Don't show againRick’s Q1 Earnings Leave Something to be Desired, Turnaround in Place
Our favorite purveyor of adult fantasy, Rick’s Cabaret International’s (NASDAQ: RICK) reported results last week that were mostly in-line with what analyst’s an I were looking for.
There is a clear slowdown in the overall economy, and with a few exceptions, this is eating into Rick’s business in a much larger way.
Aside from some bright spots in their earnings report, the Q1 numbers certainly left something to be desired, but management’s discussion on the conference call of Rick’s plans to turn things around assuaged certain fears that investors may have had.
In this post I’ll be breaking down Rick’s full earnings release, as well as their analyst conference call, and round out my post with what you should do with Rick’s stock.
New to the Rick’s story?
Rick’s Cabaret International, Inc., owns and operates upscale adult nightclubs serving primarily businessmen and professionals.
Rick’s differentiates themselves by providing an atmosphere where they can offer a unique quality entertainment environment that includes highly experienced and well screened entertainers, high quality managers hired from within the adult entertainment industry, and finally, providing an atmosphere and ambiance, including exclusive VIP rooms, that appeal to upscale clientele.
Rick’s also owns and operates several online and offline media properties that produce adult websites as well as cater to owners and operators of intimate apparel and adult retail stores.
Rick’s nightclubs offer live adult entertainment, restaurant, and bar operations in Houston, Austin, San Antonio, Minneapolis, Minnesota, New York, Dallas Fort Worth, Charlotte, and other cities under the names Rick’s Cabaret, XTC, and Club Onyx.
As of September 30, 2008, Rick’s operated 19 adult nightclubs.
Want more?
I’ll break down this report into 4 parts:
- Hit Me With The Numbers: Sales Increase, Margins Contract
- Other Business Highlights: Company Cuts Costs, Negative Cash Flow, No Guidance
- Conference Call Highlights: Management Discusses Economy, Cost Cutting Measures, and Underperforming Clubs
- Bottom Line: I’m Holding For Now; Itchy Trigger Finger
Hit Me With Some Numbers
Sales Higher as A Result of Acquisitions, Same-Club Sales Moderate
(Growth from previous year’s Q1/analyst’s estimates where applicable [only 2 analysts cover Rick’s]):
- Q1 sales of $17.3 million (up 58.1% from $10.95 million prior year/vs. $17.42 million projected by analysts)
- Q1 net income of $.79 million (down 55.6% from $1.78 million prior year)
- Q1 earnings per share of $0.08 (down 66.7% from $.24 per share prior year/vs. $.09 per share projected by analysts)
- Q1 net income margin of 4.56% (down from 16.2% in the prior year, and down from 8.4% sequentially in Q4/2008)
- Same-club sales essentially flat ($8.76 million vs. $8.77 million)
My Take: We can see that sales were higher as a result of the acquisitions that Rick’s has made in the last year or so.
These year over year sales growth numbers will begin to taper off soon as Rick’s has not, and will not be, making any additional acquisitions anytime soon.
The fact that same-club sales were essentially flat is great news all things considered, but this was mainly as a result of increasingly stellar results at 2 of Rick’s clubs that are growing phenomenally, and skewing the same-club results higher: the Miami club, and the New York club.
I’ll discuss in more detail below what Rick’s intends to do about their underperforming clubs going forward and the steps they have already taken to shore up those lagging locations.
Other Business Highlights
Negative Cash Flow: First Time in a Long Time
- Cash flow from operations for Q1/09: (-$.57 million)
- Free cash flow for Q1/09: (-$1.19 million)
- Stock repurchase program update: there is none. Rick’s is conserving cash right now, and in no position to repurchase shares
- Forward guidance: None given, but Q2 results are are already on track to exceed Q1 based on turnaround efforts at current clubs
- Forward operating cash flow projections: $1 million cash flow per month run rate as of now projection
- Cash/Debt on hand: $2.98 million vs. $32.48 million in debt ($5.6 million vs. $33.6 million in debt in Q4/08): due over the next 5+ years, with $2.6 million due in 2009.
