Things Turning Around at Rick’s Cabaret: It’s Time To Buy
Posted on: June 16, 2009 - Email Article - Printable Version
Our favorite purveyor of adult fantasy, Rick’s Cabaret International (NASDAQ: RICK) reported results May 12th, and there appears to be good news on the horizon.
I am recommending immediate purchase of shares in Rick’s stock at or around $6-7 per share, and in fact I added to my position at $6.90 on May 13th.
Readers of my Twitter feed were able to take advantage of my real-time buy alert as well as a weak stock market to grab shares of Rick’s at a fantastic price, as the company’s results while not stellar, show marked improvement and portend greater things ahead.
As I wrote in my recent buy recommendation for Rick’s shares, I feel that the company has reached an inflection point
While the economy still shows signs of weakness, it appears that as a result of Rick’s best-in-breed status, rebranding efforts at under performing clubs, as well as several marketing campaigns, the company is expanding market share and wisely spending now to reap the benefits later.
In this post I’ll be breaking down Rick’s full earnings release, as well as its analyst conference call, and round out my post with what you should do with Rick’s stock whether you do or don’t own it yet.
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, Dallas and Fort Worth, Texas; Charlotte, North Carolina; Minneapolis, Minnesota; New York, New York; Miami Gardens, Florida; Philadelphia, Pennsylvania and Las Vegas, Nevada.
As of March 31st 2009, Rick’s operated 18 adult nightclubs.
Want more?
- Read: my update on Rick’s last earnings release and conference call
- OR: read my recent buy recommendation
–> Get updates and real-time stock trades you WON’T find on PeakStocks.com by following me on Twitter.
I’ll break down this report into 4 parts:
- Hit Me With The Numbers: Sales Increase, Beat Estimates
- Other Business Highlights: Cash Flow Back, Company Sells 2 Underperforming Clubs, Renegotiates All Debt
- Conference Call Highlights: CEO Discusses Turnaround in Vegas, Other Clubs
- Bottom Line: Bought More Rick’s, You Should Too
Hit Me With Some Numbers
Sales higher, same-club sales decline
(Growth from previous year’s Q2/analyst’s estimates where applicable [only 2 analysts cover Rick’s]):
- Q2/09 sales of $18.4 million (up 21.6% from $15.09 million prior year/vs. $17.46 million projected by analysts)
- Q2/09 operating income of $3.24 million (down 31.4% from $4.73 million prior year)
- Q2/09 net income of $.84 million (includes discontinued operations) (down 67.8% from $2.6 million prior year)
- Q2/09 earnings per share of $0.09 (includes discontinued operations (down 73.5% from $.34 per share prior year/vs. $.11 per share projected by analysts)
- Q2/09 operating margin of 17.7% (down from 31.3% in the prior year)
- Q2/09 net income margin of 4.57% (down from 17.3% in the prior year, flat from 4.56% in Q1/09, and down from 8.4% in Q4/08)
- Same-club sales: down 6.9%
My Take: Rick’s preannounced earnings on April 7th, and said that its top line would be $18.07 million, so it looks like after tallying the numbers, it actually came in quite a bit higher, topping analyst’s estimates.
In addition, it looks like Rick’s was quick with the trigger as well when calculating its same-club sales which were initially reported in the same release as having declined 7.6% to $14.05 million in the quarter, while actual results came in a little better at a decline of 6.9% to $13.9 million.
I believe the discrepancy has to do with the 2 clubs that Rick’s closed and excluding the discontinued operations of those clubs, so we’ll call that a wash in actuality.
Rick’s recently preannounced April sales and same-club sales, and while sales were up 44.6% over April of last year, same-club sales declined by 4.8% showing a slowdown in the rate of decline for same-club sales.
In addition, you’ll notice that the results are inclusive of results from discontinued operations.
In the quarter, Rick’s sold or was in the process of selling, 2 clubs, and had to write down the value of those clubs as a result of selling them for a loss. That is reflected in the totals for operating income and net income.
Excluding these one-time charges, Rick’s would have come in ahead of estimates for EPS to the tune of $.16 per share.
My only real problem with the overall results would be that Rick’s ramped up advertising expenses from about $600,000 last year in this same period to over $1.5 million this time around, with the bulk of that going towards their lagging Las Vegas location.
Other Business Highlights
Cash flow back in a big way, renegotiated debt, bailing on 2 clubs
- Cash flow from operations for Q2/09: $3.612 up from -$.57 million in Q1/09.
- Free cash flow for Q2/09: $3.35 million up from -$1.19 million in Q1/09
- Cash flow from operations 6 months ended Q2/09: $3.04 million
- Free cash flow 6 months ended Q2/09: $2.16 million
- Stock repurchase program update: Rick’s bought back 162,041 shares of stock so far in the last six months at an average price buyback of about $3.615 a share, and have thus lowered their overall share count.
- Forward guidance: None given, but Q3 results are already on track to exceed Q2 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: $5.33 million/$29.7 million vs. ($2.98 million/$32.48 million in Q1/09) vs. ($5.6 million/$33.6 million in Q4/08): due over the next 5+ years, with $1.3 million due in 2009.
- Sold 2 underperforming clubs in the quarter
- Renegotiated all debt to later maturity
My Take: Rick’s really took care of its cash this quarter, and became cash flow and free cash flow positive for the 6 months ended in Q2/09 in a big way.
This money was well spent in a combination of stock buybacks at a low price in the stock near its all time lows, and paying off debt to the tune of about $4 million since the end of 2008.
Rick’s is on the hook for about $1.3 million more this year, which they will be able to handle easily out of existing cash, as well as the free cash flow that it will be generating to the tune of about $1 million per month from here on out.
I’ll discuss below in the conference call section in more detail about Rick’s put option obligations and debt for this year, as it pushed back all current debt into later this year, and into future years, saving valuable liquidity for possible acquisitions.
Finally, for my tastes, the best news was that Rick’s dumped a couple of their under performing clubs.
The company sold one of its nightclubs, Encounters in San Antonio, on March 1, 2009 for $40,000, including $5,000 in cash and a $35,000 note payable monthly for one year. Rick’s recognized an impairment of $221,563 for this club during the quarter ended December 31, 2008 and the actual loss at date of sale was $226,175.
The company also has put its Rick’s Cabaret nightclub in Austin, Texas up for sale and currently has a contract for sale of the club for $2,000,000, including $700,000 in cash and a ten-year $1.3 million note. The sale has not closed as of the filing of Rick’s 10-Q. The company recognized an impairment of the net assets of the club of $823,090 as of March 31, 2009, recognized in the consolidated statement of income as loss from sale of discontinued operations, which affected operating income, as well as net income.
Add it all up, and it was a good quarter all things considered.
Now let’s take a look at the conference call highlights…
- Chris Fernandez
Disclosure: The author is long RICK. This article was taken with permission from http://peakstocks.com. Please direct further questions regarding disclosure to the original author.
The Following Stocks Were Mentioned In This Article: RICK
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