Rick's Cabaret International F1Q08 (Qtr End 12/31/07) Earnings Call Transcript

Rick's Cabaret International Inc. (RICK)

F1Q08 (Qtr End 12/31/07) Earnings Call

February 12, 2008 4:30 pm ET

Executives

Allan Priaulx - IR

Eric Langan - President and CEO

Analysts

Eric Wold - Merriman Curhan Ford

David Vorr - Montgomery Street Research

Jamie Clement - Sidoti

Chuck Lipson - CSL Associates

Scott Kolman - Credence Capital Management

Peter Siris - Guerilla Capital Management

Presentation

Operator

Greetings and welcome to the Rick's Cabaret International first quarter 2008 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Allan Priaulx, Investor Relations Officer. Thank you. You may begin.

Allan Priaulx

Thank you, Joe. I just want to remind everybody that our Safe Harbor Statement is posted at the beginning of our PowerPoint presentation. It reminds you that you may hear or see forward-looking statements that involve a number of risks and uncertainties. I won't go into the entire statement on this call but do urge you to read it.

I would also like to remind you that our press release is posted on our website www.ricks.com, as is the PowerPoint presentation itself. And for any of you who are in New York City tonight please join us after the conference call from 6 pm to 8 pm at Rick's Cabaret, 50 West 33rd Street, where we're having a Due Diligence Ball, where you get a chance to look at our operation and up closing in person.

Now it's my pleasure to present to you our President and CEO, Eric Langan. Eric?

Eric Langan

Thank you, Allan. Good afternoon everyone. I'll begin with an overview of today's presentation. We'll be reviewing the first quarter '08 results. We look into the drivers of increase of revenues, the effects of the new clubs on our income, our acquisition update, we'll be review our '08 guidance, and we'll also review our 2009 outlook.

The first quarter of 2008 was fantastic quarter for us. Our net income of $1.78 million, up 405% over the last year with earnings per share of $0.26 versus $0.07 last year, our revenue increased to $10.95 million, up 56% over 2007 and operating cash flow was up 217% in the first quarter to $2.26 million. The main driving factors behind the revenue increases, of course, our club operations, which increased the gross revenue to $10.78 million.

Tootsies was the real star of this quarter even though it was only included in the December sales, so one-month out of the quarter. When we brought Tootsies, the revenues were based on a $1.5million of monthly income -- our monthly revenues. In December, we exceeded that actually breaking $2 million in revenues from Tootsies. It's been a fantastic location for us and as you can see from our January sales release, the sales of Tootsies continued into January.

New York City continued to have record revenues of breaking a $1 million marks in December for the firs time, since opening in September 2005. We've been very happy with the New York Location and we believe they'll continue to run year-over-year record numbers for the rest of this fiscal year. And maybe in the next year, we'll get to the end of this year and revisit that.

The Fort Worth location has been very accretive for us. The new VIP room is now open. And we expect to see increased results from that location as well, going forward. Same club same period revenue of $7.54 million, up 13% and income before income taxes exclusive of corporate overhead $2.16 million, up 84.6% from the $1.7 million of pervious year.

Our acquisition update. Currently, we have three letters of intent signed. We believe that our acquisition financing plans remain on course even though with the market turmoil and the current credit crisis in the U.S. Also, we are moving forward on the Philadelphia acquisition, now buying 100%. We expect to close that transaction in the second quarter and we have actually begun the build out for the steakhouse and the sports bar at that location.

As our acquisition strategy moves forward, we will continue to be very choosy in our locations. We're targeting profitable locations in major metropolitan areas and locations that contribute to our national branding program to increase the exposure to the Rick's Cabaret brand and the Club Onyx brand.

As most of you've probably seen in the recent week, we have hired Lonnie Hanover, who is adding to our public relations. We've been mentioned on the Howard Stern Show several times in the past week and we believe we'll continue to see additional exposure from that relationship and that will help continue to build up the Rick's Cabaret brand.

