RCI Hospitality Holdings Inc (RICK) 2008 Q2 法說會逐字稿

Greetings, and welcome to the Rick's Cabaret International second-quarter 2008 earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Allan Priaulx, Investor Relations Officer. Thank you, Mr. Priaulx, you may now begin.

Thank you, Chris. Before we begin, I just want to remind everybody of our Safe Harbor statement, which is available on page two of the PowerPoint presentation that's in distribution. It's also at the bottom of our press releases. We urge you to read it carefully.

On the call today are Eric Langan, our CEO, and Phil Marshall, our CFO. Eric will give a presentation of our second-quarter results, and we will follow that with question-and-answer from you. And Phil Marshall will be available to answer any questions that you want to direct to him. So Eric, without further ado, I would like to turn the call over to you.

Thank you, Allan, and thanks for calling, everyone. We appreciate your time. We will begin with a quick overview of our presentation. Today we are going to review the second-quarter 2008 results, the contributions of the Miami and Ft. Worth locations, discuss our organic growth strategies, our acquisitions -- where we are at with our acquisitions and update you on some of the other stuff that we are working on, update you -- update our guidance for 2008, and review our outlook for 2009.

To begin the quarter, total revenues were $15,460,000, up 104% over second quarter of 2007. Net income was $2.6 million, up 429% over second quarter of 2007, for fully diluted earnings per share of $0.32 versus $0.09 last year and operating cash flow of over $6.4 million.

As you can see, the results were right in line with, or a little better than, where we anticipated we would be at this time when we put our original guidance out. We've been very happy with the results from this quarter and the contributions that Tootsie's has added. The main driving factors, of course, nightclub operations up $15.29 million and club net income up $4.69 million from operations. Tootsie's revenue continues to exceed our expectations, averaging, since we've taken the place over, in excess of $2 million per month.

The New York City club had another fantastic month in April, and as you can see in this quarter, January, February, March were record months. We believe we'll continue to the growth in the New York City location. On April 28, one of our competitors lost their liquor license and that has put some business back on the street and some girls. And we're starting to see a little pickup in early May from that.

As well, Fort Worth has been a very strong contributor to our success. We've got the VIP room opened at that location, and we're seeing some nice growth at that location, as well. Our second-quarter same club sales were up 8.24%, pretty much in line with our 6% forecast, a little better. We hope to continue to see a little better than 6%, but 6% is what we're forecasting at this time.

We closed several acquisitions in this quarter and preceding this quarter in April. Our Philadelphia acquisition was completed. We had the grand opening April 24th through the 26th. We got a lot of media press, a lot of business. The steakhouse there is getting rave reviews in town, and we're seeing the business people that came in during that time continuing to come through the doors this week and the week before. Obviously, it's a little early to see exactly where that location is going to end up. But we are getting a very good, strong feel for where we are heading and we are very happy with -- where the direction that it is moving in.

The Dallas executive club acquisition was completed. We are currently operating. The sign, actually the temporary signs went up this morning here, rebranded as Rick's Cabaret. The grand opening is planned for June 12th through the 14th. And we also required the remaining 49% of our Austin club to make that a wholly-owned subsidiary.

And in addition, we started a media division by acquiring ED Publications Inc. and TEEZE and ABS magazines. What we got along with that was the largest industry tradeshow for the gentlemen's club industry. We're also, through our media division, going to be able to do some considerable marketing with major liquor companies and some other national advertisers in the magazine and in our clubs to help lower our costs and bring more attention to our brand.

We signed the definitive agreement for the Las Vegas Scores club acquisition. It's a $21 million purchase. Current revenues exceeding $18 million. We are going to continue targeting major clubs and metropolitan areas that we believe will be immediately accretive to our earnings, targeting clubs with $10 million plus in sales.

However, as with Philadelphia and Dallas, we will acquire smaller venues, if they have strategic value for our branding. We will continue to use a combination of cash, debt, and equity to make these acquisitions. However, if our equity -- if we start feeling that our equity is undervalued by the market, we will be using more debt and internal cash flow to make these acquisitions and probably withhold using equity at a discount, if we built a discount to our value.

Moving on to our 2008 guidance. For fiscal year 2008, we now believe total revenues will come in somewhere between $61 million and $62 million, with net income of $10.5 million to $11 million, or fiscal year 2008 earnings per share of $1.25 to $1.30. If we calenderize that over the entire year of 2008, we estimate revenues of $68 million to $70 million with net income somewhere between $13 million and $14 million, or earnings per share of $1.55 to $1.60 for calender 2008.

