RCI Hospitality Holdings Inc (RICK) 2009 Q4 法說會逐字稿

Greetings and welcome to the Rick's Cabaret International Inc. fourth-quarter and year-end 2009 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your hosts, Allan Priaulx, Investor Relations; Eric Langan, President and CEO; and Phil Marshall, CFO for Rick's Cabaret International Inc. Thank you. Mr. Priaulx, you may now begin.

Thank you very much. In the following conference call, you may hear oral forward-looking statements that are covered under the provisions of Section 27(A) of the Securities Act of 1933 regarding Safe Harbor statements. Forward-looking statements may involve revenue, income, and other business activities of Rick's Cabaret.

Actual results could differ materially from those projected in the forward-looking statements as a result of many factors. Under provisions of the Safe Harbor act, the Company is under no obligation to correct, update, or amend oral statements, so we call your attention to the fact that definitive information about the Company is presented on the Company's website, www.Ricks.com, and in filings made to the SEC, also available on our website.

And now, here is Eric Langan, President and CEO of Rick's Cabaret, who will briefly summarize our fourth-quarter and full-year results and then answer any questions you may have.

Thank you, Allan, and thanks, everyone, for taking your time to call in and listen today.

We will begin with a quick overview. We are going to review our fourth-quarter 2009 performance, highlights of the full fiscal year, keys to performance improvement, update on our acquisition strategies, and then have a brief question-and-answer session at the end of this presentation.

The fourth quarter of 2009 was a much better quarter for us for the year. As you will see, our total fourth-quarter revenues was up $18.85 million, from $16.3 million in 2008, a 16.84% increase. Our net income was $1.79 million in the fourth quarter, versus $1.44 million last year, or a 24% increase over last year.

Earnings per share, $0.19, versus $0.14 last year. We have had overall improvement and our cash flow continues to be strong, and I believe we're going to continue to see this trend continue as the consumers are starting to spend more money and the marketing that we have put into place over the last six months has driven our customer traffic.

So we have a higher customer traffic. Though the average per head was lower than previous years -- or the average spending per customer was lower than previous years, we are starting to see that trend start to increase where customers are actually spending more per visit. And if that continues on a going-forward basis, we will continue to see our revenues and definitely our net income start to increase.

For the fiscal year 2009, total revenues were $17.15 million (multiple speakers) -- $75.1 million, yes, up 29.8% over 2008. Net income declined over the previous year to $5.21 million versus $7.66 million, impacted largely by our Las Vegas marketing expenses, some other heavy legal expenses that we have had in this year, and just economy-related discountings that have affected our margins with extended happy hours and other drink discounting.

Same-club sales were off 4.1% for the year, but the average customer counts are up, as I said; just customer spending is down. We believe that we are building our market share with our current programs and plan to continue those programs moving forward, though we may start cutting back certain heavier expenses that we are able to track to see that we are not getting the results we want from that marketing, and either reroute those marketing dollars, if needed, or if we are able to eliminate those marketing dollars so that we can push that money to the bottom line.

Our major impacts for 2009, if you will move on to slide number six, 2008 acquisitions were a drag on our profit, including about a $2 million loss in Las Vegas. We believe that was basically a timing issue where we had no idea the economy was going to go into the tailspin that it did, and I think that as we move forward, we've got a much better grasp of how to work in the Las Vegas market.

We have created the Rick's name and branded it as one of the top locations to visit in Las Vegas now. And I believe as we move into the high convention business, as we move into January with CES and then the concrete convention, and then move into March with the NCAA tournaments, that we will start seeing those customers that were there last year return to us again this year. And the acquisition cost of those customers will hopefully be less and we will start seeing that location actually even turn a profit.

The other thing we have done is we have closed our unprofitable locations and actually placed a couple of those locations up for sale now. We believe that at this time, there is no sense in chasing and using management's time and resources in locations that are not really making us money when we can take it and -- now that we are acquiring clubs again, move it into those clubs and move it into continuing to see increases in our existing same stores.

We have also had much higher-than-usual legal expenses. Now we were able to settle the case in Minnesota. The New York case is still pending. And we will still see some cost from New York, but at least now there's only one case instead of two, and hopefully our legal costs will go down a little bit through this year.

