The Naked Truth About Rick's Cabaret

Maybe that’s the philosophy driving investors to the stock of Rick’s Cabaret International, Inc. (Nasdaq:RICK). While shares hit an all-time high of $29.79 on Dec. 26, newcomers wonder if there still are profits to be made from this R-rated company charting a path in the mostly G-rated Nasdaq marketplace.

“Everybody comes to Rick’s,” goes the oft-quoted line about the nightclub in the classic Bogart film “Casablanca.” Label this Rick’s a little more risqué rather than wartime risky — and its entertainers wear a bit less clothing than what they did at Bogie’s place.

Shares of this self-labeled “premier operator of upscale gentlemen's clubs” could be had for under $2 in 2003; and under $3 in 2005. Just last August, Rick’s Cabaret traded as low as $7.51. But even after sinking in January into the $19 range, and back there again earlier this month, Rick’s could be gaining strength. The stock closed at $20.30 on Thursday.

The sole analyst who covers Houston, Texas-based Rick’s Cabaret, Eric Wold of Merriman Curhan Ford & Co., rates the stock a “buy,” and recently boosted his earnings outlook to $2 per share for fiscal 2009. Last month, the company raised its guidance for the fiscal year ending Sept. 30 to net income of $8.4 million, or $1.10 earnings per share, up from $7.7 million, or $1.03 a share. The company is looking for $55 million in sales, up $1 million from its December guidance.

Rick’s Cabaret, which runs 16 adult clubs under three brands, has few competitors as a U.S. public company. There’s Denver, Colo.-based VCG Holding Corp. (Nasdaq:VCGH), which operates 19 clubs and an upscale dance club under various names; and the much-smaller Scores Holding Co. Inc. (SCRH.OB), which has seven Scores clubs.

Rick’s Cabaret goes beyond the look-but-don’t-touch club scene. The company also operates adult websites, including a personals site for, let’s say, open-minded individuals, and an auction site where consumers can sell adult-oriented goods.

Eric Langan, the president and CEO of Rick's Cabaret, is an entrepreneurial legend. Langan was 20 when he sold his baseball card collection for $40,000 and used the proceeds to open his first topless club in the Dallas-Fort Worth area. He acquired controlling interest in Rick’s Cabaret International in 1999, merging it with his company. When Rick’s went public in 1996, it was the first topless club company to trade on Nasdaq.

Consolidation is beginning in the adult entertainment industry, which traditionally has been a fractured hodge-podge of locally owned establishments. The estimated 3,800 U.S. adult clubs are facing increased scrutiny, and with growing zoning restrictions, it’s difficult to build new ones. Buying up existing clubs could prove a winning strategy, and help Rick’s Cabaret reach its goal of 50 outlets in three to five years.

Rick’s Cabaret announced this month it was buying The Executive Club in Dallas for $9.5 million in cash and stock. Rick’s spent $25 million in its biggest deal ever, acquiring Tootsies Cabaret in Miami Gardens, Fla., in December. Last year, VCG went on a buying spree, locking up 12 of its current 19 clubs.

On Tuesday, Rick's Cabaret said it expects to finalize the purchase of Crazy Horse Too Cabaret in Philadelphia by the end of the month, and is remodeling the complex to include a steakhouse and sports bar. Rick’s is acquiring the current operator of the club, which sits across from the site of a proposed casino.

On Jan. 16, CEO Langan said the company’s growth-through-acquisition strategy will boost Rick's revenue by $40 million this year. In a press release, Langan said the company is looking for earnings in fiscal 2009 of $2 a share, with a revenue run rate of about $100 million, assuming completion of already announced deals.

“We also believe we will make further acquisitions in 2009 that will be accretive,” Langan predicted.

Last year, Rick’s Cabaret took its first steps toward living up to the “international” in its name, opening its first club outside the United States through a licensing agreement with partners in Buenos Aires.

After reporting last month positive results for the December quarter, Rick’s Cabaret stock was bruised about 20% as investors with bloated expectations sold off. For the first quarter of fiscal 2008, Rick’s posted net income of $1.8 million, or $0.26 a share, compared with $353,000, or $0.07 a share, the year before. Revenue increased 56% to nearly $11 million, with same-club revenue rising 13% to $7.5 million.

February same-store sales rose 17.9% to $2.68 million, with sales nearly doubling to $5.14 million from $2.27 million a year ago. Rick’s credited its Tootsie’s acquisition, along with a 74% increase in New York club sales.

The company is attracting Wall Street’s attention. Last November, Rick’s Cabaret completed a private placement of 1.17 million shares, garnering $16.3 million. In January, money manager Steven Cohen reported having a 5.5% passive stake in Rick’s, with his Sigma Capital Management owning 415,000 shares, according to a Securities and Exchange Commission filing.

For the current quarter, Merriman’s Wold is looking for earnings of $0.30 per share, and $1.21 a share for fiscal 2008.

The naked truth is that Rick’s Cabaret (RICK) could have the fundamentals to offer investors X-cellent returns.

Disclosure: none

Comments

[Urbane Gori...:]

Found Rick's while scanning and found the stock interesting .... If you're interested in this stock, you might go to Rick's homepage and check out 'investor relations'' for a view of how the owner feels things are going.... (Can't remember seeing any nudity on the homepage for those that care...)

A further point.... Gentlemen's clubs of this type are very upscale and accepted in Texas ... These are not the sleezy 'across the tracks' type of clubs that you might think of. Also, if you are (like me,) from California, your impression of these types of clubs will be wrong... They are very much accepted in Texas...

Thx jegan ;-)

2008 Mar 25 11:51 AM

[Tyler Mayoras:]

The real story behind Rick's is that they are able to acquire clubs for 3x - 5x EBITDA, yet their stock trades at an Enterprise Value to EBITDA of over 20x.

That is very positive arbitrage that should continue to drive positive earnings growth for as long as acquisition prices remain reasonable.

2008 Mar 28 11:19 AM

[User 169650:]

How crazy is this, I was in Minn 2 years ago for the NCAA tournament. Had a flyer on my windshield from Ricks... Decided to just buy some to say I was owner of a strip club... Got it for $4 a share... Wow!!!!! am I happy :)

2008 Mar 28 02:22 PM