- Rick’s also took an impairment of $221,563 for estimated losses on its Encounters nightclub in San Antonio. The company is currently in negotiations to sell the club.
My Take: This was the first really brutal quarter for Rick’s cash flow position in a long time.
The one strength of the company in these troubled times was always their ability to generate strong cash flow regardless of underperforming clubs.
That has not changed.
I’ll go into it in more detail below, but on the analyst conference call, CEO Eric Langan talked about because of certain one-time expenses at underperforming clubs as well as rebranding efforts that ate into cash flow, and because Rick’s paid off some debt this quarter, their cash flows were temporarily affected.
Come next quarter and beyond, Rick’s anticipates generating along the lines of $1 million+ in free cash flow going forward.
No guidance was given, but on the call (more below) management talked about the improving results at their underperforming clubs and how their rebranding and other efforts were paying immediate dividends.
Now let’s take a look at the conference call highlights…
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(9) comments to “Rick’s Q1 Earnings Leave Something to be Desired, Turnaround in Place”
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May 18th, 2009 at 3:28 am
YOU DONT SEEM TO UNDERSTAND THE VEGAS OPERATION. THE COMPANY MADE A VERY BAD DECISION TO PURCHASE THIS CLUB FOR 15 MILLION DOLLARS. THE CLUB ORIGINALLY OPENED AS JAGUARS AND THEN WAS SOLD TO SCORES BEFORE BEING PURCHASED BY RICKS. ALTHOUGH THE PREVIOUS INCARNATIONS WERE WELL OPERATED, THE LOCATION IS A GUARANTEED LOSER. ERIC IS FIGHTING A LOSING BATTLE HERE, HE HAS TWO CHOICES; 1)PAY CAB DRIVERS MORE MONEY THAN ALL OTHER CLUBS AND CONTINUE TO LOSE A HALF MILLION DOLLARS EVERY THREE MONTHS OR 2)PAY CAB DRIVERS THE SAME AS THE MAJOR VEGAS CLUBS AND THUS DUE TO THE POOR LOCATION, FAIL TO GENERATE ENOUGH INCOME TO MAKE A PROFIT. ERIC DOES NOT HAVE THE MARKETING SAVVY OF SPEARMINT RHINO TO OVERCOME THE POOR LOCATION. THE RHINO NEVER STARTS THE CAB WARS, THEY UTILIZE THEIR ENTERTAINERS WHO DO MARKETING AT THE VEGAS UPSCALE NIGHTCLUBS AND THE RHINO ONLY INCREASES THEIR CAB PAYOUTS WHEN RICKS DOES. ON 5-15-09 AND 5-16 THE FOUR MAJOR CLUBS AGREED TO LOSE LESS MONEY BY PAYING CABS $30 EACH. ERIC PANICKED WHEN IT WAS FOUND THAT SOME OF THE SMALLER CLUBS WHO HE DIDNT NEGOTIATE WITH INCREASED THEIR CAB PAYOUTS TO $50. ALTHOUGH THIS WAS A MINOR CONCERN TO THE OTHER THREE MAJOR CLUBS, ERIC, OPERATING WITHOUT ANY OTHER MARKETING PLANS, WAS QUICK TO DO THE ONLY THING HE KNOWS, GO BACK TO PAYING CABS $80 A PERSON WHILE CHARGING CUSTOMERS $30, CORRECT, HE IS LOSING $50 ON EVERY CUSTOMER WALKING THROUGH THE DOOR! THATS RIGHT, LOSING $633,000 IN THE 2ND QUARTER HAS NOT LOWERED ERICS DESIRE TO LOSE MORE MONEY AS LONG AS HE CAN CLAIM TO BE #1 IN LAS VEGAS. IF ERICS EGO WAS NOT INVOLVED THE COMPANY WOULD SELL THIS LOCATION TO ANOTHER UNSUSPECTING BUYER AND CUT FUTURE LOSSES. THERE IS A ZERO PERCENT CHANCE THAT THIS LOCATION WILL EVER COME CLOSE TO RECOUPING THE 20 MILLION PLUS IT HAS ALREADY LOST. THE LOSSES WILL CONTINUE TO PILE UP UNLESS IT IS SOLD OR A PROFESSIONAL MARKETING DIRECTOR IS BROUGHT ON BOARD.
