RCI Hospitality Holdings Inc (RICK) 2008 Q3 法說會逐字稿

Greetings, and welcome to the Rick's Cabaret International third 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 Counsel for Rick's Cabaret International. Thank you, Mr. Priaulx, you may begin.

Thank you Sean. I just want to welcome everybody to the call, we have a record number of people on the call today. In our presentation, which is posted to the website and through Precision IR, you will see our safe harbor statement. Please read the safe harbor statement, and it contains the normal disclosure information. I'm now pleased to introduce to you our President and CEO, Eric Langan, who will take you through the conference call for our third quarter 2008 earnings. Eric?

Thank you Allan. We'll begin with an overview of today's presentation, which will review the third quarter '08 results, we'll discuss impact of certain events that affected earnings in this quarter, we'll discuss our organic growth, the Las Vegas acquisition update to let everyone know where we're at on that at this point, and update our guidance for 2008 and review our outlook for 2009.

To begin with the third quarter, revenues were a record $16.3 million, up 93% over the third quarter of 2007. Net income was $1.8 million, up 77% over the third quarter of 2007. Diluted earnings per share of $0.21 versus $0.16 in the second quarter of 2007, and operating cash flow for the nine months is $9.7 million versus $2.6 million for the year. It actually says in the third quarter there, at the end of the third quarter is what it should say.

Getting into the things that affected our net earnings, we are very happy with our revenue, our revenue growth is solid, we're continuing to see visits to the clubs increase. However, the start up costs in Dallas and Philadelphia were about $525,000. While we anticipated start up costs in Dallas and Philadelphia, what we didn't anticipate was having to keep out of town entertainers in Philadelphia for about four extra weeks, which added to our cost, and continued additional marketing in that market, as well as originally we only had one club in Dallas that we were buying, we actually bought two clubs, the third one closed around the 12th or 13th of June, which added to our start up costs in Dallas.

We also had $125,000 expense in the month of April due to the fact the federal judge ruled the tax unconstitutional on March 28, so we stopped collecting it, however toward April 20 we found out we had to still pay this tax. The state decided they were going to make us pay the tax anyway, and it took us a few days. So we had about 26 days of the Pole Tax that we had to pay, that we didn't recover from our customers.

We also had timing losses due to our new media division, in that the trade show is in August, we start collecting revenue but we can't book any of that revenue under GAAP principles until after the trade show is over in August.

More review of the third quarter, you'll see that we nearly doubled our revenues. Those revenues were driven mainly by Tootsie's in Miami, and the new clubs in Dallas and Philadelphia, that added $6.8 million to our revenues. Our same location increase of 8.45% also added an additional $630,000 in year-over-year revenues.

We were also able to reduce our costs, as we were seeing in the media that food costs and other raw material costs were increasing, we went to our suppliers and negotiated discounts and pushed for volume discounts, especially at our Tootsie's in Miami location, and we were able to achieve 11.68% versus 12.6% in the previous year.

The current update for the Las Vegas acquisition, we're ready to close the transaction. We've raised the capital, everything's in place to close the transaction, we have a current dispute between a landlord and the seller that's awaiting resolution. They have a hearing on August 21 that we hope will resolve that, once that is resolved we anticipate closing the transaction. Now there's a limited time that we're prepared to wait to close this transaction, and currently that is September 30 before we consider moving on and investing that money some place else. That's one of the biggest things that affected us is we issued 672,000 shares to do a capital raise in anticipation of closing an acquisition on June 25, and we haven't been able to get that acquisition closed just yet, and that's what's going to affect our guidance going forward, is an extra approximately 700,000 shares outstanding without any additional revenue in our guidance.

Moving on to the acquisition view, we continue to look at potential acquisitions, there are several strong candidates. We'll be at the Club Owners' Expo, which we recently purchased and now own, from the 24th to the 27th, and we'll be meeting with a lot of potential acquisitions candidates at this expo. We anticipate our next acquisition before the calendar year end.

Moving to guidance, which I know everyone is very concerned with, and I want to address these issues, is fiscal year September 30 we're lowering our revenue to $60 million, a small decrease in our total revenue, just due to what we consider some of our high-end customers spending down a little bit, net income to $8.6 million, for earnings per share of $1.02. Now the reason we're doing this, is we're seeing a margin squeeze. If you look at our current quarter, our net income margin dropped to about 11% versus over 16% in the last quarter. We had originally anticipated a continued growth in our margins to about 19%, now we're believing those margins are going to be closer to about 14% for the next quarter or two.

Moving to calendar year, December 31 brings our revenue to $67 million, down from the $68 million to $69 million that we originally anticipated, and brings our net income to $9.6 million, due to that margin squeeze, and due to the extra shares outstanding, and that margin squeeze, our earnings per share to $1.10 for the calendar year. Now these numbers do not assume any additional acquisitions, and any acquisitions that close, including Las Vegas, would impact these results.

Our outlook for 2009, earnings per share of $2.00 to $2.20 with revenues that exceed $100 million; what I really want to address is our current run rate, which is about $0.30 to $0.35 a quarter. Now our outlook for $2.20 assumes that we'll continue with our acquisition strategy, and continue to close acquisitions. On the next page we wanted to add a basis for our 2009 outlook, and how we plan to get from $1.20 to $1.40 in our annualized run rate to the $2.00 to $2.20.

A lot of concern from investors has been that we don't have the currency with our stock, and we agree, we will not be issuing stock and we don't intend to issue stock in these price ranges. But we'll remind you that we have $13 million in cash on hand. We can also leverage our existing cash flow from operations, which is over $1 million per month, and we also have an estimated $15 million in net real estate equity that could be tapped for acquisitions. So we believe that we are still positioned to continue with our acquisitions regardless of what our stock price is at this time.

