Don't show againRick’s Q1 Earnings Leave Something to be Desired, Turnaround in Place
Bottom Line
Wait and See…
Rick’s just had one of its worst quarters in quite some time when we look at the company’s free cash flow generation.
Looking back on 2008, Rick’s earned $11.66 million in free cash flow.
2009 will not be the same and is starting off in the negative.
According to the CEO though, most of Q1’s shortfall was as a result of rebranding some of Rick’s existing underperforming clubs, and writing down certain costs associated with those efforts, plus the actual results that brought down Rick’s bottom line and margins.
Going forward, and in fact on the conference call, the CEO discussed at length the improvements that Rick’s already sees at the clubs that were previously struggling (sans Las Vegas), so it could be a rather quick turnaround.
If Rick’s achieves the $1 million per month run rate in free cash flow that we were all used to before, then the stock price where it sits now represents a true bargain.
I’ve spoken previously about Rick’s cash generating capabilities, and how even if those drop way below historical norms, Rick’s still represents a great value.
Couple that with management’s discussion about current trends at rebranded underperforming clubs, as well as their mild assurances that Rick’s can get back to about $1 million in free cash flow per month generation, we can arrive at a valuation that shows that for patient investors, Rick’s might present a compelling case for buy and hold investing.
So, hypothetically, let’s assume a very modest $3.0 million run rate in cash flow for this year, and say Rick’s spends about $1.5 million on capital expenditures yielding only $1.5 million in free cash flow.
At today’s levels that still gives us a price to free cash flow (P/FCF) of 24.19 at $4.00 per share (Rick’s was below $3.50 as of this writing)
That’s still way below the industry average of 40.9, and assumes horrific business trends at Rick’s with almost no free cash flow generation.
But even with all that, Rick’s would still be undervalued by about 60-80% using a metric that many experts believe is the only thing that matters: free cash generation.
So all that being said, there is some definite risk here, or else the stock would never be this cheap.
We have all the usual risk factors regarding the economy, consumer spending, etc., and then a layer on top of that of Rick’s being a micro-cap stock that is severely out of favor now, and the general malaise that surrounds “sin” stocks like Rick’s.
With all that being said, I believe that a position should be started here by those that are risk tolerant, have super long time frames (as Rick’s might be battling this malaise for 1-2 years), but see value in a solid company that is just on the outskirts of acceptability both for what it does, as well as the actual stock itself, to mainstream investors.
The economy could sour further, Rick’s could fail to meet its debt obligations as a result of an absolute collapse in its business, and we could be looking at a stock going to $0 fast.
That’s the beauty of investing.
You use the information available to you, find information that not too many others know about, and then make an informed, calculated decision, basing your decision on facts, and the percentages in and out of your favor.
In this case, I see that we have about a 60+% chance of Rick’s doubling in value from $3.50 per share, and about a 10-20% chance of the company going out of business.
Those odds favor us greatly.
Bottom Line: If you already own 1/4, or 1/2 position in Rick’s, that should suffice. Look to add on weakness if you have 1/4 or less, but continue to diversify your portfolio with other names on my list before adding to Rick’s. If you don’t own Rick’s, consider starting your initial position right here, but make sure it is within a balanced portfolio to protect you against continued consumer slowdowns, and a potentially deteriorating market.
As I look through the bargain bin that is the current stock market, I might decide to shed Rick’s for now, and revisit the company in the future once I have purchased other names that appeal to me more now and show more upside potential with less risk.
Keep your shares for now if you already own some, look to sell to generate cash for new names if you need to, and look to purchase only for a small slice of your portfolio and for a long term investment if you currently don’t own any shares in Rick’s.
New to the Rick’s story?
|
*Variables You Should Know About Rick’s (NASDAQ: RICK) |
|
|---|---|
| Current Recommendation: |
BUY |
| The Company: | Rick’s Cabaret International, Inc., owns and operates upscale adult nightclubs serving primarily businessmen and professionals. 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. |
| Why Buy Now: |
|
| Market Cap: |
$31.68 |
| Revenue (TTM): |
$66.3 |
| Cash/Debt: |
$3/32.5 |
| Current Price: | $3.50 |
| Risk Rating (?): | 8 (High) |
| Position Size (?): | 1/4 (10-8-08) |
| Buy Around Price (?): | $7.00 (10-8-08) |
*As of 2-20-09. Except share price, all values in millions.
Pages: « previous page 1 2 3next page »
(1 votes, average: 5 out of 5)
Loading ...
(9) comments to “Rick’s Q1 Earnings Leave Something to be Desired, Turnaround in Place”
Leave a Reply
PeakStocks.com welcomes and encourages reader comments. Add your voice to the discussion whether you agree with me or not.
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.