And I think most of the costs are going to be incurred in the next six months. So hopefully as we move through that process and get those costs out of the way, for the full year of 2010 we will actually see a decline in overall legal costs.

Moving on to slide number seven, talking about Las Vegas. We do continue the marketing campaign out there, though there has been some agreement and it seems like we're able to lower our cost significantly going into the last 60 days, and hopefully on a going-forward basis, especially as we return to the big convention season, hopefully we will be able to lower those costs.

However, we are prepared to continue those costs, if needed, to not lose market share. The one mistake we made when we first took the location over was trying to keep those marketing costs down at the expense of the brand and of our market share. And we can't make that mistake again going into this high convention time.

We are considered among the top clubs in Las Vegas now. We are recommended by the drivers. Our locals program, where we do a local party basically every nine days, has been fantastic. It brings a lot of locals to the club.

A lot of those people work in the casino industry, work in the nightclub industry. They come in on their nights off and party at Rick's, so that when they're back at work, they recommend Rick's to the clients that they are serving in their businesses.

I expect to see further improvements as the economy rebounds. With the new City Center opening, hopefully traffic in Las Vegas is going to continue to increase. And hopefully, what we will see is a better convention traffic. I know that they have done some -- the casinos have made major pushes to bring conventions back to Las Vegas, and from what I have seen on some of the preliminary numbers that they are expecting, we should definitely see a benefit to Rick's with that -- or from that.

Moving on to Tootsie's in Miami, obviously that is one of our most profitable locations. We expect that, especially in the January through March quarter, this location is going to be a very, very big winner for us as we are preparing for the Super Bowl and the Pro bowl.

We have basically two weeks of parties planned at the club now, including the NFC and AFC media parties; a Vivid's party that we are going to have at the club; one of the radio stations, a sports radio station, is doing some parties there. And we expect to have a few more parties to announce as we get closer to the Pro Bowl and the Super Bowl there.

We have created the new party rooms upstairs, which basically allows you to -- there is four of these rooms. They have basically their own bar in them. They have their own stage and own sound and lighting system, satellite television, whatnot. And we rent these out.

So basically, you rent your own little private club inside the club. We expect those rooms to be very, very profitable for us during this two-week period, as well as groups look for places to throw parties. And the fact that our 6 AM liquor license in Miami lets people have their parties and run them much later than some of the other venues.

Moving on to the next slide, our New York City location. The club has been doing very, very well. The media events that we are starting to have there have been fantastic. I know that they just did the Toys for Tots event there last night, and it was fantastic. Lots of toys, lots of people at the club.

The only complaint that I having from New York now is that people can't get in sometimes. It is getting that busy, which is great for us.

We have continued with our aggressive marketing there, including our street teams and some of the billboards that we have put up. Once again, I say we're continuing to see improvement in the results there.

When we originally built that location, we thought that the maximum sales per week that that location could do would be about $300,000. We now know that that is not the case. We have exceeded that number on several different weeks. And I expect that the average at that location may actually start beating that number.

As far as acquisition strategy goes, we have raised $7.2 million in August. We bought Cabaret North in Fort Worth for $2.3 million, so we only used a small portion of that money, and at the same time, we are generating cash flow. I think our current cash on hand is well over $12 million. So we still have plenty of money available for more acquisitions.

We have announced the new location by the DFW airport that we will be having built for us. That is a turn-key operation. I know there was some misunderstandings on a few people. This is a $4.5 million turn-key purchase by us.

We do not -- we are not paying any money for the construction until it is absolutely completed. The contractor and -- the landowner is contracting and building a build-to-suit for us. And so, actually, our money will not be invested until closing, when the club is ready to open.

So that money is still available. We believe that the location will appraise for much higher than the $4.5 million that we will have -- that we have the right to purchase it for when the construction is complete. And while we have not secured any type of financing for that location at this time, we do believe that we will be able to at least partially finance part of that $4.5 million against the assets and the land. So we won't have to use a full $4.5 million of our cash on hand to close that transaction.