At this point I'd like to take any questions, and invite everyone to come out to the Due Diligence Ball tonight. I will be at the club from 6:00 p.m. to 8:00 p.m., and we have free admission and free hors d'oeuvres, of course discounted drinks, as always, and I'll be available to answer any questions in person that you might have, or any concerns. I know that the Q was just recently filed with the SEC so a lot of you may not have actually seen the entire 10Q yet, but it is out at this time. At this time I'll any questions.

Thank you. We will now be conducting a question and answer session. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Dave Foyer with Montgomery Street Research. Please go ahead.

Hey guys. The jump in salary and wages from 2Q to fiscal 3Q, was that basically the start up costs at Philly and Dallas?

I'm sorry, I didn't get the first part of your question.

I'm sorry Eric. I guess the step up in salary and wages between this quarter and the previous quarter, was that largely due the start up costs in Philly and Dallas?

Yes, and of course the media division as well.

And another clarification question, is the exotic dancer revenue going to be located in the "other" bucket of revenue?

Phil, are you on the call?

Yes, I'm here. Yes it is, it's in "other" right now. Until it gets larger, we're going to break it out probably in the annual report, but right now we just stuck it in "other".

Thank you.

And do you have a sense on what the revenue's going to be, impact or contribution in the fourth quarter from the conference itself?

You know we don't have the exact numbers yet, because this is our first conference, we've looked at past ones, we have changed the format a little bit and we're anticipating a larger turn out from the general managers in the industry. I have talked with Don personally, some of the sponsorship revenue is down just a little bit, but not a huge percentage, and he anticipates making that up with the increased participation from general managers actually coming to the show. And the other show, the Store Erotica Show, is actually increasing in size, this is its second year.

Okay. And then just one final question and I'll get back in the queue. On the acquisition funding side, how far do you want to go in terms of leveraging the balance sheet on the debt side?

I think we would keep it at less than three times EBITDA at this point, probably closer to two and a half would be the ideal, maximum leverage. However, you've got to understand that our leveraging, a lot of our debt is real estate debt. We do not really have any debt other than the $10 million for Tootsie's that's really what I consider business margin debt. The rest of it is in exchange for rent, we pay no rent because we pay the rent to ourselves basically, which covers those payments. So some of the real estate debt should kind of be stepped out from that percentage, in my opinion.

And then I guess one last question, sorry, one more. It looks like in terms of our 2008 guidance you're implying about $17 million in top line revenue for 4Q, about $0.27 or so on the bottom line.

I think it was $7.8 million actually. What are we at right now? We're at, I don't have it in front of me. We estimated it at $16 million, I think we're currently 17.3 less than that, so we're at 47.6 right now.

Okay, great.

I'm sorry, I should have had it right in front of me, but I didn't.

Well super, well thanks guys.

Thank you. Our next question is from the line of Eric Wold with Merriman Curhan Ford. Please go ahead.

Good afternoon. A couple of thoughts, one on the $525,000, I know the last guy kind of asked you, a lot of that was in salaries and wages, can we assume it was kind of split between salaries, wages, and other, and do you know the break out of how much was in each?

You know I don't offhand, obviously we can dig into it and get it for you. The majority is probably the salary and wages increase, simply because we have three more clubs of people that we're paying. The revenue hasn't really stepped up all the way. I think the advertising and professional, or the advertising, was stepped up quite a bit too in this quarter.

Great. On the acquisition front, you mentioned you expect to get one more acquisition closed before year end, is that in addition to whatever happens in Vegas?

Yes, it is.

Okay. And then can you give a little more color to what's included in the '09 guidance, obviously continuing the acquisition program.

And you do realize I'm talking about calendar '08 when I say in this calendar year?

Correct, right. What can we think about, in the '09 guidance, what you're assuming in there in terms of club acquisition, either number of clubs or kind of revenue acquired, if you want?

Well I think we're going to see a couple of things, I'm hoping to see the margins increase back up into that 16% to 17% range that we were at, number one, as Dallas and Philadelphia start contributing to revenues instead of being a negative. And also, well Vegas would be about $18 million, so if we don't close Vegas we'll definitely want to replace that with a similar transaction, and we're also looking at $10 million to $12 million in additional revenue acquisitions, with margin ratio similar to our current operations. No more in this 2009, I don't believe we'll do any other acquisitions that aren't immediately accretive. I think we did the two startups in March and April and I think we're done with that for at least this year.

Okay and then, lastly, on the existing clubs, can you give us a flavor of kind of what you're seeing, you know, from consumers, either in the higher end clubs, the lower end clubs, where are they -?

It's kind of been across the board and it really started affecting us in June a little bit and in July, I think we're seeing a little bit of it. The guy that used to buy three bottles is buying two; the guy that used to buy two is buying one. You know, the guy that was buying one bottle is buying drinks by the glass. Basically, what we're seeing is more people through the door, spending a little less money, is what I think we're seeing right now.

And the other thing we're seeing, this year, which we didn't see last year, is a change in --- actually, the last two years we haven't seen it; the summers have been very strong the last two years. But this year, we're turning back to a normal trend, slower during the week and much, much busier on the weekends. Except in New York City; New York City's just the anomaly of everything. We're continuing to see strong growth in this market, with every day busy. The weekends are picking up and during the week is still picking up, so, very strong growth in New York.

Are you seeing any impact of people in the club spending less on the girls, on dances, what-not, impacting your ability to retain workers in the club?

Actually, as the unemployment rate goes up, we actually see more girls coming in and applying. So, as times get harder, we're seeing more girls come in. I think you're seeing the customer spend a little less money on the girls and I think we're seeing more girls at the clubs because of the current economic conditions. And so, the girls perceive it as being a little slower than it actually is because they're getting hit twice; A, with the customer spending less money and B, more girls taking those dollars, dividing those dollars up.

Right, part of it. Thank you guys.

Thank you. Our next question is from the line of Jamie Clement, with Sidoti. Please go ahead.

