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RICK Stock: Rick’s Cabaret Might Have Legs

Sex sells. If Rick's Cabaret can reduce debt cost, it'll sell better.

   

A slew of naked women trotted out the quarterly earnings report for Rick’s Cabaret International (RICK) earlier this week!

ricks185 RICK Stock: Rick's Cabaret Might Have LegsWell, no, that’s not true — Rick’s Cabaret is what we call a chain of “gentlemen’s clubs” in the U.S., and I wanted to grab your attention. There’s a reason for the phrase “sex sells,” so … made ya look!

Still, there’s something sexy going on with RICK stock.

Rick’s Cabaret Q1 Earnings

Here’s how Rick’s Cabaret did this past quarter. Q1 2014 revenues reached $29.4 million, an 8.4% year-over-year improvement. Apparently, the December ice storms in Texas kept the guys away from the lap dances or results would have been higher, since Texas represents 75% of the Rick’s units and generates approximately 50% of sales. Rick’s Cabaret says weather killed $500,000 in sales, of which 80% would have contributed to operating profit. (Personally, nothing would have kept me away.)

Rick’s Cabaret earnings came to $2.4 million, or 25 cents per share, which was down from last year’s $2.6 million (28 cents) in the year-ago period. Adjusted EBITDA did a little better, running level with last year at $7.3 million.

Meanwhile, Rick’s Cabaret stuck to its FY14 guidance of $130 million in revenue, and $1.20 earnings per share.

Otherwise, a few other stats behind RICK stock: Rick’s Cabaret has $10.2 million in cash, and $75 million in debt, which is costing it about $8 million a year to service. That’s a brutal 11% interest rate on its debt, which substantially impacts its bottom line.

What to Do About RICK Stock

So those are the numbers, but what can we interpret from them in determining whether to become a stakeholder in RICK stock?

Rick’s Cabaret has pursued a growth-by-acquisition strategy for more than a decade. If you’ve ever been to these clubs, then you know they range from the skeevy to upscale, of which Rick’s Cabaret is definitely the latter. I know this because … um, because that’s what the 10-K says, after all. (Ahem.)

There certainly is a perpetual market for this business, with a specific demographic. Since Rick’s Cabaret focuses on the upscale market, it means it attracts people with more money to spend. The company can price its products accordingly and yield higher margins, which in turn should be a boon for RICK stock.

The real question for me, though, is whether Rick’s is scalable. I suspect it is, provided management continues to focus on the best markets and acquire at the right prices. There’s no need to open a new club and reinvent the wheel. Rick’s Cabaret is better off finding a solid club that they think they can improve upon and get it at the right price.

However, that leads us to the expensive debt load. That 11% interest is killing Rick’s. Somebody needs to refinance that debt soon, because paying $8 million in annual interest while yielding $2.4 million in profit is just siphoning the upside away from RICK stock.

This in turn leads to the next question: How much more leverage can Rick’s Cabaret take down to purchase clubs? The $10 million in cash is good, but that won’t get the company too far.

I think Rick’s Cabaret has, er … legs, and it’s definitely on my investing radar. I like the 13% insider holdings, and I like that it has attracted private equity dollars.

RICK stock might be a buy someday, but we’ll need to see a few things happen: Rick’s Cabaret needs to refinance that debt and continue to grow revenues. And, bigger-picture, the economy can’t tank, because Rick’s will be one of the first to really feel it.

If we see those things fall into place, this could be the start of a beautiful friendship.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He may occasionally, in very rare circumstances, pay a visit to certain gentlemen’s clubs. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at pdlcapital66@gmail.com and follow his tweets @ichabodscranium.


Article printed from InvestorPlace Media, http://investorplace.com/2014/02/rick-stock-ricks-cabaret/.

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