We're looking for clubs with $10 million plus in sales, but we'll acquire smaller clubs if they have strategic value either in our branding process or in the ability to be in markets that have limited competition. We'll continue to give the combination of cash, debt and stock to make these acquisitions.

Moving forward to guidance for 2008, we're comfortable and raising our revenue guidance to $55 million for fiscal year 2008. Our net income of $8.4 million that we believe will contribute $1.10 per share to our earnings per share for fiscal 2008.

Our calendar 2008 revenue we believe will be $61 million with net income of $10.4 million and earnings per share of $1.35. This guidance has not assumed any additional acquisitions. Further acquisitions, if closed, we anticipate will add an additional $0.15 for these numbers. And our outlook for '09 continues to be on a run rate of $100 million going into the beginning of fiscal '09 and earnings per share of $2 on an ongoing basis.

As we close our acquisitions and continue to expand our acquisition pipeline, we'll give further outlook guidance for 2009. And this will conclude the formal part, I would like to once again invite everyone to come down tonight to Rick's Cabaret in New York at 50 West 33rd. And at this time we'll take any questions that people may have.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). Our first question is from Eric Wold with Merriman Curhan Ford. Please state your question.

Eric Wold - Merriman Curhan Ford

Hey, good afternoon guys.

Eric Langan

Good afternoon. How are you?

Eric Wold - Merriman Curhan Ford

Good. A couple of questions. One, on the Miami club, Tootsie's gave you $2 million in December and January. Where would you attribute the main causes to that and how sustainable you see that? Can you give us any seasonality there, just kind of could it go up from here throughout the year or it's just kind of a good level of think about as an annual number?

Eric Langan

Well, I mean, It's too early to tell, to be honest with you. We do believe that we'll stay this level. We are told by the locals that the actual season begins in Miami about mid January and runs through mid June and the December is actually not a really good month in Miami because of Christmas and holidays and a lot of the northern travelers don't actually comedown and settle down until mid January.

We've seen very steady numbers with not a lot of increase obviously sporting events and fights have affected the numbers on a week-to-week basis as well as there is continues to be some good fights out there whether it's ultimate fighting challenge or boxing and different sporting events the Super Bowl was fantastic for the club for any of those types events. I think we'll continue and even if we've a month where there is absolutely no events we may have a little effect but it seems to be very steady and still growing.

Eric Wold - Merriman Curhan Ford

And what do you expect kind of if you look at when you acquired the clubs you are doing about by $80 million and now it's on a run rate doing about say 24 plus. Where you going to give the flow through a kind of the contribution margin that incremental revenue down to your bottom line?

Eric Langan

Probably after taxes and cost of goods sold up to 70%. It's really been an unbelievable location for us. We’re able to go in and put our VIP systems in The Miami Herald had a really nice article saying that Rick's was coming to town. A lot of people saw that article, word spreads that very rapidly that Rick's was coming and taking over Tootsie's that Tootsie's was going to be changed to a Rick's Cabaret. We've actually kept the Tootsie's name -- it's a tradition been in business there for over 17 years -- and so everyone knows it's owned by Rick's, which has been fantastic. And it's got a lot of quality girls in, it's got a lot of quality customers in that are used to the Rick's Cabaret way of doing things the customers service, how the entertainers are treated and I think we've seen a real nice increase in the revenues from them.

Eric Wold - Merriman Curhan Ford

Okay. And then on the -- I know, you probably won’t give a lot of information on the 3 LOIs that are out there, but maybe beyond that including that how we want to phrase it. Are these acquisitions are the acquisitions you look to do this year more likely to be brand new markets you were not in before or not in there right now or would some of them be filling locations?

Eric Langan

Little bit of combination. We're looking at new markets we're definitely looking to expand the Rick's brand. That's our part of the strategy with hiring Lonnie -- to get ourselves more national exposure through the Stern Show and other media that Lonnie is introducing us to. So, it's a little, to answer your question, honestly, we're looking at some of the markets that we're in as well as new markets.