Now these assumptions do not include the Las Vegas acquisition. So if we closed the Las Vegas acquisition on time we will -- they will add to these estimates. And estimates do not any include any additional acquisitions. This is, basically, a snapshot of where the Company is today.

Going into our 2009 outlook. Our 2009 outlook for fiscal year 2009, is earnings per share of somewhere between $2.30 and $2.50 and revenue that will exceed $100 million. This assumes the completion of the Las Vegas acquisition and that our acquisition strategy will continue through 2009.

On our August conference call, we intend to give real guidance, instead of just an outlook for 2009, and provided that we have our acquisition pipeline together and in place to where we feel comfortable, we will also give an outlook for 2010 at that call. If we do not have enough of our acquisitions lined up at that point, we may just give guidance for 2009 and hold off on the 2010 outlook until a little bit later in the year when we have a better idea of how we think 2010's guidance will go.

With that, I would like to invite everyone to come out next Tuesday. I know normally we do the Due Diligence Balls after the conference calls. My schedule has not allowed me to get into -- to make it to New York tonight. I will not be able to make it up there til late Monday evening so we're going to do the Due Diligence Ball on Tuesday.

So I invite you to come out and meet with me, I'll try to answer any questions and let you do some due diligence, check out the club, maybe have some dinner. We'll have $8 drinks til 8 PM. We'll have free hors d'oeuvres and free admission for anyone that wants to come out.

And that will wrap up our formal presentation. And we'd be happy to take questions from anyone that would like to have more information.

(OPERATOR INSTRUCTIONS) Jamie Clement, Sidoti.

Just wanted to make sure I was clear on the guidance for this year. In the press release, you alluded to some start-up costs related to the newly acquired clubs. Your $1.25 to $1.30, that includes those costs or that excludes those costs?

Yes, that does include those costs. What we were warning against is, we expect a big ramp up in the next quarter -- not this quarter that we're in right now, but in the fourth quarter. The third quarter could go either way. We're, I'm going to say somewhere, $0.31 to $0.34 will be added to our thing. And then we'll have the breakout quarter of $0.38 to $0.42 maybe in that fourth quarter.

It's still a little early to tell. That's why we've ranged from $1.25 to $1.30. We wanted to be in a pretty safe zone there with the new clubs. New clubs are so hard to gauge. Once we have the grand opening in Dallas, which is not until June, then we'll have a much better idea here.

Philly has been very strong for us. We are very happy with the results there. We've been getting very, very good reviews, lots of positive press. The business clientele that we were hoping to attract, we're attracting. The sporting events have brought in good numbers of people. The weekends have been very, very strong. So far so good there. We'll continue to monitor and I believe continue to see success there.

Okay, great. Moving on to the Vegas acquisition. I think that there are some macro concerns surrounding Las Vegas in general. And there has been some news that has not been the most favorable about some areas of that market, not from a gentlemen's club perspective, but just kind of overall. Obviously, it's a competitive gentlemen's club market. How do you feel about that? Obviously, I'm sure you are aware of that.

We're very committed to the acquisition. And if you notice, this is one of the few acquisitions that we actually put minimum numbers in -- minimum revenue numbers, minimum EBITDA numbers -- trailing 12 months from closing date. And we did that for the specific reason that, if the economy seeing too much of a slowdown or too much of a recession before we closed this transaction, that we'll have time to go in and maybe negotiate or rework the deal a little, if it's necessary.

From what I understand at this point, everything is still on course there. Things are looking really good; we're watching our due diligence. We are going through the permitting process, which I have learned is one of the most painstaking processes of any state or government regulation we have ever had to deal with. When you deal with Las Vegas for a liquor license you deal with the Gaming Department, and they do some very extensive background checks. It's not that it's a problem. We will pass and we've got licenses in many states. It's just tedious to get through.

Sure and I would assume that's why you're also -- you're not including that club in this year's guidance, right?

Right, because we have no idea. We intend to close -- we would like to closing in early June, and I am probably more pessimistic towards the end of June. But obviously with licensing, lots of things can pop up. As we have seen in past transactions where it has taken seven months in Philadelphia, where in Dallas we thought it was going to take 90 days and it took 23.