Eric, Allan, good afternoon.

Good afternoon.

Eric, just a clarification; I think your calendar '08 EPS guidance is about $1.10?

Right.

Okay so, going from the September quarter to the December quarter, that is, you're not including Vegas in that guidance?

No, absolutely not. This is no additional acquisitions. We want to show you where we are right now and we bought nothing else. We just left that $13 million cash sitting in the bank earning 2% on the Treasuries that it's earning right now.

Okay. So, in terms of going from a, you know, mid-$0.20 type number in your September quarter to a $0.30-something number in the December quarter, are the primary drivers there a question of seasonality and of getting your newer clubs kind of up and running? Is that how you're thinking about it, you know, over the next couple of quarters?

Absolutely.

Okay.

And the fact that we have a trade show in September that we don't have in the December quarter as well. So, we figure that the seasonality, which October, November, December is typically our best quarter of the year, almost every year in history. So we know the sales are going to be up in those quarters. They always are.

And we also know that the Dallas and Philadelphia clubs are going to be six months old, so they can start hitting that six-month growth cycle. So they won't be a drain; the fact that we estimate they'll both contribute in that quarter, as well as the trade show revenue coming down a little bit. Otherwise, we may have been a little higher but the trade show revenue will not be included in the December quarter.

Okay. And, you know, as you-.

And, keep in mind, we'll have all three months of Tootsies this year, versus last year we didn't.

Right.

That's a change, year-over-year.

Now, in terms of, you know, Eric, in terms of how you're looking at the business, you know, today versus three months ago, obviously, the consumer is a little stretched. But let me ask you this. I mean, do you think that, you know, opening new clubs, and, just whether you want to talk about Dallas or whether you want to talk about Philly or both together, do you find that this -- that maybe the economy has sort of, you know, maybe prevented or impeded your ability to kind of drive new customers to the clubs? Like, in other words-.

We believe it has definitely done that in our markets.

Yes and the reason we think that is, what we're seeing now is that customers, they're not going out as much. So, when they go out, they want to have a great time. So they're going to the place they know. So getting them to try something new has been more difficult. When we switched to the free passes and changed all of our ads to get in free, we've started seeing an increase in the customer counts. And that's the main point; they don't have the money to pay two cover charges. So, we kind of had to let our cover charge go and we've built our business up.

We're very confident that, football preseason is here now so we're seeing some increase in that. And once basketball season starts, we're very confident that both Philadelphia and Dallas will do very, very well. The Dallas club is within five miles of the football and the basketball stadiums. And the Philly club is one mile, or a mile-and-a-half from the football and the basketball and the hockey and every stadium in Philadelphia, basically.

And Eric, let me just, about Philly as a market, I'm wondering whether, you know, is Philly a market that's going to be a seasonally weak over the summer kind of market? I mean, it seems like most high end customers in Philly, I mean, at least in my perspective, leave Philly on the weekends.

You know, it's possible. There're a lot of blue collars too that party just on the weekends.

Okay.

It's just too new to tell.

Okay.

And that was one of the main problems in December is -- I mean in May, when we did our guidance we looked at everything and we'd seen a strong growth. And we estimated our growth continuing. Our margins, we anticipated our margins growing to about 19%. And the reality is we didn't get that extra 3% margin growth in our existing stores, even though we had same-store sales growth, the margins got squeezed because of higher costs related to different things.

And at the same time, we had the drag from the new locations, which brought us, I think, to about 11% net income. We're aware of that but the other problem we had was our accounting had to take in four new businesses and so, while we were watching the top line revenues, because they're very easy to get on the top line revenues, some of the accounting staff got a little behind on getting us some of the bottom line numbers. So, we didn't realize the margins were being squeezed as much as they were.

And so that was a problem. We are aware of that now; we're completely caught up in the accounting office now and we're aware of what's going on with that. And, obviously, as we're more aware, we're able to make sure that those margins are climbing back to where they need to be. And we estimate that they're going to --- you know, we picked the low end of 14% but we estimate that they'll get back to that 14% to 16% range that we were at, now that we're aware and watching it much, much closer.

Okay. But what it sounds like is, you're comfortable with where things are. There're some costs that are unwinding here. You should be up sequentially in the September quarter and you think you'll be up sequentially in the December quarter, even without an acquisition?

Right and the biggest thing that's affecting earnings per share is that we have 700,000 shares outstanding that are not bringing in any revenue; that's not accretive right now. It's dilutive.

We will invest that money and it will be accretive. And when that happens, we'll update our guidance. And, as you can see from our outlook, we're very confident that we'll get back on course. But this is a blip. And I've always said for the last few quarters, everybody's always said, what can the economy do to you next? It can cause a quarter's blip or maybe even a two-quarter blip in that we have to make adjustments if customer spending habits change.

So far, we haven't seen any changes. Well, in June we started seeing some of those changes, towards the end of June and in early July as well. So, we've had to make some additional adjustments. We started making the adjustments in June and increased some of our costs, especially when we bought the new club in Dallas. So, around mid-June, we started making a few adjustments. But I think overall it'll be very strong.

Okay. Thanks very much for your time.

Thank you. Our next question is from the line of Scott Coleman with Credence Capital. Please go ahead.

Hi, thanks; hey guys. I'm just wanting to get some clarification on some of the numbers. You said, for '09, without any acquisitions, we're looking at $1.20 or a run rate of $1.20, $1.40. Was that calendar of fiscal?

That's fiscal '09.

Fiscal?

Yes.

I wish you guys would switch to a calendar because it gets so confusing.

I know, I'm sorry. Yes, I know.

Just kidding; okay so....

But it's a lot cheaper for us when we get our audits done and everything because everybody else isn't fighting for auditors.

All right now I remember when were talking about run rates, I think it was last conference call, this is with Vegas, we have $92 million to $94 million and $1.70. And I think that was fiscal, right?