Eric Wold - Merriman Curhan Ford

Okay. And then lastly for Howard -- but lastly on the -- an accounting question or numbers question the $7.7 million in diluted share count for the quarter is there any that's not in that number is that a good number for Q2 assuming you don't [issue anymore shares for acquisitions?

Eric Langan

I think that's a good number. I don't think there is anything else out at this point.

Eric Wold - Merriman Curhan Ford

Okay.

Eric Langan

Until we do another acquisition.

Eric Wold - Merriman Curhan Ford

Perfect, thanks guys.

Operator

The next question is from [David Vorr] with Montgomery Street Research. Please go ahead with your question.

David Vorr - Montgomery Street Research

Hi guys, great quarter, really a good quarter. I guess, first it seems like it really still [one of] the buyers market for you guys for acquisitions. I guess on that are you seeing a lot of version increase from potential sellers in the market? And then two how long do you think it's going to last during this stern environment right now for that positions?

Eric Langan

Is your questions on the (seller) calls yes. We're getting tons of calls from owners that are looking to sell their clubs. Right now we're just really sorting through and trying to cherry-pick the top locations. I think that the environment’s going to stay for a while until, as the credit markets are tightening, whether they continue or not remains to be seen. But as they continue to tighten there is less and less people out there that are able to come up with large sums of cash to buy these clubs.

So, I think it keeps at a buyers market. There is not a lot of people out there trying to buy especially the high end clubs right now. They can come up with $22 million to $25 million or even with using stock $8 and $10 million and buy these locations.

David Vorr - Montgomery Street Research

Okay. Then, I guess Buenos that entered in. We look at kind of that choosy bucket or that cherry picking segment of the clubs and sales. I mean how big is that number I mean, to say there is 2000 clubs when you last sold of the 2000 or what percentage which kind of fall in the kind of bucket you are looking at there?

Eric Langan

There is estimate there are 3,500 to 3,800 clubs in the U.S right now. We think that the top 20% are acquisition candidates. There are probably 50 locations out there right now that we're looking at -- either that we're talking to the owner because we want to buy or they want to sell.

David Vorr - Montgomery Street Research

Okay great. And then, I guess one last question more on the international side. Especially if you could comment I guess, as an outside tours international markets versus U.S right now or maybe look for the next year or two on that?

Eric Langan

The next year or two we're staying strictly in the U.S with company owned stores. We have a licensing agreement in Central and South America. We do expect the Buenos Aires location to open sometime in March. They have, their management team is actually coming into the States next week to visit a few of our locations, spend some time with our management team and learn some of our methods of operations and how we do it. So I think we're getting much closer to getting that location open.

David Vorr - Montgomery Street Research

Great. Okay. Thanks for your answers. Great quarter.

Eric Langan

Thank you

Operator

(Operator Instructions). The next question is from Jamie Clement with Sidoti. Please state your question.

Jamie Clement - Sidoti

Good afternoon, Eric.

Eric Langan

Good afternoon. How are you?

Jamie Clement - Sidoti

Good. Thanks. With respect to your guidance for '08 and 2009, what kind of tax rate you're assuming?

Eric Langan

Fully taxed.

Jamie Clement - Sidoti

Fully taxi. So...

Eric Langan

I think 35% is the actual number that we...

Jamie Clement - Sidoti

Okay. So you'd expect that, as this year progresses, your tax rate would come up to that level?

Eric Langan

Yes

Jamie Clement - Sidoti

Okay. And with respect to guidance for this year, are you assuming just for the purposes your guidance, so you're assuming, the Philly club hits the revenue strength, kind of, the first day of the third quarter, is that how we should think about it?

Eric Langan

Actually, we're hoping to open on April 1st.

Jamie Clement - Sidoti

Okay

Eric Langan

Yeah. Well, yeah, first day of the third quarter, yes.

Jamie Clement - Sidoti

Okay. Very good. And just with respect to the things that you mentioned in your prepared remarks to promote the brand nationally, and I know you mentioned Howard Stern Show and that sort of thing, can you give us a sense of some other things you might be considering? Obviously, there's -- you're a well known company and becoming more well known by the day. So can you give us a sense of what you're branding and marketing and that kind of stuff might be looking like over the next couple of years?