So you just don't know, and we don't like to guess. We like to tell you what we know and be very transparent on the rest of it. We hope to get the transaction closed by the end of June. The reality is, is it's out of our control to actually when the licensing will be approved, but once the licensing is approved we'll move very quickly to close the transaction.

Thanks very much. I will get back in the queue.

[David Foyer], Montgomery Street Research.

Great quarter, actually. Just a couple quick questions here. One, it looks like you had a substantial step up in operating margin from quarter to quarter, sequentially. But it looks really like sales and salaries and wages came down substantially on a percentage of basis of revenue. Is that really sustainable going forward in your minds?

Absolutely. The reason why is, you're seeing three months of the Tootsie's transaction. I have been trying to tell people as I'm out on the road and as we're doing things that you're looking at one month -- when you look on a trailing basis, 12 months, there's only one month of Tootsie's in that trailing 12 months. This quarter was the first time people are going to see what three full months of the Tootsie's acquisition meant to the Company.

And as we said in some of our presentations, that our margins were going to increase to 30%, our EBITDA margin would increase to 30% plus. They came in this quarter at 32.4%. We've always thought that was going to happen. While I didn't realize it was going to be this quarter, I thought it would be maybe the next quarter or the quarter after. But we're very happy that we're able to get to that 30%. We've always believed that that was the magic number for us.

Super. And I got another question I guess on the Texas pole tax repeal. That looks like taxes from it still has -- I guess that tax within the number for the quarter is that correct? The 2.02?

Yes, it does, and I will elaborate on that a little bit, if you don't mind. That tax was $517,000. That tax was ruled unconstitutional by the lower courts. The state appealed. They used a tax code trick to, basically, force us to pay a tax that has been ruled unconstitutional. There is an appeal to the Texas Supreme Court to try to stay the collection of that tax. We have no idea when they will rule or how they will rule, but we are hoping to get a stay from that.

We are collecting the tax still, and we hope that someday -- we filed it, we paid the tax under protest. We will be filing a lawsuit against the state to get that money back, because we believe that it's an unconstitutional tax and we should not have to pay it. We don't necessarily collect the tax directly. There's no way to tax the actual patron. It's a patron tax on the business, so it's the business that's actually being taxed.

So what we do is we increase our cover charges, we've increased some of our drink prices in the Texas market. And as you can imagine, it has a little bit of a chilling effect on the smaller, blue-collar clubs. The Rick's clubs, the larger clubs, and even the XTC in Austin, have seemed to kind of just absorb it.

To some of the smaller clubs who were having a little harder time with it, we may adjust how we collect or -- collect our reimbursement on that in those clubs. We're watching very closely. I think our same-store sales would be -- without the tax, if the tax had stayed out, I think our same-store sales would have been increased even more.

Okay, great. And then one last question on the tax side though. More of a general question now. What's your tax rate, or are you kind of marketing in there for us?

We are modeling at 37%. That includes, because of the state -- basically, has some corporate, state corporate income tax in New York and Florida.

And that's from '08 and '09?

Yes.

Okay, great. Thanks, guys. Again, a great quarter.

[Chuck Lipson, CSL Associates]

Well done, Eric. Just one thing I think has been impacting our stock is that most people would have said there were two consolidators in the industry in the adult club business, you and VCGH. Given what has happened to VCGH, how do we convince investors that the VCGH issues are not Rick issues?

Well, it's funny because we called our recent downturn a VCGH flu that we've caught from it. I think we continue to do what we do. We executed on our business strategy, we give our guidance, we meet our guidance or beat our guidance, and continue to grow the Company. I don't really know how to do anything different than what we're doing, as far as addressing those concerns.

We are very transparent. Allan, you can reach him through e-mail or through his office. We're very responsive to investors' concerns. And of course we operate our business, and we're running the numbers. We're meeting the sales targets; we're meeting the income numbers and continuing to grow the Company. So I think eventually the market corrects to fundamentals; our fundamentals are solid. I believe that eventually our share price will correct to that.

Has this collapse of the VCGH stock price in anyway changed the price or deal flow that you're seeing?

The deal flow is so heavy right now. I think it's -- I don't know if there is any factor out there right now that's going to change the deal flow. I am sure that Troy will tell you the same thing. The phone rings every single day, different e-mails, contacts, brokers calling us constantly with new opportunities that are out there.

