 mil in cash, $36 mil in lt debt, and $9 mil in st debt. There are 10.4 million shares outstanding and RICK has a market capitalization of $85 million.
For more information from a previous article see here.
For the company's investor website see here.
RICK has the potential to earn north of $1.00 a share with busy club traffic and a profitable Las Vegas operation. Earnings growth could be in the range of 15% and higher. At its current market price, shares are trading at a PE of 10.6 and 1 times sales. This may seem pretty reasonable based on stagnate 2009 and 2010 earnings, but undervalues the potential of a normalized economy, along with club expansion.
Patient investors who believe consumer discretionary spending is improving, albeit a bit choppy, should be well rewarded with RICK potentially reaching $12 to $15 a share with earnings closer to $1.00.
As always, investors should conduct their own due diligence, should develop their own understanding of these potential opportunities, and should determine how it may fit their current financial situation.
Disclosure: I am long RICK and have been a shareholer since 2007