Right. I think we're --- if we closed the Vegas transaction, I sure we're going to be a little lower than that just because the margins are being squeezed a little bit. We're going to have a hard time tweaking out that 19% margin. But I do strongly believe we can get back to that 15%, 16% margin rate. With our current run rate, I guess we're about $72 million annualized. So, depending on where that percentage of that margin comes in at, you know, to figure where we'll be, we're going to be at about 9.5 million shares outstanding, fully diluted in this next quarter.

All right.

And unless we buy something else, I think that is fully diluted. That's almost every share we could have outstanding.

Got you; so, if you could just give us a little color on what costs kind of got out, a little out of control, because you weren't looking at the bottom line enough? And, what adjustments you could make; just some color on that.

Sure. I think our marketing and advertising increased dramatically. If you look year-over-year, our marketing is up to about $665,000 from about $300,000 last year. Our legal and accounting has gone up considerably. And some of our other professional fees and that so we're working on lowering some of that stuff, talking with some of our legal counsel.

We did have two lawsuits that popped up that had a little bit of --- we did some depositions and stuff. But I believe most of that will go away after this quarter.

Okay.

We'll get into some finality on some of that.

What about regional managed entities?

You know, obviously our salary and wages had increased.

What about regional managers? Did you start to have a few too many people around as the acquisitions rolled in?

We have cut a couple of management, high-level management personnel in the last two months, due to A, we believe we've got stronger people coming up. And, they just weren't performing to the standards that we wanted.

Okay. And the marketing, was that because you had some overlapping as you had new clubs and you had some overlapping marketing were you seeing?

Well, a lot of that was in those startup costs, obviously.

Oh, okay.

You know, in the $525,000 startup costs, a lot of those startup costs were marketing expenses. We did a lot of radio in Philadelphia when we first went in there. And we've added some considerable marketing in Dallas as well. And some of our existing locations, I think we're doing new stuff in New York and trying some new stuff in Miami as well.

And you're planning on bringing that back down?

Yes; yes, definitely.

Okay, all right that's it for me for now. Thanks.

All right.

Thank you. Our next question comes from Ian [Schafer] with [Galliant] Capital. Please go ahead.

Hey guys, how're you doing?

Good.

A couple of questions, maybe some comments to begin and let me preface it by saying I am long shares in Rick and I do like the story a lot. I've followed you guys for a long time but, Eric, there's been some, you know, some issues that, you know, I spoke with Allan today and I told him I would bring this up in the call. And I just think there might be some level of frustration going on with some of the investors.

There seems to be some sidebar conversations or assumed conversations that people at Rick, who are aware of current trends in the business and market conditions are having with reporters. And I could cite, remember, the July 1st date when a discussion, you were having, I believe, with a reporter maybe got misconstrued. And I'm sitting at my Bloomberg desk and comments are streaming about how things have changed and all that and how the Las Vegas acquisition may be delayed.

And then, later on in the day, a press release comes out from you guys, maybe around 1:00 o'clock, addressing that situation.

Right. Well, the reason why, she took everything out of context. All right, so in other words, we were having a conversation and she asked me something specific about food costs. And I answered an answer that was about three paragraphs. And she took just one sentence out of those three paragraphs and used it in her story.

So, if you look, they changed their, they updated --- the Bloomberg, after, of course, Allan got hold of them, and clarified, he said, you need to go re-listen to what was said, you'd taken it out of context. They did reissue a different release. Unfortunately, the damage had already been done.

Right and the point is that, you know the damage is done. But the bigger issue that I'm having and I think other people are having is, there's only so much news flow coming out of the company.

Right.

But there are individuals who seem to have more information than others. So, wouldn't it be more fair or a good idea to have discussions with reporters, maybe being web cast so that all investors can have that information at the same time, rather than the situation that happened here?

And I also have to say, some of the analysts on Wall Street that you may have spoken with, had some idea that the Philadelphia and other clubs may have higher startup expenses. And you know, that wasn't privy to....

Right, well, I think Eric visited a lot of those clubs.

Okay, that's fair. But I'm just letting you know that there is an assumption out there that there have been discussions from people with Rick hinting to that affect. And if there are investors who believe in the long-term, and I do, I'm not looking to get out of the company, I like the company. But this is something that I've felt, and I've heard it from other people that there are some side discussions occurring, or there's believed to be, and it would be fair if everyone had the information at the same time. If you felt that maybe if you knew a month ago that expenses would be high, you don't have to halt the stock at earnings day, and you could have put out a press release say a month ago, maybe give the short sellers some reason to stop shorting the stock.

If you'll notice, the 10Q didn't get filed until 4:25 or 4:30 today, there were last minute changes from the auditors even up to the last, literally, minute of the bell, before the bell went off. We struggled, I'll be honest, we struggled to get this 10Q out on time today, simply because we just made a lot of acquisitions in this quarter, and there was a lot of things, the accounting people got behind as they tried to assimilate the new clubs into our accounting systems, especially with the media division and the rules on booking the revenue from the media division, which was on a cash basis before we took it over. So we had to go and create all of the accrual accounting and what not to get it in.

If we had talked with people, I know that both analysts lowered their estimates, but I think that was just based on our revenues were down. I think they both had us at $16.6 million in revenues, I don't know what the club portion of that was in there, in their mind, but we only reported $15.8 million in revenues. So I think that was part of it. You can talk to Eric and Jamie about exactly why and how they came to their numbers, but I don't think that they had any inside information from someone at the company.

No, and I'm not saying they did, but there is a thought out there that there is some aggressive short sellers on the company, and is this maybe because they're naked short selling, but that someone's in the know of something. I'm just letting it be out there, I'm not saying its fact. But I'm just letting you know, maybe be a little more cognizant that if you're going to talk to someone make it public, make it a web cast or a press release, whatever you're going to do, but before the fact.