Eric Langan

Well, a lot of it is through, obviously through press, which we can never guarantee that we can get on a national level. But we're seeing, the stuff like we did on Fox, stuff we were doing with CNBC and those types of story. We had an article on the Street.com. It's just really a lot of things to continue, putting our name out in front of more and more people in introducing ourselves. Our website were collecting a lot of names, a lot of contacts through our website as we move in a new market. And as we move into the new market, we put new ads out that -- in those market that help to continue.

Jamie Clement - Sidoti

Okay. Eric, thank you very much for your time.

Eric Langan

Thank you.

Operator

The next question is from Chuck Lipson with CSL Associates. Please state your question.

Chuck Lipson - CSL Associates

Yeah. Hi, Eric. Recently, PTT brought a club for, that's about $22 million for about four times EBITDA. I know you paid far less than that for Tootsie’s. Is that sort of -- would you visit the four times EBITDA for an acquisition or is that a little high for you?

Eric Langan

We definitely would. I mean we've looked as high as -- we paid as high as six for the Fort Worth transaction. It really depends on the market, the amount of competition and the size of the acquisitions.

Chuck Lipson - CSL Associates

So four times, two and a half was – Tootsie’s was a one-off and somewhat higher.

Eric Langan

I think it was the first time someone has bought in that price range. So I think we got sweet heart deal. I think that woke up a lot of these other -- a lot of these other owners realizing that hey, wow, somebody out there can really write these 20 plus million dollar cheques. And we've got some phone calls. I am sure that VCG got some phone calls and they were able to lock that one up. I don't know what they've -- I think they've put a letter of intent on it. They -- we remain to see as they get close and we get some of the numbers on how we'd operate now.

Chuck Lipson - CSL Associates

Okay.

Eric Langan

But I'm very excited about it. I mean I think that it just shows and confirms what we've both begin saying is that there are clubs out there, there are owners out there that they are interested in monetizing their assets and that we are a viable extra strategy for them.

Chuck Lipson - CSL Associates

Now, some of these clubs like the one that's PTT just bought or has this letter of intent there on. Like the one that PTT just what or has its letter of intent on that. I guess they own more than just that club. Are you finding in some of the clubs that you've letters of intent out for the owners might have additional clubs that might be for sale for you or they usually just one club with them?

Eric Langan

We've kind of kept what we're buying kind of quiet. But I mean I think little bit of both. I mean we're seeing everything. You're seeing the chain guys look at you. We’re seeing the individual club owners I mean between the two of us we're really the only viable exit strategy they have.

Chuck Lipson - CSL Associates

Okay.

Eric Langan

Whether they are single club or a chain unless they want to owner financing carry a bunch of paper for an individual, who is going to come and run the business and paying with their own money.

Chuck Lipson - CSL Associates

Or maybe we’ll see the two of you get together and then there will be only exit strategy for all this as a club?

Eric Langan

That right now we like to -- there is a peer comparison at the moment. So…

Chuck Lipson - CSL Associates

Okay. Well, keep doing well.

Eric Langan

All right, thanks.

Operator

(Operator Instructions) The next question is from Eric Wold with Merriman Curhan Ford. Please state your question.

Eric Wold - Merriman Curhan Ford

Hey guys couple of follow-ups. So, if I think about, if I'm thinking about this right the numbers for Q1, I know your not giving guidance for Q2 some of you, but let me know if my thinking is incorrect if you had Miami and Tootsie’s in Q1 for only one month and it did I think $2 million bucks in a month or $1.5 million bucks in the month was it $1.5 or $2?

Eric Langan

$2 million in December.

Eric Wold - Merriman Curhan Ford

$2 million in the month. So, as you get through March, for all three months we should have an additional $4 million tacked on the kind of what you did in Q1 assuming nothing else really changed the other clubs.

Eric Langan

Right but now keep in mind that the first quarter is always a little bit percentage wise better than the second quarter. So, we probably won't get the full benefit of the $4 million

Eric Wold - Merriman Curhan Ford

Okay.