I think the real trick and the real challenge for us, and for VCG, is picking through them. Sorting through, finding the needles in the haystack and buying the right deals. And growing within our ability to manage and within our ability to raise funds and not get ourselves in too much debt. Or get ourselves into a situation where we're forced into a deal where we have to raise money at any price just to get a deal done. And I think that's one thing that we have avoided.

Basically, we could grow much faster than we're growing right now. We're growing at a very, very high rate compared to most growth companies. However, we could grow faster than this. We have the management in place to grow faster. What we don't have right now to increase these growth rates exponentially is access to capital at rates that we're willing to give up equity to access that capital.

Finally, the Scores in New York losing its liquor license. Any thoughts on what might happen there?

You know, it's in bankruptcy court. Obviously, I'm sure if it goes up for auction, I will be at the auction. If we can get a good price for the location, we'd love to have it. I'm sure there's a lot of other operators out there that will be doing the same thing. We had talked to these guys off and on for a year or so trying to figure out if we could do some kind of deal with them. And it has just been very difficult to get any solid agreements done. We're kind of in a hold pattern, wait and see what happens.

Thank you very much.

[Steven Gart], AM Investment Partners.

Hey guys, again I'll make it a foursome. Congratulations, on a great quarter. Most of my question Scott answered, but I just wanted to ask a general one. I guess where, if anywhere, do you feel the impact of the economy, and how do you adjust to it? If there's any specific geographic or -- whereas New York may be feeling some of the pinch from Wall Street --?

New York is growing at unbelievable growth. We kept hearing we're going to feel Wall Street, we're going to feel Wall Street. So far that's all it has been is talk. The real effect on clubs that we've seen is in our lower and blue-collar, what I call -- actually a lot of the clubs, but it's what I call the $50 customer. The guy who comes in three days a week, spends $50. Now maybe he's only coming in two days a week because he's throwing the extra $50 in gas.

But what we are also seeing is more $50 customers in because, when reality is what it is today and you're down and you're depressed, you look for an escapism route. And Rick's are fun, party place to walk in and just get away from it all. Leave your troubles outside and get away from it. So the real effect that we've seen so far has been very, very nominal. It's very hard to gauge.

We are watching our sales figures on a weekly and daily basis. Kind of watch and see, and doing comparisons from week to week. Watching patterns and flows at different clubs. We're prepared to make pricing changes, throw extra VIP parties, do whatever we have to do to continue to make sure that we meet our revenue numbers. And so far we've been very successful at that.

Okay, great. Thanks.

Steve Martin, Slater Capital Management.

Thanks a lot. Most of my questions have been answered. But Eric, if you look at your guidance for the September fiscal year versus the calendar '08, you're really only guiding to a fourth quarter of $0.30 to $0.35. And does that make sense, given that your September quarter will be somewhere closer to $0.40?

Well, we're guiding in between there. We don't know exactly where are the numbers. Basically, you're looking at, probably, if this quarter comes in at $0.34 and $0.39 -- so basically we're at $0.56 right now. So to get where we need to be, we need another $0.74 to get to $1.30, $0.37 a quarter. So $0.34 one, $0.35 one, maybe $0.33, and then $0.39 to $0.40 the next. I think we are very close in that range.

Okay, is the December quarter -- and that doesn't include Las Vegas, if you close it.

That does not include Las Vegas. That includes only (multiple speakers)

Right, and that would be another, based on your guidance, another $0.07, roughly $0.07 on a straight line basis?

Pretty much, yes. We actually have some additional start-up costs as we convert it over, and the attorney's fees and what not on the transaction. (multiple speakers) Some costs in the beginning, but that was definitely what the run rate would be increased by.

Okay, so if you assume you make the $1.55 to $1.60, that would -- what would -- and you close Las Vegas sometime. What is your run rate when we get into '09? Without any more acquisitions, just the one.

With Vegas?

With Vegas.

I believe we're well over $90 million. Maybe it's $92 million, maybe it's $94 million, but definitely in the $90 million range.

And EPS?

Well, right now we're saying for the quarter, I think if everything -- we wouldn't have the new acquisitions in, but maybe it's $1.70 or so. We're saying $1.55 to $1.60 calendar. It's so hard to tell right now because we just don't know what Dallas and Philadelphia are going to do. So we're kind of having to --

But at a minimum you would throw $0.29 on to the $1.55, $1.60?