Okay.

So that's just one thing. The second question I have for you though, and I know you guys want to continue acquisition strategy as a key part of the story, but there are a lot of naysayers on the name, a lot of people who want to lump you with VCG and you've made great leaps in the past to talk about how you're a different company. Wouldn't it make sense, okay you guys are trading at $12 or $13 right now, maybe six times your next year's earnings, there's a thought out there -- and again, I believe in the company, but how can you give investors confidence that you won't make other acquisitions and something like the Scores Las Vegas thing won't happen again? Or higher start up costs in Philly may occur that you won't hit the guidance. How do you keep investors -- I personally think that if investors actually see you hitting that $2.00, $2.10 number they'd be happy and they'd support the stock. It's just there's a lot of naysayers out there saying you guys are too acquisitive, you don't necessarily always know what you're acquiring, and then there's going to be some issues that will arise, as we say this quarter, that's going to force you to bring down the guidance.

So why do you have to be so aggressive with the acquisitions? Why can't you just slowly digest them, you've done a lot, and actually prove to the Street and main street, that you can hit the numbers that you put out?

Well I think we've done that in the past, we had a glitch this quarter, there's no doubt. I'm not trying to make excuses; I'm trying to explain what happened and what I'm going to do about making sure it doesn't happen again. And that is, we brought the estimates down to about a 14% profit margin, which is a little less than we did two quarters ago, but more in line with where we believe the economy has us at today. We did miss this quarter, but we beat every quarter for the past four, or maybe even six quarters, I looked back four quarters before the call today to see exactly where I was at, and what we had done in the past, to see how bad this miss was versus some of our overages, and this is a bad miss, I agree.

The margins got squeezed, we were anticipating growth that didn't happen, and at the same time had expenses that we didn't account for in our guidance. We have reevaluated everything, we've set down and we've, I mean along with getting this Q out a lot of our time for the last four days has gone solidly into getting this guidance down and making sure that we regain the market's credibility and saying these are the numbers we're going to do, and doing those numbers, as we've done in the past.

Okay, fair enough. And just last point, any thought out there as to maybe do a share buy back? You are flush with cash right now. I know you're saving some money on the side for future acquisitions, but --

When we do our capital raise I don't think that the people that put that money had anticipated us taking their money and buying the stock back at a cheaper price. They anticipated us taking that money and doing accretive acquisitions, and that's what we intend to do with that $13 million. Now there may come a point where if the stock sells off to some ridiculous amount of money that we will take some of our weekly cash flow and start supporting the stock.

But I think the long-term benefit to our shareholders, and to make the long-term gains, we have got to do these accretive acquisitions. One of the mistakes we made was buying the one location in Dallas and the location in Philadelphia, they were a little different than our business model had been, kind of our old model of buying some fix them up locations, we bought two at one time. Now originally we didn't intend to buy two at one time, the original Dallas location was going to be converted to Club Onyx, then after we closed the transaction the main competitor said "We don't want to compete with you, buy our club, we'll sell it to you for $1.5 million", and we couldn't tell them no.

So we had to reconcept what was originally going to be Club Onyx into a Rick's Cabaret, which increased our expenses. None of that was anticipated in May, but that's just the way it ended up working out for us. When we originally bought the original Rick's location in April, that was going to be converted into a Club Onyx, we were going to wait basically until the end of May and convert that into a Club Onyx, and during that time we were able to buy the only competitor that Club Onyx would have had on the marketplace at just a ridiculously cheap price.

Just to reply though, aren't those possibilities that can occur when a company is acquiring a new entity? I mean you guys are quick when you put out a press release to say "Okay, we're buying this company", and you up your guidance. But before the deal is closed and before you know every little thing of what might happen, wouldn't it be safer, I guess, going forward, to wait till you fully close the acquisition, wait till you've seen a month or two of operations, and then give that updated guidance? You don't want to seem too optimistic either.

I don't think we've updated our guidance based on an unclosed acquisition. Our guidance is snapshots of where we are today, only the outlook that we've given for 2009 has been based on any type of acquisitions.

That's what I mean though.

The guidance we gave, the reason we're missing our guidance, is a margin squeeze. We thought our margins were going to grow to that 19% and now we believe that we're going to be closer to 14% to 16%.

Okay. All I'm saying is conservatism can't hurt, and the Street stands by firms that hit their guidance. Listen, I'm supporting you guys, I think you guys are -- hopefully this is a one time glitch. But it's hard to watch the stock every day react the way it is, and I'm just trying to express maybe what some investors are feeling.

I mean I was shocked when I found out that our shorts position went up in the first fifteen days of July by half a million shares. You know, I was like, whoa, where did this come from? What's going on?

Anyway, good luck guys.

Thank you.

Thank you. Our next question is from the line of Blair Sanford with Burlingame Asset Management, please go ahead.

Hey Eric.

Hey, how are you?

Getting to the start up acquisitions you made earlier in the year, and I understand, I can see what it's done for you in the quarter, but can you sort of quantify for us, or give us a framework for thinking about up and coming acquisitions like Philadelphia or Dallas versus an existing business that's already up and running, and you pay what I think might be a pretty attractive valuation for that. But it seems that you got these other clubs for really good valuations and the only costs that you incurred was some extraordinary expenses with regard to grand opening, marketing.

I think we take a hit for three to six months when we buy something like Philadelphia, but we turn it into a business that we would normally pay $7 million or $8 million for and we buy it for $2 million or $3 million. That's the real difference. So long-term it pays off for us, but unfortunately we're feeling the short-term pain. If our margins had continued to grow, the pain would have been very minimal. However, when the margins didn't grow to what we anticipated them to at the same time that we had these other costs, you get a quarter like this where we do $0.21 when the market is expecting $0.26 or $0.32.