We are reviewing several other acquisition targets, but we are still taking our time to get the best deals. I think that on a going-forward basis if we can close an acquisition every quarter, we are going to be happy with that, unless something major comes up that causes us to increase that pace.

We are still focusing on building our brand names and focusing in major markets. But we are looking at some things outside our normal level of comfort and markets -- our markets of comfort, simply because the deals out there are starting to get better. And we believe that we have seen the bottom of consumer spending for our industry, at least, and that the consumers are going to continue to start spending more money at our clubs.

Going on to our outlook, with 2009 behind us we are definitely looking forward to a much better 2010. We definitely believe that the first half of 2010 will be very, very strong for us, especially when compared to last year, as we had a much weaker quarter in October through December, and even January, February, and March.

The Super Bowl and Pro Bowl games in Miami, we have the NBA All-Star game in Dallas. We are already booking and setting up parties at our clubs for these events, which will definitely increase revenues. We are looking for and receiving marketing dollars from different groups that want to market and advertise in our clubs during this time period.

We will continue to expect both strong revenues and increases in income in 2010, and while we're not prepared to put out guidance at this time, I do believe that as we move through the next few weeks that the Company will probably consider issuing some type of guidance on a going-forward basis.

I do think that we are much closer to being in the range where we were at this quarter of $0.19 a quarter. Obviously, the January, February, March quarter we expect to be much higher than normal. So it should put us on a pretty good course to be in line with where the analysts have us for 2010. And once we have a better feel for everything, we will know exactly where that is.

The other thing I'd like to do is let everyone know that the new Cabaret North location in Fort Worth, we have had a very, very good build of the business at that location. We have actually taken the business from about the $200,000 range, $150,000 to $200,000 range that they were doing in the time before we bought it, to now exceeding $70,000 a week at that location. And if we continue to see the revenues increase at that location, that that location will become much more profitable than we originally anticipated.

I will end the conference call here -- the presentation here and take any questions you may have at this time.

(Operator Instructions). Jamie Clement, Sidoti & Company.

Just a couple of things. With respect to Las Vegas, I think you mentioned, the last 30 to 60 days, a little bit of moderation perhaps in the marketing costs. Do you think that is just a function of Vegas getting kind of back up on its feet a little bit and having more customers running through town, or do you think there has been more of a philosophical competitive change among you and your competitors in that market?

Well, I think it is a little bit of both. I think the main thing is is when we got back into the marketing game out there, everybody said, Rick's will do this for a couple of weeks and then they will back back down.

I think that now we are a year into this thing, or almost a year into it, I mean, we really started with, I guess, in mid-February, mid-March, I guess, mid-March of last year. And I think that they have realized that we are going to continue to be a player and that we are not going to back down and we're not going to be scared away by a little bit of losses and giving up our market share and let people basically buy or take our market share. So I think that has a lot to do with it.

And I think the fact that the average customer spend in Las Vegas, of course, is down dramatically. So it just doesn't make sense for everyone to spend the money.

So I think that, overall, it is kind of a combination of the two things that you mentioned. And I think we're going to continue to see those expenses decline.

I could be wrong. I mean, there's always a wild card. That is just the Vegas market. There is always somebody that wants to come in and gamble or take a chance, but I think overall people have lost enough money. I know we feel we have (technical difficulty) money buying market share.

And if they're going to try to take it from us, it is not going to be cheap for them. So I just don't see -- I don't see where they think they get the advantage anymore. There used to be -- in the first six months we owned the club out there, it was a huge advantage. We were behind on the learning curve and we made mistakes.

Okay.

And I think they have now realized that we're well aware of the mistakes we made and that we're not going to repeat those mistakes. And so, there is no cost benefit for them to try to do anything other than settle this thing.

Okay. Sometimes you guys, when you put out your earnings releases, you put a line of earnings from a continuing-operations number. Am I right that there were about $300,000 or $400,000 of losses from discontinued operations during the quarter? So without that, you'd be more like $0.23? Is my math right there?

I believe you are right on that. And keep in mind, which we don't directly disclose because of the nondisclosure agreements that we have in the settlement, we also settled the Minnesota case, which was expensed in this quarter.