Yes. Well, see you have to remember in the fourth quarter of last year you only -- and 2008. So you are talking first quarter 2009, which is October, November, December of this year, we only had Tootsie's for one quarter.

Right. Okay, I think that's about it. Thank you very much.

Jeff Feinberg, JLF.

Thanks very much. All my questions have been answered. Love what you are doing, just keep doing it.

That's the plan.

[Gary Bryan], private investor.

Question is, as the number of clubs increases I wondered if I could get your thoughts on how you see that helping on both the expense side and the income side. In other words, I assume on the expense aside there are some economies of scale in terms of purchasing power, I would assume, for things that are common to clubs. But how do you see benefits to each club, in terms of, from a corporate branding for people maybe, going between cities or what not?

Certainly. We see that now. We opened -- when we took over Tootsie's in Miami -- excuse me -- a lot of our New York customers travel to Miami, have second homes in Miami, Fort Lauderdale, West Palm area. Immediately, we are seeing them in the club in Florida.

The other thing we are seeing is, as business travelers, guys that travel from city to city, once they know our brand, we hope that they will continue to visit our location in all the cities that they're in, which we are seeing happen. And I think as we grow and become a much stronger, more nationalized brand, we're also going to be able to do more national advertising.

Right now national advertising is expensive and cost prohibitive because we are not in enough major cities. As we are in 30 major cities, the effect of that advertising will be much more cost-beneficial for us. We are really seeing, which is one of the main reasons we went after Exotic Dancer Magazine and the tradeshow, is that the national liquor companies -- liquor companies want to get their brands out there and build their brand. We have a crew of probably 4,000 salespeople with our entertainers that can market their products for them.

So they get point-of-sale marketing through all the promotions and in-house training that they can do through our staff, our waitstaff, our bartenders, our entertainers, as well as advertise in our national magazine to the industry, come to the tradeshow, help support the gentlemen's club industry.

Budweiser and a lot of these liquor companies do a lot of stuff for the restaurant industries and the hotel industries. Basically, what we've said to them is -- and the casinos -- you can't ignore us anymore. The gentlemen's club industry is a $2 billion industry, and you have to pay attention to us. And we've been getting a very positive response from that.

We're going to get national buying power. So we're paying lower prices for certain brands that we're promoting in our clubs, which will bring our costs down. So those of the type of synergies that we get as we get larger and larger.

Thank you.

[Philip Calvarone], private investor.

Great quarter, guys. Quick question. Last call we talked about Las Vegas and how that could be the next hottest thing as far as acquisition. So now what's the next hottest city?

That's a big question there. We're looking; we're looking everywhere. Obviously, we moved in to Dallas and the Philadelphia location. We would like to continue to branch off of our existing hubs where we have strong regional management -- Miami and New York. So we would like to hit some major cities that branch off of either of those locations, as well as continued expansion in Texas.

However, we will be watching. We don't want to get Texas-heavy again. We've managed to bring our Houston revenues down to about 10% of total revenue, about 5% of operating income. We would like to continue to, basically, spread our risk from market to market. Instead of being -- we want to be clustered but we don't want to cluster our risk. So those are the things we look at.

I think we're going to look at major cities on the West Coast. We're going to continue to look up and down the East Coast and maybe get into Detroit, Chicago, places we can expand off of Minnesota from. Maybe some places in Wisconsin or Indiana. Those types of locations that we're getting calls on on a regular basis. We just pretty much try to stay around our hubs and expand off of our hubs.

Okay, great. One other question, if you don't mind. Last call, we talked about international and want to see how that business is growing and if there has been any changes? And then also acquiring the new media company, is there any international growth seen with that?

Not really. We bought the media company for the synergies within the industry. The main thing that we're looking at on international growth is really the licensing in Argentina. We haven't really expanded out of the U.S. because there's just so much growth here for us. Once we have a national brand, an American -- strong American national brand, can we take that to international locations and be successful? We believe absolutely we can. And we probably will.

The point is for the next three to five years there's just so much domestic growth that it really doesn't make sense for us to spend the money and the time and the energy learning all these new laws and all these new customs of these other countries to figure out how to go in and make money in our industry there.

Thanks for your time.

[Stewart Kwan, Vander]

What is the guidance for fiscal '09, excluding Las Vegas?

