Forgive me, readers, for I have sinned.
I have visited the occasional gentlemen’s club. I have received the occasional lap dance. And while my hard-earned money was being frittered away on the lovely blonde named Zee, only one thought came to mind (well, only one suitable for this venue):
“How can I make money off of this?”
The answer was obvious: Rick’s Cabaret International (NASDAQ:RICK).
The company takes a different approach to this long-standing business concept. Before Rick’s rolled around, the best way to describe these establishments is … well, I’ll let the company’s 10-K describe it:
Operating policies of these establishments were lax, the sites were dimly lit, standards for performers’ personal appearance and personality were not maintained and performers alternated between dancing and waiting tables. The quantity and quality of bar service was low and food was not frequently offered. Music was usually “hard” rock and roll, played at a loud level by a disc jockey. Usually, only cash was accepted. Many businessmen felt uncomfortable in such environments.
Rick’s did the equivalent of turning Travelodges into Hyatts (NYSE:H) by focusing on the things that matter most in these clubs. It looks for female entertainers who can converse with customers, and have the right attitude, good communication skills and demeanor — not just the ability to shake it. It recruits management from large restaurant chains. It is all over compliance issues, making sure that customers, entertainers and employees are meeting proper behavioral standards, as well as following all statutes, and reviewing all credit card charges.
Rick’s treats the operation as any first-class restaurant, because that’s an integral part of the experience. Trust me, you don’t want to eat Chipotle (NYSE:CMG) in a business meeting with girls. You want good food.
Rick’s has been acquiring little chains here and there around the country. It has augmented its brick-and-mortar business with trade shows, trade publications and online products. The company’s clubs are mostly located in Texas, but also in a few other major cities like New York.
On a macro level, a club like this is a great investment idea. Sex sells. The business is highly fragmented, so a great operator who is able to execute and distinguish his brand can become very profitable. However, it is that same competition that can create a headache. Not every man is a gentleman — some are perfectly happy to go to the sleazy clubs by the airport. The upscale club is a targeted niche.
Because of the unusual nature of the company as a public entity, raising capital hasn’t been easy. A lot of the transactions the company has engaged in are private ones involving private convertible debt placements, warrants and put options. Rick’s carries $63 million in long-term debt, and some of the puts and convertibles could make life uncomfortable if the company fails to meet its obligations. However, I don’t see any reason to panic. In the fiscal year that just ended, Rick’s increased revenue 14% and net income 40%. Cash flow from operations came in at about $18 million — more than enough to soldier on unimpeded.
The company appears to be in fine shape. Rick’s intends to grow organically, to open new clubs, purchase others and create new concepts. I’d love for Rick’s to find a way into the online porn business, to be perfectly frank. That’s a gold mine.
RICK earned $1.26 per share this year, and there are no growth projections from analysts, so it fits a couple of Peter Lynch’s criteria about investing in businesses that appear to be distasteful and are underfollowed.
So you have a stock trading at 6.5 times earnings that appears to be executing quite well. I think it’s a long-term bargain proposition — but also a trading vehicle, as the stock has been as low as $7.17 and as high as $10.50 in the past year. I have bought into the operation and plan to hold half my shares long-term and use the other half for swing trades.
Best of all, I might just put my profits right back into the company … if you know what I mean.
As of this writing, Lawrence Meyers owned shares of RICK. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.