Eric Langan

Based on previous quarters for like January, February or March versus last January, February and March. When you compare those quarters to the October, November, December quarter.

Eric Wold - Merriman Curhan Ford

Fair enough. And then in the January press release you talked about the Minneapolis probably having some impact from the weather. You talked about in the same store sales it's become revenue wise, how much of impact do you think that was in the month?

Eric Langan

I had it the other day and I don't still remember that on the top of my head. But it was considerable because I think our same store sales dropped down a lot from 8.8% but they would have been without that if they are just done their normal numbers. I want to say in tune of about $80,000.

Eric Wold - Merriman Curhan Ford

Okay. And then lastly let me sure I heard it correctly the 3 LOIs you have out there, if those do close, would you say it was $0.15 incremental or EUR50…

Eric Langan

15. $0.15

Eric Wold - Merriman Curhan Ford

15 that would be incremental to the fiscal '08 numbers. What would it be kind of on an annual basis?

Eric Langan

A little more, simply because you've another quarter in there. But I mean, we just -- we didn’t really dig that far into it because there is still a lot of timing, a lot of moving parts as we close the transactions we will know exactly what they are, then we can revise the guidance further than that. We just wanted to give everyone an idea of where we're for the fiscal year 2008 provided we close these transactions as we anticipate.

Eric Wold - Merriman Curhan Ford

What's the likelihood of those transactions closing in this quarter versus next quarter versus Q3?

Eric Langan

I think that probably we'd be looking at maybe a transaction each quarter at this point.

Eric Wold - Merriman Curhan Ford

Okay, perfect. Thanks guys.

Eric Langan

Okay, thank you.

Operator

The next question is from Scott Kolman with Credence Capital Management. Please state your question.

Scott Kolman - Credence Capital Management

Hi guys, I was hoping you could maybe walk us through in a little more detail what's been driving the is it called same club, same period revenue comps, they are very impressive and I was just wondering if there is particular clubs that are really driving that or if it's really what you're doing rolling out across all the clubs.

Eric Langan

Well, it's a little bit above. We have certain clubs that are a little higher in some months and little lower in other months. A lot of it is our New York location, and the Club Oynx location in the South Huston has been doing very well for us. And I think as we move forward, we're going to such see the Austin and San Antonio locations contribute. It really has lot to do with our past acquisition strategy, and that in 2006 we bought four clubs that were all start-up or fix-em up clubs.

As those clubs matured --18 months to 36 months maturity levels -- they start seeing steady growth from 18 months to 36 months. And so we have clubs that are entering those cycles that are contributing. The New York Club has been a phenomenal, because –it is well over two years and we're still seeing very steady growth as much as 40% year-over-year growth at that location still.

Scott Kolman - Credence Capital Management

That's great. And what do you see driving it, is it more traffic or people spending more at the bar, people getting more at dances, charging more at the door, what's driving that?

Eric Langan

Lot of it just more people, as we're becoming more well known, especially in the New York market, we're seeing more and more people come to the door.

Scott Kolman - Credence Capital Management

Okay.

Eric Langan

Certain nights, we're seeing them spend a lot more money and other nights we're seeing just a lot more people in the building.

Scott Kolman - Credence Capital Management

Okay. Great thanks.

Operator

The next question is from Peter Siris with Guerrilla Capital Management. Please state your question.

Peter Siris - Guerrilla Capital Management

Hi, Eric. How you are doing?

Eric Langan

Good. How are you?

Peter Siris - Guerrilla Capital Management

Good. If I -- there is just sort of take a big picture questions. If you looked at -- how many clubs are there at the level that you could see acquiring and I don't mean you. I don't mean Rick's by itself, but how many potential acquisitions could there be in the country between, say, you and Troy and whoever else might come along could make? If you were like talking about A and B clubs, how many of them are out there now?

Eric Langan

I think a lot of it is like -- it's a 20/80 rule -- 20% of the clubs are doing 80% of the revenue.

Peter Siris - Guerrilla Capital Management

Right.