Right, so it just seems like its expectations, short-term expectations whereas in my view you allocated money fairly adroitly buying these start up clubs.

I guess the big struggle with the market right now is the value investor versus the momentum investor in the stock. The value investor is going to say like you're saying, this is one of those things, temporarily I'm going to feel a little pain, but I'm going to get paid off big for it six months, twelve months down the road, which is the outlook we took when we bought these locations. Plus they're very strategic in expanding the Rick's Cabaret brand to a more national level, and that's the thing we took on it.

Now in 2009 I think we're going to stick with very strategic, immediately accretive acquisitions.

On that front, I had two more questions, and one of them was on that same topic. Have you seen a change in the number of opportunities out there, and have you seen a change in the valuation of those opportunities?

It has just been very steady, to be honest with you, lots of people calling, lots of deals out there. We're expecting to be very inundated at the tradeshow; we're talking to a lot of different club owners. What we're seeing some of the larger chain operators definitely considering their options and seeing the valuations that we get versus the private market valuations, which are very attractive to them, and I think we're going to continue to see that. There's a lot of opportunities out there, we've kind of -- unfortunately for us we really thought this Vegas thing was going to close already. So we kind of sat on the sidelines a little bit waiting to close it to absorb it and then move on to the next one. We are not sitting on the sidelines right now; we are out actively looking for our next acquisition and intend to close our next acquisition before the end of the calendar year.

Regardless of what Vegas does, whether we close Vegas or not, we've talked to some different debt lenders and some other stuff to make sure that whatever we negotiate with the next party that we're covered and prepared to make the acquisition without using equity.

Last question, back in June I thought you said you made some adjustments in terms of marketing, cover charge, etc. Give me an example; give us an idea of what you have in your toolkit, what you did in June and what you have in your toolkit, what you've done before when you're in slow markets.

A lot of its extending happy hours, what's really amazing, what doesn't tell the story, is that we've lowered our cost of goods sold at the same time that we extended happy hours and price discounting. If we had continued with the past pricing and the past terms of the happy hours and stuff, I think we would have seen an even better cost of goods sold. And those are the kinds of things that we do, is basically extended happy hours, more discounts, different types of specials, maybe more shot specials and stuff throughout the night, and those types of things, to really get the numbers up.

Every now and then we've had the girls doing more promotions, going out to different places and basically bringing customers to the club. Right now it's a numbers game to us, we wanted to continue -- when the markets are weaker and clubs are slower, we don't want the perception that our clubs are slow. As we get the perception as the busy place, our competitors lose market share to us, and that's what we want to see happen during the summer, so that when we hit October, November, December we have a chance to get back on course and maybe get to that 18% or 19% margin that we expect, because we put so many more customers through the door during those big spending months.

Eric I just thought of one more thing. You've had many acquisitions in the past couple of years, and tell me about how you've been able to build up your management team, or sustain your management team during this phase of growth. How are you set up if you buy another club in Dallas? What does that mean for your regional folks? Do they get stretched a little bit?

Well we've actually made one of our regionals more of a director of operations now, that's Ed Anakar; I know a lot of you guys know Ed. So Ed's really stepped up, so he's leading the regionals and the GMs are reporting directly to him now, which has strengthened the team a little bit in that they get his 100% attention versus maybe half of the attention that I was giving the regionals and what not. So that has helped us.

And we're attracting some decent guys, we brought in a couple of guys from outside of our industry that have been in the regular nightclub business that are bringing a lot of fresh ideas and just helping increase the customer count. And I think the trade show is going to give us another chance with the GM thing of the trade show this year, to see some of the talent around the industry and get a chance to meet and talk with some of that talent. And we'll continue to attract that talent to the Company.

Okay, Eric, thanks a lot. Good talking with you.

Thank you. Our next question is from the line of Steven Martin with Slater Capital Management. Please go ahead.

Hi there guys. Eric, you know, and I know you said this before and I will echo the sentiment of the preceding callers; I think the market wants to reward you for buying clubs that are profitable and accretive and the market doesn't want to reward you, albeit, maybe short-sighted, for starting them up from scratch.

I agree with you 100% and are thinking of getting in line with the market.

Okay.

I think that one of the biggest things that affected us was when we bought the club in Dallas. Like I said, we originally were going to make it a Club Onyx. Then another deal popped up that was just basically too good to pass up. We were buying a competitor so we would have no competition for the Onyx concept in that market. And the price was just unbelievable for us.

When we talked to the landlord; we were able to buy the property at a great price with bank financing at 7.5% interest. So, it was just one of those deals where, okay, we can just go with the concept we had or we could re-concept this and move with the other one and, I think, we just kind of mis-guessed what the cost would be in doing that in the quarter. And that's part of the miss, is that miscalculation.

So, when do you expect Dallas to start contributing?

The Onyx location contributed in June. We had net income in June from the new Onyx location.

And what about the other one, the starter?

That location still has some cost. I'm hoping that, in this quarter, to probably get that to breakeven and then, in October, November, December start seeing some solid profits from that location. Once again, I think it has to do with the football and the basketball seasons and just entering our prime season as well.

Okay and Philadelphia? How do you expect that to progress?

About the same as Dallas; I think Philly and Dallas are both very, very similar clubs, in that they're both close to those stadiums. We're drawing from the convention business and what-not in Dallas; we're drawing from some of the business travelers in the airport there, in Philadelphia. So, I think their progression is following each other very, very closely. I know their sales are following each other very closely.

The costs in Dallas are a little bit higher than the costs in Philly for us right now but we've made some changes there recently that I expect that we'll get those costs in Dallas back in line.

Okay. You started your talk about the long-term debt and I've got the queue and it's a fairly long footnote. Can you break out the long-term debt for us in, you know, baskets? Is it all, you know, 100% of it now, real estate?

No. $10 million of it is the Tootsie's debt.

