Don't show againWhy Is Everyone Hating On Rick’s? Is It Time To Buy?
There is a definite slowdown in Rick’s Cabaret International’s (NASDAQ: RICK) business as a result of the overall market forces and economic malaise, but all things being equal, the company still reported fantastic numbers for 2008, but failed to give forward guidance as a result of the down economy finally peeking its head at the company’s strip clubs.
As I wrote about previously, I wanted to see Rick’s results come in where they said they would (they did for the most part), and show continued execution on the cash flow and free cash flow side of the business (which they also did). Finally, I was looking for Rick’s forward guidance to be cautious with respect to the headwinds that they are facing, and that also came to pass.
In fact, Rick’s failed to give forward guidance based on the precipitous slowdown in their business within the last month.
So what does this mean for our investment? Is Rick’s still a good place to put new money to work? Is the business flawed or coming under pressure that would prevent the company from continuing as an ongoing concern? What about Rick’s cash reserves and liquidity?
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 Higher, Same-Club Sales Also Accelerate
- Other Business Highlights: Strong Cash Flow, No Forward Guidance
- Conference Call Highlights: Management Shows Caution, Assures Investors, Especially About Liquidity
- Bottom Line: Hold if Already Own, Dip Toes In if You Don’t
Hit Me With Some Numbers
Sales Higher as A Result of Acquisitions, Same-Club Sales Very Strong
(Growth from previous year’s Q4 or Full Year 2008/analyst’s estimates where applicable [only 2 analysts cover Rick’s]):
- Q4 sales of $17.23 million (up 92% from $8.97 million prior year/vs. $17.29 million projected by analysts)
- Q4 net income of $1.44 million (up 22% from $1.18 million prior year)
- Q4 earnings per share of $0.15 (down 17% from $.18 per share prior year/vs. $.23 per share projected by analysts)
- Q4 net income margin of 8.4% (down from 13.1% in the prior year)
- Full year 2008 sales of $59.93 million (up 87% from $32.01 million prior year/vs. $59.99 million projected by analysts)
- Full year 2008 net income of $7.66 million (up 151% from $3.05 million prior year)
- Full year 2008 earnings per share of $.91 (up 82% from $.50 per share prior year/vs. $1.00 per share projected by analysts)
- Same-club sales increased 14.8% for 2008
- Full year 2008 net income margin of 12.8% (up from 9.5% in prior year)
My Take: These are certainly wonderful results across the board, brought about mostly as a result of Rick’s acquisition spree in 2008.
One note is that earnings per share for the 4th quarter of 2008 were lower than in 2007 mainly because of a much higher share count used to help Rick’s in acquiring new locations.
Total shares outstanding were 9.38 million at the end of 2008, and 6.87 million at the end of 2007.
In addition, the same-club sales growth was tremendous and represents pure organic growth at clubs owned longer than 1 year.
The true test, and where Rick’s is already seeing some problems, is right now in Q1/2009 and beyond. More on that later.
Also, net margins were higher across the board, except for the 4th quarter which is typically Rick’s slowest time of the year, but overall net margins for the entire fiscal year came in at a stellar 12.8%, which is unheard of for a retail/bricks and mortar business.
As you’ll also see in the following section, most of this net income drops straight to the bottom line in the form of free cash flow, and in fact, Rick’s typically generates MORE free cash flow than net income!
Other Business Highlights
Strong Cash Flow, Stock Buy Back Update
- Cash flow from operations for 2008: $14.8 million
- Free cash flow for 2008: $11.66 million
- 2008 marked the first time Rick’s paid a full year of taxes with no left over tax loss carryforward, thus decreasing their earnings per share figure from previous years.
- Stock repurchase program update: up to $5 million total, and of that Rick’s has purchased 48,200 shares from $3.54 - $5.95. They will continue to purchase shares depending on stock price and cash levels. CEO stated that when the stock gets below $4.00 it’s just too cheap to pass up, and they will look to purchase more if that happens, depending on cash flow and their current cash on hand.
- Forward guidance: Due to the economic uncertainty in the coming year, especially in certain markets like Las Vegas, they are not giving forward guidance for 2009, but the CEO did state that they feel they will exceed their 2008 revenues and EPS numbers, but they aren’t yet comfortable giving any guidance for the time being.
- Forward operating cash flow projections: $1 million cash flow per month run rate as of now, still cash flow positive and still gaining cash in their coffers.
- Cash/Debt on hand: $5.6 million vs. $33.6 million in debt due over the next 5+ years, with $2.6 million due in 2009.
My Take: At first glance it may look like Rick’s is carrying way too much debt, but one look at their ability to generate free cash flow ($11.66 million in 2008), in addition to their current cash on hand of $5.6 million, shows that they can easily meet their current debt requirements in 2009 of $2.6 million, even if they generated NO additional free cash flow if the economy and market decline even further from current levels.
