Rick's Cabaret International (RICK) reported quarterly earnings, or a lack thereof, last Monday (see conference call transcript here). The company missed again, reporting earnings below consensus and its own estimates. More importantly, the company has pulled its guidance for the balance of this year and next. It is another example of management overpromising and underdelivering not a good combination for garnishing Wall Streets embraces.
Ricks Cabaret is not your stereotype sleazy, dimly lit, poorly decorated stripper bar. RICK operates a chain of 21 upscale clubs in major cities, like New York, Miami, Las Vegas, and Dallas.
Revenues for the quarter came in at $19.9 million, a decline of about 11% below last year, and were led by a 17% decline in same store sales. Anticipated FY10 revenues should be close to $81 million, a bit below managements January forecast of $84 million. The big difference is in 2011 current street consensus of flat revenues versus managements previous belief of 20% growth. The large decline in same store sales is a bothersome trend that needs to be watched closely.
RICK earned $0.15 per share, excluding non-cash and one time charges, in their 3rd quarter ending 6/30 against consensus of $0.20. In January of this year, management forecast FY September 2010 earnings of $0.95 with a potential of $1.20 in 2011. The reality may be $0.60 to $0.75 in 2010 and $0.75 to $0.85 next year. Keep in mind that RICK earned $0.91 in FY08 and $0.55 in FY09.
The story described in my February article remains intact. RICK is an old-fashioned roll-up in a high margin retail business, where barrier to entry is relatively high. The business model has been to buy existing clubs and to rebrand/upgrade the facilities, attracting a higher end client. Management focuses on improving and standardizing club practices, and offering a professional dining and entertainment experience.
As the major operator in the country, management enjoys little competition when negotiating acquisitions. RICK has available cash to make several acquisitions when the opportunities are ripe. Management recently announced a slight deviation from this model and is building its first club located just outside the Dallas/Ft Worth airport. It should open late summer 2010. RICK acquired a large club in Las Vegas just as the economy was going over the cliff.
Vegas has been hard hit with slower tourist/convention visitors, and has negatively affected RICKs profitability. As traffic picks up in Vegas, higher operating profits from the Las Vegas club should improve overall gross margins. A major key in returning to eps growth of just a few years ago will be a very profitable and busy Las Vegas club.
Gross margins continue to be around 88%. Expanding top-line growth is the key to RICKs future. Revenues will increase as the economy improves and as customers increase in numbers,spending more as well. RICKs $18 million cash position is funding an expansion plan of one new club a quarter, for a 20% increase in club count annually.
Management pulled its guidance due to recent uncertainty as to the strength of consumer spending. While customer count appears to be acceptable, spending per customer varied widely, with only the last few weeks of the quarter being positive. The Las Vegas club continues to be a drag on earnings, with another quarterly loss.
Management has the ability and assets to expand revenues to upwards of $100 million and should earn somewhere north of $1.00, but obviously not within the timeframe previously given.
The overall economic headwinds are obvious. RICKs business model focuses on high-end luxury consumer spending. As the economy recuperates, so will this sector of consumer spending. However, RICKs current market price is discounting any expansion for at least 18 months. From these low expectations and with a potential for more positive turns in the economy, current share prices offer an interesting opportunity. RICK is trading at 11 times FY2010 EPS and 9 times FY2011 estimates.
Management needs to regroup and continue to offer good investor guidance with few surprises. It is far better to underpromise results and beat expectations than the alternative. Being overly optimistic in a weak operating environment leads to investor disappointment and its accompanying share price haircut just like RICK is currently experiencing.
An investment in RICK could be seen as an option on the improvement in consumer discretionary spending over the next 2 years. Increased earnings coupled with expanding multiples should amply reward patient shareholders.
The basic investment thesis remains the same: How can you not own a company whose business model is to charge its employees to work there and where clients are expecting to grossly overpay for even the most basic services? $8.00 Coke, anyone?
As always, investors should conduct their own due diligence, should develop their own understanding of these potential opportunities, and should determine how it may fit their current financial situation.