Okay, so $10 million of the long-term debt is Tootsies?

Is Tootsie's. And then, about $2.2 million is other, the airplane that we bought and some other convert that we have that's not backed by real estate.

Okay and therefore, if I take the current portion, which is $1.6 million and $28.9 million..?

I think we're at about $30 million total, with about $12; so about $18 million of that debt is real estate debt.

Okay and the long-term debt related parties?

Those are convertible debentures. One of those, $660,000 of that converted this month, I believe, and it's probably footnoted in there somewhere, maybe.

Right, right; it's probably in the long footnote.

And then the rest of it converts in November. So that will all be gone and the rest of it converts at, I believe, the original note, it was about two years ago; I think it's $7.50 a share that it converts out at, so that's, like, another 100,000 shares or so.

Okay.

That's in the fully diluted count already.

All right; let's talk about the poll tax. What did the poll tax cost you in the June quarter?

I believe around $480,000. We've got about $1 million out there that should come back to us eventually. I don't know....

Okay and so, since you opened up, should we assume that the poll tax will run about $500,000 a quarter? Or, will that be higher because you'll have the new clubs in Dallas?

Well, we have converted the clubs in Houston to a what we consider, I'm sorry; what the definition of the law says is not adult related. In other words, we put on shorts and latex in Houston so we have three clubs in Houston that are not paying the poll tax now.

However, we have a club then so, it'll probably increase a little bit. But, I think it's going to stay pretty close to around $500,000 a quarter.

When the legislature meets, there's talk that the legislature is going to redo the law to try to make it constitutional or some type of new deal in that maybe we'll see some relief at that time. If not, we're waiting on the appeals court.

Okay. So, it's roughly $500,000 a quarter, which may or may not be recoverable at some point in the future?

Right. We've paid the tax under protest; we filed a lawsuit against the state to retrieve that money and we do strongly believe that, at some point, we'll get that back.

It would be one thing if the lower court had ruled unconstitutional on some little stuff. But I mean, they ruled unconstitutional --- I don't know if you've read the ruling but, I mean, they've ruled it unconstitutional on every ground that could possibly be ruled unconstitutional on. So, we don't believe that that will ever be overturned.

I don't think the state believes it either. I think they just saw it as an easy opportunity to collect some revenue from an industry that isn't really liked politically.

All right; thank you very much.

Thank you. Our next question comes from Ronald Welks, a private investor. Please go ahead.

How are you, Eric?

Good; how're you?

Great. A quick question for you; with the unexpected increase in spending, as far as the marketing with the new acquisitions in Philly and Dallas, I know you have said that you anticipate them to start contributing this quarter and, definitely, the next. Are there any plans to keep the costs where they are, or possibly increasing them in their marketing field and advertising field?

Well I mean, we're going to watch and see what the market requires us to do. And we're going to spend the money that we need to spend to create a Rick's Cabaret out of those locations and make it the number one, number two location in the marketplace.

Right now, with the summer, it's very difficult to judge exactly what we're going to have to do or not do, two to three months from now. We're reviewing it every month, on a month-by-month basis. The costs have come down, dramatically in the recent month and I anticipate that we're probably lower. In some markets, we're going to raise the cost a little bit and in other markets we're gong to lower the cost a little bit.

I believe that we'll return back to normal; by October, November, December, everything will be back to our normal percentages. When football season starts, it's very easy to market. We take a bunch of the girls down to the stadium; they pass out a bunch of free passes and the club fills up.

Okay and do you think Dallas is struggling a little bit because of the new laws passed? And as well, do you think Philly is just a tougher market than anticipated?

I really think, the Philly effect, I believe is basically, you know, gas went to $4.00 a gallon; people started watching a little bit and kind of went into a, you know, I'm going to go where I know I'm going to have a good time type deal, versus, trying new things.

We're seeing that change a little bit in July and I think, especially the first couple of weeks of August. And I think we're going to continue to see that. And as the football season starts, they're right down the street from us. They've got to drive past our location to go to one of the other clubs. So, I think we're going to be able to get them to stop.

And I think once we get them to stop, once we get them in the building, we're seeing a nice return of repeat business. What we've got to continue to do is see the new business come in as well. And I think we'll see that once the stadiums start filling up.

And you were saying that Dallas is five or six miles away the stadium and the Philly location is two miles away from the stadium. Are there any plans, during these seasons, to increase the amount of out-of-town girls, like you were saying, as one of the increasing costs?

I don't think we're going to need to. I think we're getting a solid base of local girls now. I definitely don't have to in Dallas. And we've seen girls from the Fort Worth location, if we need to, in Dallas. But, our girl count in Dallas and the quality of our staff in Dallas has improved markedly.

We brought a new, local manager in, in the beginning of June, end of May, beginning of June, who is really, really, turning the place around. We're very happy with what he's been able to do up there.

I think the biggest problem with Dallas was, we bought it in April; we thought we were going to do one concept with it. Then we were going to do another concept; so, we kind of just left it in limbo. So, it kind of sat there in limbo for about, two, two-and-a-half months, until we closed on the Onyx deal. And once we closed the Onyx deal in mid-June, we've gotten very serious about it and we're seeing some nice, steady increases in July, August and I think, going forward, we're going to see increase. Because, now we're committed to the Rick's concept.

I think the biggest problem we had, we didn't commit to the concept because we weren't for sure if the other deal was going to close and what-not. Once we closed that transaction, we became committed to the new concept and, we spent money in the Dallas market, not only on Rick's but on the Onyx as well. So, we had two clubs in start up costs in Dallas, when, originally, we had anticipated only one location there.

Great; thank you.

Thank you. Our next question is from Scott Coleman, with Credence Capital. Please go ahead.

Hi guys; I had another question. You know, I believe it was written up that it was in the last quarterly fling, about you have a number of locations that are not making money. And I just wanted you to comment on that. And, what are you doing about those locations?