We haven't done that. We haven't given any type of guidance. Basically, the run rate is about, I think the run rate is probably about $72 million without Vegas, maybe $74 million. So you could probably extrapolate down from that through our EBITDA margins and cost to maybe get to that number. But we just haven't put that together yet.

Okay.

In August, we will give a solid fiscal '09 guidance with our outlook, probably either for calendar '09 or our outlook for 2010. It's so hard and difficult -- because of the acquisition pipeline heating up and the equity markets acting the way they are right now -- it's very difficult for us to figure out how fast to grow.

We want to grow as fast as we can but we're not going to grow at the expense of our existing shareholders to the point where we dilute existing shareholders or give up equity to cheap. If we've made acquisitions and we got the growth and the market isn't pricing that growth into our stock, then we don't want to continue to give up the equity for the sake of growth.

I think 100% growth is pretty phenomenal. Do we have to go out and grow 200% or 300%, if we're using cheap equity? I don't believe that's the right thing to do.

Did you say what the Las Vegas acquisition adds to the fourth quarter? Just another gentlemen asked the question and I coldn't follow the numbers. (multiple speakers)

We believe it will add $0.29 annualized the way it is right now. Now we do plan on making some changes there that we hope will increase revenues, but based on where they're at right now, it would add about $0.29, or it's between $0.07 and $0.075 a quarter.

Thank you.

Peter Siris, Guerrilla Capital.

You can't do better than 100% growth?

I can. I'm just not going to give up cheap equity to do it. I could probably grow at a 100% right now, or pretty close with internal cash flow, and some of the bank financing debt that we're able to pick up recently. The trick is, is there's some major acquisitions out there for us, like Las Vegas. There's a couple other that we're looking at, but I don't want to get into a contract situation on these acquisitions and be looking at raising money with a $19 stock. It just doesn't make sense with our earnings where they're at right now.

Actually, there were a couple questions I wanted to ask. First was you were talking about your brand, by which I gather you mean the Rick's brand. What about the other brands?

We believe the Onyx brand is very strong, as well. The XTC brand can be expanded, but it's really not something we focused on at this time because those locations are very difficult. They're all nude, it's BYOB. Most states with full nudity don't even allow liquor consumption, so it's a little different business model as we would expand outside of Texas. So we really haven't gone actively after expanding that brand. But the Onyx brand, we're looking at several locations around the country right now that have a lot of potential for the Onyx brand, and we would love to see that.

Because that is a very profitable -- The Onyx brand --

(multiple speakers) it's basically the upscale gentlemen's club is the branding that we're working on.

Right, but the Onyx brand itself is a very profitable business for you, isn't it?

Yes, it is.

Second question, you mentioned before, I think somebody mentioned, that Scores in Manhattan lost its liquor license. And somebody also mentioned -- I don't know if this is true -- that the Penthouse Club is turning into something other than a club?

I've heard rumors of that, as well. I have seen nothing that confirms that. Other than we've had some of their employees come and apply for jobs and continue to spread the rumor. But I guess until they actually notify or say something, we don't know for sure. But yes, that is a rumor that is going around that that entire block is being bought by someone including the club location.

The question I have is, it's pretty tough to get a license for a new club in a city like New York or I assume in other cities. So when somebody like Scores loses its liquor license or if something different would happen in the Penthouse space, you say you pick up the talent. How do you pick up the customers? Do they just know, or do they follow the talent?

Well, the nice thing about Scores customers are they're big Howard Stern fans. And since we've picked up Lonnie, and Lonnie's had us on The Stern Show and The Stern Show has been so supportive of Rick's. And we can't say enough for the help they gave us in the grand opening in Philadelphia. And Gary and Ronnie had came out on-site and were fantastic. Great draw, great sports, lots of fun. Really, really made the grand opening party a huge success for us.

But they talk about Rick's on the show. The fans go to Scores, it's not open they go, well, maybe let's just go over to Rick's. And I think that's helping a lot. The rest of it I think is word-of-mouth. As we continue to grow -- we've always said in New York City that marketing, true marketing in the sense that you do in other cities just doesn't work. You can't afford to pay to market to 15 million people when 1.5 million of them are your potential customer base.

But it doesn't hurt if your competitors get closed.

Exactly. That doesn't hurt anything. That's for sure.

Keep up the good work, Eric. Thanks.

We'll do it. Thank you very much.

[Jason Schlesinger], private investor.