May 18th, 2009 at 4:38 pm
Jason Z,
You aren’t the guy on the conference call harassing the CEO were you?
Curious to know where you got your knowledge?
Either way, as I already broke down in my last post about Rick’s but I’ll reiterate here, I don’t care how much the company spends for “advertising” on this club.
What matters to me as an investor, and to other investors, is that 2 things happen:
1 - Ricks stays and becomes even more profitable, and that their cash flow stays high and increases, in a cumulative way, regardless of how they get there.
2 - Results don’t deteriorate at the Vegas club to the point where they hinder those results.
Aside from that, go ahead and wage whatever battles you want Eric, and amen to those battles.
In the end, we are investing in a strip club company no?
To that end, we have to accept that things are done differently in this industry, and be ok with that, or else not invest in the company.
Chris
May 19th, 2009 at 6:52 am
NOPE, I’M NOT THAT GUY…
SOMEWHAT ODD THAT YOU WOULD CONSIDER IT HARASSMENT TO ASK THE CEO TOUGH QUESTIONS. THERE WAS A LOT OF INFORMATION FOR INVESTORS SUCH AS YOURSELF IN THAT CONVERSATION.
REPLY TO 1 & 2;
1)RICKS SHOULD CONTINUE TO BE PROFITABLE, OTHER THAN ZONING ORDINANCES IN VARIOUS MARKETS WHICH COULD AND HAS SOMEWHAT AFFECTED PROFITS, THE ONLY AREA OF REAL CONCERN IS THE INEVITABILITY THAT THE VEGAS CLUB WILL PERPETUALLY OPERATE AT A LOSS. DESPITE THE PREDICTABLE, POSITIVE SPIN BY THE CEO, THIS CLUB IS TOAST, IT IS ONLY A QUESTION OF WHEN WILL WE CUT OUR LOSSES.
* I FOUND IT HUMOUROUS WHEN ERIC BRAGGED THAT WE ARE LOSING LESS MONEY IN VEGAS THAN WE WERE BEFORE! I ALWAYS THOUGHT YOU WERE SUPPOSED TO MAKE MONEY WHEN RUNNING A STRIP CLUB.
2) THE COMPANY LOST $633,000 IN THREE MONTHS IN VEGAS, HOW MUCH MORE DETERIORATION DO YOU NEED? I WOULD BE WILLING TO MAKE A WAGER THAT NEVER IN THE HISTORY OF STRIP CLUBS HAS A CLUB LOST THAT MUCH MONEY IN THREE MONTHS, LETS GET ERIC IN THE GUINNESS BOOK OF WORLD RECORDS!
HERE’S AN UPDATE;
ON FRIDAY ERIC SENT A TEXT TO THE VEGAS CAB DRIVERS STATING “IN AGREEMENT WITH ALL OTHER CLUBS RICKS WILL NOW PAY $30 PER HEAD”
ERIC FORGOT ONE THING, HE NEGOTIATED WITH THREE OTHER CLUBS TO LOWER THE PAYOUT TO $30, HE MUST HAVE NOT REALIZED THERE ARE 41 STRIP CLUBS IN LAS VEGAS. WHEN TWO OF THE CLUBS THAT NEVER AGREED TO AGREE WENT TO $50 PAYOUTS ERIC PANICKED AND RAISED THE PAYOUT BACK TO $80 (THE CLUB NOW TAKES A $50 LOSS ON EVERY CUSTOMER THAT WALKS THROUGH THE DOOR). THE THREE OTHER CLUBS HE NEGOTIATED WITH (S.RHINO,SAPPHIRE AND TREASURES)DID NOT WANT TO RAISE THE PAYOUT SINCE THEY WERE NOT LOSING MONEY AT THE DOOR AND WERE STILL GETTING BUSINESS. ERIC NEEDS AN EGO CHECK, IF BEING #1 IN LAS VEGAS MEANS LOSING HUNDREDS OF THOUSANDS OF DOLLARS IS IT REALLY WORTH BEING #1? THE ONLY AREA IN VEGAS WHERE RICKS IS #1 IS IN LOSING THE MOST MONEY.