So even though we settled it now, we have to go back and accrue that expense because it is a known expense. So you had some costs from that settlement as well that would have increased our earnings per share. So we actually had a pretty good quarter. I mean, we were very happy with over $3 million in cash flow from operations (multiple speakers) in the quarter.

Like I said, we are very, very pleased with where we are seeing this head now and we know going into -- definitely the next six months, the problem I guess with guidance, we really are trying to work out a definite guidance plan. And we are just -- we're really concerned with how it is going to look going into next summer, how the economy is going to be, whether we're going to see some type of setback in that, which could affect us in that April-to-September timeperiod, the (multiple speakers) half of 2010.

We are very, very confident that the next six months are going to be very, very good months for the Company.

Okay, very good. Eric, just on a diluted share basis, or I think on a basic-share basis, I'm looking at the K, you've got just under 9.4 million shares outstanding, so fully diluted with the financings that you guys have done, where are you at right now? Do you have that number?

You are talking about if everything was to be converted?

Yes. Yes, like in terms of for reporting purposes going forwards.

(Multiple speakers) If you're talking the $7.2 million --

Yes.

-- convertible debenture. The $7.2 million converts at $8.75 a share. Which I guess is about 830,000-some shares. And then there's an additional 160,000 warrants that were issued in conjunction with that. So basic, you can add just a little under 1 million shares.

We are currently buying back our put options. I believe at 12,500 shares a month now. So -- but we are buying those shares. Or excuse me, we are not putting those shares into the market and paying the difference. We are actually paying the full amount. So basically, we are buying back 12,500 shares a month right now.

Eric Wold, Merriman Curhan Ford & Co..

Walk us through, as you look at the clubs, the continuing operation clubs across the board, in general are you seeing the same trends across the board or are there kind of big variances of strength or weaknesses in the group (multiple speakers)

Well, it varies. It definitely varies, the strengths and weaknesses. Obviously, the New York location is probably the strongest location we have right now, and doing very, very well for us.

You know, Tootsie's in Miami is kind of just holding in its range. And then we have other clubs that are all over the place. Some are down a little bit, some are up a little bit.

But what we are doing is we are taking the winners and we are taking the strategies that we have put into place at the clubs where we are winning at and gaining market share and increasing revenues, and we're now starting to take those models and move them into some of the underperforming locations. And we are starting to see positive results in this quarter from that maneuver, especially on the revenue side.

Now the real trick, of course, is always getting that down and then squeezing those margins back up. We were at 17.8% margins this quarter versus -- or this year versus 26 last year. I'd like to see us squeeze in between those two numbers so that we can get enough of the margins to get an increase over that 17.8% going forward. Maybe not getting back to the 26%, but that is the goal, obviously, is to move back towards the higher number.

Okay, and then as you look at the opportunities that may be out there for acquisition, I know it's tough to talk about, given there is competition, but are the opportunities more with strong, small clubs and markets? Are you looking for still the mega-clubs that are out there? (multiple speakers)

Well, we are looking at everything right now. I mean, I will be honest, we are looking at tons of stuff.

I'm getting -- we have been getting pretty bombarded. Everybody knows we're sitting here with all this cash, so we get a lot of calls; a lot of brokers have called.

But we have pretty much stayed in that midmarket range, similar to the Fort Worth location, stuff that we think is going to add $3 million in revenues or so, and that we can get that -- sweep that $800,000, $1 million in net earnings out of it.

Something we can go into with a limited amount of cash.

Of course, we'd prefer to be able to either -- an option to purchase the property or purchase the property from the get-go with some type of owner financing. That is our preferred acquisition right now simply because they are just -- they're easier to integrate. They are quick and we're not taking a ton of risk.

We have been a little risk adverse, especially this last year. We are starting to come out of that a little bit. I'm gaining confidence in that I think that the forward-going numbers are going to be better than the trailing numbers at this point. And so, obviously, I don't want to wait a year and start buying on trailing numbers that are higher than what I can buy stuff for right now.