Eric Langan

And I think those 20% are the ones, we're going after. So there is 3,800 clubs, there is 760 potential clubs that are in that top 20%.

Peter Siris - Guerrilla Capital Management

Okay.

Eric Langan

We already -- some of those either weren't for sale or maybe not in the best strategic location. We are not… I would say the number is somewhere in the 500 range. That's what we've thought for about two years now. We're still -- we are pretty much still sticking with that number, around 500 potential acquisitions.

Peter Siris - Guerrilla Capital Management

So does that say at some point, I'm not saying fulfilling that this year, but does that say at some point, years -- several years down the road that someone in the industry if I combined you and Troy and whoever else might show up the play in this world, then you would find two or three chains between them that would have a 100 clubs each. Is that a long-term goal or something?

Eric Langan

I mean our goal has always been to be 30 to 50 locations in the next three to five years.

Peter Siris - Guerrilla Capital Management

Okay.

Eric Langan

Sorry.

Peter Siris - Guerrilla Capital Management

So you see…

Eric Langan

So I think that's very realistic. They are not making a bunch of new locations with the zoning requirements and the different laws out there. So I do believe that it's very feasible to see in five years, ten years down the road, a company that has a 100 locations, absolutely doing -- if you figure the top 20% and 80% of the revenue -- you're talking about $1.6 billion in revenue that those 20% of the clubs run.

Peter Siris - Guerrilla Capital Management

Right.

Eric Langan

So I mean you could see, easily see clubs or company's doing 200 million or 300 million in revenues.

Peter Siris - Guerrilla Capital Management

Okay, now if you saw a company doing, obviously these are not projections. So, if you started to have whatever 30 to 50 clubs. What branding opportunities does that give you beyond the idea of economies of scale, having you've got of couple of different brand names you could use?

Eric Langan

Let's look at the most famous adult brand name out there, Playboy. They started with clubs across the country then…

Peter Siris - Guerrilla Capital Management

Right.

Eric Langan

…with their magazine out. I mean, I think it's unlimited. Once you get that type of brand name recognition, at that point I think we would bring in experts to tell us how do we leverage this brand, how do we create and make the most money we can from leveraging the brand at that point.

Peter Siris - Guerrilla Capital Management

And when do you start to -- when are you -- obviously you are running around making deals and stuff, but when do you personally start thinking about leveraging the brand?

Eric Langan

Right now, we are making so much money buying and adding additional clubs and building the brands that I just don't think we're to that level yet. Probably in the next three to five years, as we get to that size that we'd truly have a national brand. You know, we need to be in about at least 30 major markets and then we are reaching a huge amount of people at one time and then we'd launch something out through the clubs.

Peter Siris - Guerrilla Capital Management

And the last question I'll ask is anything happening with Las Vegas?

Eric Langan

We've always looked and been interested in that market. There are times when we think it's not a good market and others we think it is a good market. We're just laying all the options that are available out there to us. We'd really like to be in a casino and operate out of a casino, but we're not ruling out stand-alone properties either.

Peter Siris - Guerrilla Capital Management

But do you believe that it's a matter of when, not if?

Eric Langan

Absolutely yes. Definitely a matter of when, not if.

Peter Siris - Guerrilla Capital Management

Casinos?

Eric Langan

It's definitely a market. In order to have a national brand we're going to have to be in that market. Everybody travels at least once to Las Vegas, especially in our customer base.

Peter Siris - Guerrilla Capital Management

Thanks a lot,

Eric Langan

Yeah, thank you.

Operator

As the phone showing no further questions in queue I'd like to turn the call back over to management for closing remarks.

Allan Priaulx

Just want to remind you that our transcript of this call will be posted on Seeking Alpha most likely tomorrow. So, if you want to review anything that we've gone over here you can go to Seeking Alpha to get it. And also there will be a link on our website as well. And if you have any further questions please send your emails to [e-mail]. We'll try to get right back to you. All right and thank you very much for you calling in, look forward to seeing some of you tonight down at the club.

Operator

Thank you, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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