You know, we're continuing to monitor and make sure that they're getting better. We've been working out new management deals. We've lowered costs; we've changed a lot of our kitchen and food items to more profitable and lower-cost, easy to prepare food items, to lower those costs. And, basically, we're just in there really monitoring the costs, trying to get the costs down.

You know, going out and spending a bunch of money trying to bring people in, in July and August and we don't think that's the best use of the money. As we get to mid-September, after Labor Day, then we'll really look at what's the best way to bring more and more people into those locations.

How long have you run most of those locations?

It varies; some of them are smaller, that we keep around. Some of the locations that lose money we keep around because we don't want anybody else to open in those locations. You know, we've locked those locations down because we have a very profitable location a mile down the street or three miles down the street that this location would compete with if there was somebody who would make a big investment there.

If somebody else had a license, right.

So, we keep the licenses tied up. And they're trivial; I mean, we're losing, you know, $10,000 or something. The losses are covered by one weekend at Tootsies, you know, for the losses of those corporations. Other than the newer ones, you know; Philadelphia and Dallas, actually contributed to the losses at those two locations.

But I think, going forward, we're going to see that tighten up. Austin is still a pain. We're going to run it through the end of December, 31st. We're going to see if we get the growth this year as we reach that two year point and if we don't start seeing some growth there, we may consider re-concepting or doing something different at that location.

Okay. All right; thanks.

Thank you. Our next question is from Philip Calvarone, a private investor. Please go ahead.

Hey guys. Last call, you basically said that Vegas was being held up because of, I think you said it was very strenuous laws that you had to basically fix. Now you're saying that it's basically a difference between the landowner and the seller. Have the laws in -? Go ahead.

Once we get the landlord to sign the assignment, we'll turn it in to the city and the gaming commission. We've been issued our health permits; we've been issued our fire permits. Most or our permits are issued. They cannot issue the liquor license or the occupancy permit until we have a right to possess the property. And that's what we're waiting for right now.

Thank you.

We don't have that right so, once that's done, we believe that those licenses will be issued right away. I know there's been a lot of talk on different message boards and stuff about us having to go before the commission. We do not have to go before the commission. The business is already licensed. This is just a transfer. So, those dates, whenever the commission meets, have no bearing on when our license will be issued.

Thank you.

Thank you. Our next question is from Chuck Lipson, from CSL Associates. Please go ahead.

Hi, Eric. Since you've considered the Scores acquisition, has their business changed since the economy is certainly changed in the last four or five months?

We talked to them about that at our last get together. We've decided that until we know -- we won't have a trailing 12 month number until we know we can close. And what we've decided to do is get everything ready so we can close, get the trailing 12 month number, and then discuss what adjustments are going to be made. But we do believe that there will be adjustments made and they're probably not going to be at $4 million in EBITDA. Their April was off, their May was great, their June was off, I haven't even bothered to look at July numbers because we've already agreed to some type of adjustment once the numbers are in. So whatever they are, they are, and we'll sit down and work it out.

Okay, so this topic has been broached.

Absolutely, and there's no sense in trying to figure out what it is, until we know exactly what it is. In the long run the fact that it's taking so long is going to benefit us, because we would have closed after the May numbers and everything looked great, and then June was off, so that brought it back down. I think we'll see some type of negotiation in that, I don't know exactly what it's going to be at this point, but it's going to be something that's in the best interest of our shareholders and something that makes business sense for us.

Okay. Also I don't have the Q in front of me, but the tax rate, was there a change there?

I believe the tax rate is about 37%. Phil, are you on?

Yes, it's a full effective 37%.

Okay, that's what I thought, so it's definitely increased.

Was that in your budget for this quarter when you gave us the guidance?

Yes I think we anticipated that, correct, Phil?

Yes, we did.

Okay so that's what it will be going forward. Also going forward, I don't know when the window opens, but a little insider buying would certainly go a long way to convince those people.

You know I would love to, especially at these prices, and I talk to my attorney every day, call him up and ask him, and he tells me every day I can't buy, I have too much information until this Vegas transaction is done. Now we're starting to work on a couple of other acquisitions, but believe me I would love to be buying $13 a share.

Okay. It hasn't hurt you not buying it the last few weeks.

I know where it's going in the long run; I've been blocked out for a long time. I do have some options that I'll exercise here I think in February, about 75,000 that will be exercised, so you'll see those exercised. I don't anticipate at this time really having to sell any shares to exercise those, but that could change, if the stock is 13 I definitely won't, I'll just pull the cash out of my pocket and buy them.

And as far as the huge short interest in the stock, you're feeling that it's all kosher?

Well I don't know, we've been on the reg short list several times so no, I don't think it's kosher, I think that if they buy all the shares and short them I'm fine with that. But to print shares out of thin air, I don't think that's fair to the company, I don't think it's fair to our shareholders, and I wish it would stop. I know the SEC has been working on it with the banking stocks, whether they'll get to all the other companies, especially to the small cap companies, who knows? But we look forward to the day they do. I definitely believe it has taken a few bucks off of our stock price.

Well thank you and hopefully the next quarter you'll raise guidance.

Hopefully if we get this Vegas deal done, that's what I'm looking forward to, and getting moved on to the next one, and keep things rolling.

Thanks.

Thanks.

There are no further questions in the queue at this time. I'll turn the floor back over to management for any closing comments.

Thank you everybody for participating in the call. I just want to remind everyone that there is a Due Diligence Ball tonight at Rick's Cabaret New York City, 50 West 33rd Street. Also, the transcript of this conference call will be posted as of tomorrow on seekingalpha.com; and finally, if you happen to be in the Las Vegas area, please come out to the Noble Financial Conference in Lake Las Vegas Monday, we are presenting at 8:30 a.m. Thank you very much everyone for participating.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.