Okay, and then last question, you talked about -- you mentioned legal expenses should be down this year versus last year with most of the spending happening in the first half of the year. Looking beyond that, if you had to look at where Q4 expenses ended up, where do you have the most meat that you can cut without hurting operations?

I mean, the media -- obviously, a lot of the media and the majority of the media is Las Vegas. We did have some pretty high expenses in Dallas as well as we really went into that market to dominate, especially in the Fort Worth market. I believe that we have been hugely successful in that market with our media.

So we're going to continue it, but we're probably going to start cutting back on it a little bit. We have noticed in certain magazines, we put coupons in and we don't get much response. We know we can cut those magazines without -- and cut that expense without actually hurting our customer counts and our headcounts.

Right now, we want to stay the busiest clubs. We may not make the most money that we could make, we may not maximize our profits by staying the busiest clubs in the short term, but in the long term we believe that by building up that customer loyalty and building up the market share and keeping our competitors -- excuse me -- as clubs -- as [known] as clubs aren't as busy as ours, that that is where the customer is. As the flight to quality continues, that the customers will continue to visit our clubs. And as the spending goes up per person, that our clubs will benefit greatly from that.

Richard Kein, Kensington Management.

Richard Kein Most of my questions have been answered, but I was wondering about -- the clubs that are for sale, number one, have you added some that are for sale now? How are you going to come out on those? What are your expectations as far as (multiple speakers)

Well, the Austin location we have had for sale for some time. We had it actually sold and then the funding did not come through for the other people. We've got that location still up for sale.

We are also in some talks amongst ourselves a little bit about maybe a re-concepting -- re-concepting that club and buying some additional parking, so that we have enough parking for the new concept and re-doing that location. That is one of the things we are talking about.

At that location, I think we have expensed -- I think we have wrote off enough of it that we probably wouldn't take a real hit to earnings or a real hit on anything on that location.

The other location we have up for sale, we have been in negotiation. We own the property, so we are actually selling the property and everything. The club itself was pretty much depreciated down and had very little to no investment in it anyway. And the property will probably sell for pretty close to what we paid for it.

So we probably won't see much of an effect from that location either.

I think we are pretty much safe on the two clubs that we have up for sale right now. We have a third location that we have actually closed down that we have remodeled. It will probably re-open in the second week or -- the first or second week, maybe the third week of January.

Which one is that?

That is the one we have in South Houston. It is a smaller location. It wasn't really doing a lot of money. It's actually -- it was operated at a loss basically since we've owned it.

We bought it as an insurance policy in case the city of Houston actually started closing the clubs in the city. And we bought that location for that, but we have decided now is the time to go ahead and -- we have basically gutted out the inside, re-did it and made it much more modern. It was a very, very old location. So we've modernized it.

We re-did the outside of the building with stucco and made it very nice and presentable. And like I said, we will relaunch that club probably in mid-January.

Okay. Now in Las Vegas, you are not profitable yet, are you?

No, we are not. The closest -- I think the closest we came was in the June and July months, where we had the losses under $30,000 for those two months.

And obviously as we moved into Labor Day, the marketing expenses went up drastically due to a couple of competitors. And now we are moving back in the direction towards where we were at in those June and July months. As we move into the prime season, I believe that -- I believe that if we stay in these markets, we will be profitable in the next quarter.

It really just depends on whether we can keep these marketing costs down where we have them right now, or even lower than where we are at right now.

What are they now, the cap price?

Between $70 and $30. We are paying -- we kind of changed the game a little bit. We only pay for the top customers during the top business hours.

During the off-business hours, we are now paying much less. And that is part of the reason why we believe the losses will go down and stay down, as we finally got the market to realize, and our competitors to realize, that there is no sense in all of us competing and paying a ton of money for customers during the off hours.

Now if we can just get everybody into a -- everybody to agree and we can make it all makes sense for everyone in the prime hours, then I think we will see us return to a more normal business model in that Vegas market. Unfortunately, I think the Vegas market is always going to be different than the rest of the country. That is just the market.

But at the same time, I do believe that even with the economy where it is at today, that we can turn a profit out of that location if we can keep these marketing costs at certain levels. Below certain levels.