NO ONE WANTS TO WAGE A BATTLE WITH ERIC, THE CAB PAYOUTS WERE A GENTLEMENS AGREEMENT BETWEEN THE CLUBS BEFORE RICKS ARRIVED.
HERES A TIDBIT FOR EVERYONE- THE LAST CLUB TO START A CAB PAYOUT WAR WAS SCORES, THIS WAS MOSTLY DUE TO THEIR POOR LOCATION. AFTER INCREASING THEIR BUSINESS BUT LOSING HUNDREDS OF THOUSANDS OF DOLLARS THEY FINALLY SOLD SCORES IN LAS VEGAS, THATS CORRECT, THEY SOLD IT TO RICKS. CUT YOUR LOSSES GENTLEMEN, MAYBE YOU CAN FIND ANOTHER UNSUSPECTING STRIP CLUB TO SELL IT TO AND THAT CLUB CAN IN TURN CAN START THE NEXT CAB WAR!
May 19th, 2009 at 7:24 pm
JasonZ,
Do me a favor, and type in lower case from now on so that we can read through your replies easier.
As for that caller, I would have been fine with him grilling the CEO IF he actually had something decent to say, and wasn’t just blowing smoke, and talking crap.
There were no real questions in his spiel, that’s why I thought it was harassment.
Anyway, I understand everything you are saying, and appreciate the inside scoop, however, I ask again, how does this affect Rick’s long term if they manage to lose a little in Vegas, maybe even breakeven, while exploding in their other clubs, and expanding while maintaining profits and cash flow?
I ask because none of this other stuff really matters unless things start to deteriorate exponentially in Vegas to the detriment of Rick’s other clubs, and total operations.
Again, we own stock in a strip club company…the rest as they say, comes with the territory.
Chris
May 28th, 2009 at 7:48 pm
We are now in the worst period of the year for Vegas clubs, Memorial Day through July 2. The clubs make over half of their profits from January through April, too bad Eric thought that would be the best time to lose $700,000.00. Since Rick’s and all other clubs are slow right now Eric will not be able to lose as much money in the third quarter as he did in the second quarter, I suppose that is the good news. He could hire a marketing director / consultant for $50,000 a month and cut his losses, instead he is paying the prior property operators of Scores to run his business into the ground the same way they did it with Scores.
May 28th, 2009 at 7:50 pm
Hey Jason,
Maybe you should apply for that job since you seem to have such an intimate knowledge of the going’s on at the club and in the industry…it might help you sleep better at night.
Chris
June 6th, 2009 at 8:16 am
Thanks for the tip Chris, however I would prefer to still be employed a year from now. Good news though - Eric is moving to Las Vegas. He has been doing much better in dealing with the competition, Spearmint Rhino is a significantly larger operation than Rick’s, there was no way Eric was going to take them down by overpaying cab drivers and losing boatloads of money.
November 23rd, 2009 at 5:42 pm
Hey
Why don’t they make it SCORES again? They seamed to be very profitable when i went. Ricks name just doesn’t have the same sizzle as SCORES did.
Just my two cents…
November 23rd, 2009 at 8:59 pm
Scores lost a ton of money in that location, they used the same taxi strategy as Ricks, some of the people Rick’s used to work at Scores (smart move!).
There are two options for Rick’s Las Vegas
1) Lose a lot of money
2) Lose a small amount of money
They are still trying to get to #2.