What I want to see

Close or improve crappy performing clubs

We all know what’s going on around us.

We’ve all heard and talked about it ad nauseam.

So instead of rehash what we already know, let’s instead talk about what I want Rick’s to do in short order to improve their operations ASAP.

1) Rebrand other underperforming clubs: If Rick’s can continue to rebrand clubs successfully as they did with their club ONYX in Philadelphia, then there is a chance that they can salvage these locations and turn them profitable.

I don’t mind a little restructuring cost and lag in terms of sales, so long as Rick’s can prove that these locations are breaking through, growing revenues and most importantly, operating at breaking even or better.

2) Close underperforming locations: If that fails, then I want to see Rick’s begin to acknowledge fault, and close their underperforming locations quickly.

If something isn’t working, you know rather quickly and you need to do something about it before it drags your whole company down.

Close locations that are sucking up cash flow, and becoming a drag to the company’s overall results.

Analysts expect Rick’s to earn $.09 per share this quarter (down from $.13 per share a few weeks ago, down from $.29 a few months ago), on sales of $17.4 million (Rick’s already preannounced $16.9 million).

We know already that Rick’s margins are going to contract per their preannouncement, but the question will be, can they come close to these numbers, and if so, can they show that they are not losing cash?

What We Need To See

Current quarter outlook vital

Along those same lines, it will be vital for us to see that conditions at Rick’s are not deteriorating further, or at least not on a runaway basis.

We also need to hear cooler heads in the conference call, and not have a flustered CEO that seems befuddled and not aware of what’s going on within his company.

The last call was a little flaky in that regard, which I’m sure lead to some investor angst and skittishness, which in turn lead to a lower stock price.

We need to see the situation being handled, whether results are great or terrible.

What We’ll Probably See

Serious issues on the horizon?

Since Rick’s preannounced their Q1/2009 results, we already know what the top line figure is, that’s not the problem.

The problem will be in the profitability figures and the cash flow line, which was the gem in Rick’s financial results quarter after quarter in the past.

I think that we’ll probably see more caution on the call, and reduced guidance and expectations for not only Q2, but full year 2009.

We’ll also probably see much lower margins, restructuring costs for the rebranding efforts of the underperforming clubs, and deteriorating business trends.

The question will be have they stabilized?

Bottom Line

Now’s not the time to gamble up

My small position in Rick’s is looking more and more tenuous as the days go by.

I still believe in the concept and the cash generating capabilities of the company when things are right, but it’s looking like the deteriorating economy has blindsided management to the point of possibly undercutting all the progress this company has made over the last several years.

The question for us now becomes where do we go from here?

Will Rick’s management provide the details and outlook that we need to see that our investment, however small, in this company is well founded, or is it time to seriously consider taking our losses and running for the hills before a bad situation turns into a worse one?

That’s what quarterly updates are for, and I intend to listen closely to this one as it will directly affect my investment thesis in the company.

It could very well be that even with the stock price beaten down to current levels, even in lieu of Rick’s stock buyback program (where they are heavy buyers any time the stock goes below $4.00 per share), the company is a classic value trap, and our investment would be better served elsewhere for the time being.

I’ll take my time on this one, and look to update the situation probably by the end of the week to consider the entirety of the investment, and the implications going forward.

New to the Rick’s?

• Read my last company update here.
• OR: Read my initial company buy recommendation here.

*As of 2-13-09. Except share price, all values in millions.

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