Also, as we’ll discuss more below, Rick’s has an obligation of about $13.9 million for all the put options that they gave to the businesses that they bought in 2008 in lieu of cash, if their stock went to $0, and the full amount were due immediately.
I’ll explain this in more detail below, but it seems that the market is having a hard time with this, and understanding that Rick’s is indeed doing fine in terms of liquidity, cash position, and debt financing that is due in the coming year and beyond.
Now, as for the forward guidance, that’s fine with me, as I never like companies giving guidance anyway, so I think it is prudent for Rick’s to suspend guidance especially in these difficult times when they are having a hard time gauging their future sales, especially at certain locations that are struggling mightily.
We’ll go into this in more detail below.
Now let’s take a look at the conference call highlights…
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(6) comments to “Why Is Everyone Hating On Rick’s? Is It Time To Buy?”
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PeakStocks.com welcomes and encourages reader comments. Add your voice to the discussion whether you agree with me or not.
January 2nd, 2009 at 5:42 pm
I held on to the stock despite the large drop after the earnings announcement. It may seem premature to suggest that the stock price rebounded after the earnings announcement was fully digested, but it seems to be pointing to some heavy volatility over the next little while — especially with the large upswing as of late.
Should we be capitalizing on this volatility by writing short-term out-of-the-money call options to protect a similar drop? or would the potential upside not be worth the insurance?
January 2nd, 2009 at 9:35 pm
Reading through the conference call, I was unimpressed by the CEO’s weak grasp of his numbers by location & even the month to date #’s. He should have them down cold. Not good
follow up to earlier commitments/initiatives either. Additionally, 50%to 60% of the profitability coming from 1 location (New York) puts them in a very risky position. I agree the ratio’s are very interesting…. but putting money on this stock is more like gambling than investing.
thanks!
Bill
January 3rd, 2009 at 12:32 am
Tony,
I think covered calls could be a good strategy, especially if you feel that the stock is going to go down further from here, and that today’s bounce was short lived.
However, as I outlined, $4 per share is a very nice price for shares of Rick’s for long term holders for a small portion of your portfolio, so it’s tough to say.
Chris
January 3rd, 2009 at 12:37 am
Bill,
I do agree that the CEO was a little flustered on the call at times and was at a loss when trying to explain when the economy and the clubs might pick up again and kept referencing the “economic stimulus” package that the new presidency might institute as a solution to their problems.
That’s not a good sign to be sure.
The way I took it was that the company was merely going through some rough times, and that they are at a loss to explain when it will get better and the potential catalysts for as to when it will get better.
By the way, investing in any stock is like gambling, its all a matter of whether it is a gamble in your favor (that you still might lose, or a gamble not in your favor.
Either way, there is risk that must be weighed and each person must weigh their tolerance to that risk.
I am ok with a 1/4 small position in light of my other holdings.
Chris
January 3rd, 2009 at 5:55 pm
I listend to the call and was stunned as to how Eric was lost when answering about performance of individual locations.
Also Eric admitting he should have never of completed the deal in Las Vegas seeing the markets going down he still went forward with an 18 million plus deal. Now Vegas has dropped from 250K a week by 50-70%.
Lets not forget about asking for “favors’ from debtors holding stock options valued at 25.00 a share.
Then for Eric to turn around and say oh and we will most likely be closing 2-3 locations if things do not turn around.
Oops we spent over 6 million buying the former Executive Club in Dallas and has since lost the right to the liquor license and worst case scenario its going to become a BYOB. Why is nobody screaming about this bad decision? Who advised Ricks on purchasing this club knowing it had a high chance of losing its liquor license? Liquor sales is the name of the game and the high profit margins this company was producing.
Thats a lot of bad management. Oh yes Eric did bring up removing a lot of high to mid level management but hey the damage is done.
The real story is coming in 3-19-09 when the months of 10-11-12 of calender 2008 ended. That will be Ricks 1Q. I think its going to be ugly.
Think about this the entire company is basically dependent upon Miami Tooties and Ricks NYC locations. Like Eric said Ricks is geting a lot of offers to sell those two locations but not interested. No I do not think Eric would sell them because the company would collapse.
The albatross around Ricks neck is now Las Vegas, Dallas, Austin, and Houston.
January 4th, 2009 at 1:11 am
Hey Bill,
These are all excellent comments and observations.
I tend to agree with everything you are saying here, and as I stated above, I still feel that with the track record of cash flow, even from 2-3 clubs propping up the whole company, that this is still a worthwhile business to own in very small quantities.
I think that Eric has learned from what has transpired, and I do agree that he sounded flustered on the conference call to some extent in trying to allay fears of the business.
Again, as a small position, at today’s prices, this is a nice name that has either takeover value, or a pure take-out value because of its cash generation, in addition to being valued very low relative to that cash flow and valuation levels.
I don’t advocate anymore than 5% of your port on this name, and at that, only a 1/4 position.
I agree that Q1/09 is going to be ugly, but that is already being priced in the stock.
What will be interesting to see and hear will be how Q2 is going.
Chris