That payment is a lot less -- is substantially less than you were having (multiple speakers)

Yes, I mean as a total, as a total, as a total per quarter, it is probably half of what we were paying during the highest quarters.

Right. Right.

If we can continue to pull that down -- and our revenues are not off as significantly. Our revenues -- looking at where we are at today, our revenues -- what we call net revenue, which is our total gross minus our marketing costs to our net net, our net gross, is increasing. Even though our total gross revenues have declined, our net has increased. Our net after payouts have increased.

And that is what we've focused on out there right now, and we are hoping to continue to see that happen.

Got you. The final question is on the legal expenses. What would -- could you give us an estimate of what you think the legal expenses will be, moving forward?

You know, I wish I could. Unfortunately, there is just so many moving parts in that, that it is hard to say. As a percentage of income, I would like to see it decline back to the levels from last year.

Whether we can get it -- and maybe even lower than that, depending on how many acquisitions we do. There is a lot of costs in there from acquisitions and that type of stuff.

How about just the litigations that you have gone through?

I mean, obviously I think the litigations in the next few months are going to be a little higher. We are actually moving -- we are going to be doing depositions especially in the January-March quarter. I think they'll be a little higher, especially in the New York case.

Of course, the Minnesota case is gone. There will be no legal expense from that case now. So overall, I mean, they may stay in the range that they have been at for the next quarter.

And this quarter is obviously going to be a little bit lower. I think the October, November, December quarter will be a little lower because we settled the case. So, and that settlement was written off in the last quarter. Excuse me, in the last fiscal year. We had to write it off on the September 30 quarter; we had to accrue it.

And so, the costs will hopefully be a little bit less this October, November, December quarter. They are going to increase a little bit January to March, but there is going to be enough other stuff out there to offset that with the Super Bowl and Pro Bowl and NBA All-Star Game. So I don't think it's going to be a big -- a function of -- as far as the percentage of gross revenues.

And then, hopefully, as we move into the last six months, as a percentage of gross revenues it just becomes a trivial expense again.

[David Johnson], private investor.

Again, a follow-up on the Las Vegas location to the previous caller. You mentioned that your cap is about half in the most recent quarter -- your payout's CapEx, as you mentioned, as he had stated it, were about half in the current quarter as they were maybe earlier in the year.

Yet it looks like it's still driving a loss. You mentioned about a $2 million loss for the year. I'm just wondering -- as an investor, I'm just wondering, is there an impairment discussion taking place at all between yourselves and the auditors, and if so, what are those discussions basically entailing?

Obviously, we use a three-year deal on the deal. Yes, we have looked at it, and if you will look in our footnotes, you will see that -- if you look at the financial notes in the 10-K, you will see there is disclosure in there that, on a going-forward basis for 2010, if we don't see improvements at several of our locations, that we will have to take impairments in the next fiscal year. On those locations.

Okay, so you guys are looking at a three-year (multiple speakers)

And Vegas is one of those. We are following -- it's very complicated. It's a very complicated formula that you have to use, but yes, basically you use the FAS rules that govern that, and the accountants and the auditors have been very familiar with it and studied it, and we have done several different valuations to figure out where we are at.

And we felt that definitely with the current economy and given the current situation, that there is no impairment at this time. However, if things don't improve in the next fiscal year that we will be re-doing those and that, based on the formulas, that without an increase in the income, of course, that we will definitely have an impairment in the following -- in 2010 for that location.

[Brian Burns], private investor.

A question in terms of -- on the most recent, I guess, the build-out, I guess. Is there a sense in terms of going forward with acquisitions that you're just more comfortable buying or building new clubs in cities where you already have a presence that you, I guess, either both know the market and also have management in place?

The reality of it is is we are really not looking to buy or build clubs, new clubs. We're looking to buy existing locations that are already profitable.

The thing with this location is, you know, location. It is a one-of-a-kind location. Basically, every traveler that leaves DFW airport out of the South Airport exit is going to be driving down the toll road there to get on the Highway 183 and they are going to be looking at a Rick's Cabaret sign.