Congratulations. Actually you answered my question about two seconds ago. I was going to ask you about, if you were looking at going internationally at all. Certainly not implying that you need to, I'm just curious what your ideas are.

Like I said, we're looking. In the U.S., it's so strong right now. When we need to look internationally to continue our growth strategy we will, but I think right now there's just so much domestically. And it's so much easier to operate, it's so much easier to -- we know the laws here, we have the attorneys here in this country. We have the things we need to be successful in this country.

And the growth, we don't have access to enough capital to grow everything we can grow in the U.S. right now, so I don't see why we would want to go spend capital outside of the U.S. at this time.

I don't really disagree. It makes sense.

Chuck Lipson, CSL associates.

Back again. Did you say during the conference call that you're modeling was based on 6% comps?

Yes.

Okay, so we'll only know the first month, but you're somewhat ahead of that?

Basically we decided to go to quarterly -- I'm glad you brought this up because I wanted to mention this. We've decided to go to quarterly for a couple of reasons. We're getting into some major cities now. We're spreading on all these different cities and there are these huge events on a monthly basis that affect specific locations directly -- NCAA tournaments, football. So we figure on a quarterly basis it will pretty much even out.

But on a month-to-month basis, sometimes our comps are 17% because we had some huge event that is a one-time event. And we just wanted to even it out and give people a much better, constant flow of revenue growth with 8.4% for the quarter on same-store sales. One month was 12% and one month was 4%. To me it just doesn't make sense to our long-term investors.

The traders, they probably hate the fact that we're going to quarterly deals, but the long-term investors understand it. They'd rather have solid information. You don't want to be making long-term decisions on information that is not necessarily what -- it's 100% accurate, but I don't think it tells the real story of the Company and the growth. And on a quarterly basis it will.

I agree with the quarterly, to tell you the truth. You either buy into it or you don't hang on each month to say that something has changed dramatically. You said you wanted to use more debt, especially with your stock down here. Would that include convertible debt, or would that be just straight debt to you?

We've used converts -- small converts in the past. What I don't want to do is create any major market overhang. I've studied these convert deals that some of these companies do. And, while GM or Kraft can get away with a large convert, I just don't believe a small cap company like Rick's could go out and do a -- we could do these $1 million, $2 million here for quick money if we need it for a specific deal that the return on the investment is so huge that it makes sense for us to do. But to do a large one, I'm not leaning towards that at this time at all. I think just think that it puts a cap on us; it'll slow us down. While we would work right through it, but I feel like it would be like putting the brakes on for a six-month or 12-month period if we did that.

Okay, thank you.

That's pretty much where I'm at. It is very confusing. We've got a lot of -- it's hard to weigh all these factors. And that's one of the things we do, really on deal-by-deal basis and an overall basis is how do we fund it and not stimey our growth going forward? We want to keep that growth moving.

You're doing it so far.

Thank you.

[Harold Huffman], Stonegate Securities.

I just wanted to ask you about -- a little bit more on some of the acquisition financing. Just moving forward, you obviously were really successful in structuring the Dallas deal with the mortgage debt. I was just wondering if you've seen -- in some of the other markets where the real estate has already been more volatile and seen more of a downturn -- if you've seen any inclinations that there will be a restriction in commercial financing in those markets or just generally around the country? And if you did run into that later in the year, how might that, if at all, constrict your acquisition pipeline or your strategy on it?

I guess the big thing that we have right now is we've never had bank financing before. A few deals here and there, 40%, 50% loan-to-values from some banks that took a chance. Some smaller banks here, very regionalized banks in Texas that have done some financing for us.

We're starting to get a little more solid base. Our cash flow is so huge that they can't ignore us. And with the credit crunch where it's at right now, good lenders are in high demand with these banks. So I think we've gotten kind of -- it's a double-edged sword for us because it's a recession and it's causing problems here and there, but at the same time it's opening up opportunities to Rick's that we didn't have before.

I think we'll continue to see deals done with bank financing for the real estate, which is what we've always wanted. We hate to give up equity for real estate. The return on equity for real estate is 8% or 9%, at best. When we go and do these clubs we're getting 30%, 40% return on investments. And in the past, having to come up with all that money for real estate definitely has -- drags us down a little bit on our return on equity.

And so we're very conscious of that, but at the same time, we do believe that owning the real estate gives us a huge competitive long-term advantage, and we're a long-term thinking company. We're not just worried about this month and next month and next quarter and next year, but we are worried about where we're going to be three years from now and five years from now.

Okay, thank you.

[Scott Coleman, Credence Capital]

Congratulations. What a great quarter and great guidance, and I just wanted to say, as a long-term shareholder, I am aligned with your outlook of not trying to grow at such a high-cost. But my question is, were there any weather issues this past quarter that might have slowed things down that were abnormal for the season?

I know that Minnesota did very well. I think Minnesota definitely had some weather. New York had a couple storms, but I don't think it was anything -- you know, it was like one-, two-night effects, slow effects. And what we're seeing in this economy is, when people get -- they don't come in for a couple days, clubs have a couple slow days. Maybe they missed the normal Tuesday, Wednesday, Thursday night out for whatever reason. Then they come out on Friday and go crazy. They get cabin fever.

So overall we haven't seen it. We have seen the business model, at certain locations, has changed a little bit to that thing. The weekends are -- the weekdays are a little slower, the weekends are a little busier. But overall the spending is pretty consistent when you take it on a month-to-month basis, a week-to-week basis.

And if you could just go over how you think about the put options that are in some of the buyout contracts that you've done.

I'm glad you asked that, because a lot of people are very confused on that. They think it's going to create this huge market overhang or that all the stock is going to be dumped on the market. And that is absolutely not the truth.

Both of the deals, we have two deals. If you look on our balance sheet, you will see a line called "temporary equity," and that temporary equity right now is a little over $5 million and represents 230,000 shares of stock from the Dallas transaction. I'm sorry, that 230,000 is only the Philadelphia transaction and the Austin transaction. There will be an additional 210,000 shares to add to that. Right now we have about 440,000 shares through April.

But for example, the Philadelphia transaction, those shares can be put back to us at 5,000 shares a month. Creates about $100,000 a month cash call, if the stock is trading below a margin where we would have it put into the market. And we've decided just to buy it back for $23 a share. It would take the owner about four years to put all that stock back to us. So it's not like it's going to be a big giant cash call we have to come up with one day. We're more than free-cash flowing enough money.

The Dallas transaction is very similar. Each partner can put 5,000 shares to us if they want to. So it is 10,000. So total you are looking at about some $300,000,$400,000 in cash flow, if we had to buy every single share back at the absolute full put price. We also have the option to have them sell the shares in the market. Let's say the stock is $21. We can have them sell the stock in the market for $21, the 5,000 shares, which right now 5,000 shares coming into the market is not going to hurt anything.

If they decide -- let's say the stock goes to $30 and they want to sell. They are still limited to 10,000 shares in a week, 25,000 shares in a month, or 70,000 shares in a quarter. So we believe that we've set it up so that any stock that enters the market will enter the market in an orderly fashion. And if the company actually had to buy that stock back, that we have more than adequate cash flow to buy it back and basically it's an interest-free loan for us.

So at this point all those shares are in the current diluted share count?

Yes, they are.

And I just picked up on something that I didn't know before. I think you said that, say the stock is trading at $20 and the strike on the put is $23. You can ask them to sell it in the market, and then you have to write them a check for 3 dollars a share? Rather than having to buy it for $23 a share?

Exactly.

Okay, that's great.

Like I said, it's 5,000 shares a month. The market could absorb 5,000 shares. I think our average daily volume right now is 300,000 range or so. So the market wouldn't even know if they were selling. You wouldn't other than if we told you. But as far as the price, I think it would have very minimal effect on the stock price. And in any circumstance, whether stocks is lower, whether stock is higher, I think it is a non-issue.

Great.

We designed those put options for that exact reason. A) it gives the seller of the club a little guarantee or cushion that he's given us his asset for value that he is going to receive at a later date and limits his downside, without putting any undue strain on the the Company to be able to perform under the terms.

Great deal. Thanks.

Mr. Langan and Mr. Priaulx, there are no further questions at this time. I would like to turn the floor back over to you for any closing comments you may have.

Yes, I just want to add that, starting tomorrow, a transcript of this call will be available on seekingalpha.com, as it is after every quarterly call. And again remind everybody who is in the New York area to attend our Due Diligence Ball on May 13 from 6 to 8. You will have a good time. You'll get a chance to look at the club. Eric, any final comments?

No, I think that's it. I look forward to seeing everybody in New York next week, and we're going to continue to grow the Company. Appreciate your support.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation. May you all have a great night.