And when you take the amount of business travel through the DFW airport, we just couldn't -- from a branding standpoint alone, we couldn't give up the value of that. Add on top of that that this is a location that is going to be turnkey-built out for us, ready to go, in the $4.5 million range, which we believe presented a fantastic value in a city that we are very familiar with and in an area that we want to grow in, it was just impossible to pass the deal up.

I have got some other -- since we have announced this, I have gotten offers for other properties where we could build clubs. But it is just not something we are actually looking to do. If somebody comes up with another location that is this fabulous with the kind of traffic count that this location has and the visibility that this location has, maybe we would consider it. But it is not part of our long-term plan to build clubs from the ground up.

I was actually focused more in terms of on the location. In other words, when you talk about buying existing clubs, do you feel like, going forward, your preference would be to buy an existing club in a city where you already have a club and have at least a better feel for the market, as opposed to going into a brand-new city, or does that -- is that an impact for you?

Yes, I mean, obviously if we already have locations, it is easier to manage for us. However, as you have known from our past, we will go into markets we have not been in as well for the right deal.

I don't think we really have a plan of saying we should only buy in our markets or we should only buy in other markets. Our real strategy for acquisitions right now is we need to buy the best clubs we can buy that we believe will create the longest and best use of our capital and create the longest cash flow stream and the largest cash flow stream that we can create with our cash. And that is really how we are evaluating these transactions right now.

Obviously, something that is in a market that we are already in creates other synergies for us, and therefore may be a much better use of our capital then, say, going to a market that is far away and harder to manage, more expense in travel and more time in travel for our management teams.

But at the same time, it is not the only thing that we are looking at. The main thing that we are looking at is the profitability and whether we believe we can continue running that location at a profit and make a nice return from our investments.

(Operator Instructions). [David Griffith], private investor.

The question I have, it sort of dovetails on the last question, is when you examine -- when you're looking at these deals, like whether to build a new club or to acquire an existing club, what kind of metrics do you evaluate it on? Are you looking at comparable property values? Are you looking at EBITDA multiples? Are you looking at IRRs? I am just kind of curious what (multiple speakers)

I mean, we are looking at the EBITDA. The first thing we are looking at is EBITDA. We want to make sure that they are making money, but the reality is we're looking at all of those things.

We want to make sure that we believe that we're in a legal environment that is going to be stable. We are looking at the competitive landscape, how easy would it be for someone else to come in and open a location that could actually compete with our location, that is in proximity or in the market where we would have to compete for, say, entertainers or customers.

And we are looking at the facility itself. How much investment is it going to take on the Company to make this facility something that we want to own and something that we would run? We are looking at the physical features. Does it have a kitchen? Does it have parking? Does it have -- you know, is it easily accessible from high traffic streets or freeways?

And all those things -- and then, of course, can we buy the real estate? Is the real estate priced at a fair value? If not, what type of lease and how long-term is the lease? Can we secure it for a long enough period of time that we believe we can make all of our money back, plus big returns. And those types of things. So.

There's not really -- it is really -- because of our industry and because of the way the laws are so different from market to market, it's really a much more complex -- it's not really a cookie-cutter -- this is what we are looking for and this is -- . You know, we may have a location that is very, very profitable, but if the legal environment isn't so that we think that that's going to stay that way for the next 10 years, then we think we're going to be looking at some major changes to method of operation that could affect the profitability of it, obviously we're not willing to pay as much for it.

Right. Okay. I guess I was just trying to get a -- just a sense in general of, say, you guys trade at five and a half times EBITDA, kind of like your target spread between your public multiple versus (multiple speakers)

Yes, that is one of the things we definitely look at. And that is why when our stock was trading in the $3 range and $4 range, we were buying it back.

Because what else could we -- we couldn't buy other people's -- we couldn't buy other clubs for the amounts we were buying our own club back -- our own Company back for. And so we thought that was the best use of our cash.

Good answer.

(Multiple speakers). What we are doing is looking for the best use of our cash.

And I think that is all the questions. So everyone, have a good night, and if you have a chance, come by the New York club. I won't be there tonight, but there will be plenty of due diligence for you to do there. All right, thank you very much.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.