RCI Hospitality Holdings Inc (RICK) 2011 Q1 法說會逐字稿

Welcome to the Rick's Cabaret first quarter conference call and webcast. The host today will be Eric Langan, President and CEO. Also on the call will be Phil Marshall, CFO of Rick's Cabaret. Now, here's Allan Priaulx to open the call.

Good afternoon. I'm Allan Priaulx, Investor Relations Counsel for Rick's Cabaret. Welcome to our first quarter 2011 conference call and webcast. In a moment, I'll turn the call over to Eric Langan and Phil Marshall, who will present the results from the quarter ended December 31, 2010, and then answer any questions you might have.

Before we begin, I would like to call your attention to our Safe Harbor statement, which is included on Slide 2 of our PowerPoint presentation. It's available on our website and at PrecisionIR.com. Please take a good look at the statement, as this conference call may contain forward-looking information within the meaning of Section 21-E of the Securities and Exchange Act of 1934.

I'd also like to remind you that Rick's Cabaret files reports and other documents with the Securities and Exchange Commission, and all of them are available on our IR site at www.RicksInvestor.com, which is the new discrete Investor Relations Web address for our investors. A transcript of this call will be available, most likely tomorrow or the next day, at www.RicksInvestor.com.

Also, I want to invite anybody in the New York City area to attend our Due Diligence event tonight at Rick's Cabaret at 50 West 33rd Street in Manhattan. We start at six p.m. You'll have a chance to meet Eric Langan and to get a guided tour of the club, if you want, and to see how we conduct our business at the club level.

And now I'll turn the call over to Eric Langan.

Good afternoon. Thanks for taking your time to call in this afternoon. I'll give a quick snapshot of our first quarter, with $20.9 million in revenues versus $20 million in revenues last year. Our higher revenue's primarily from strong sales in our New York and Miami clubs, as well as our newly acquired clubs in the Dallas-Fort Worth Metroplex that have really started to bloom and contribute now.

Our first quarter net income of $2.1 million versus $783,000 in the last quarter for a totally diluted earnings per share of $0.21 this year versus $0.08 last year. As I was saying, the newer clubs are really starting to contribute to earnings. I think we'll continue to see that trend as those clubs continue to mature and we get more time in those markets to continue to build our market share there, as well as keeping the cost controls in line. And lowering our advertising and marketing costs in the Las Vegas market helps keep things in line.

Income from operations was $4.1 million, or 19.8% in this quarter versus $2.4 million, or 11.9%, last year. Those are the margins that we talked about in the past that we really need to continue to try to expand and grow and keep that in a higher range.

Still awaiting a ruling from the Texas Supreme Court on the patron tax. We paid over $2 million in this in already, and I believe we have about $4.7 million in accrued liabilities at this time. So we think once this ruling comes in, it will be a really big boon for us.

Also in the tax savings field, we have the Las Vegas property, which we have now written off. Although the Las Vegas property has performed better than last year, we're still very unhappy with the current forms of that location. But if we sell that, we would have a significant tax savings. So we are looking at all options at this time on what is the best use of that property for the Company, and we'll know more by this summer on that when we get to same-store comps, so when the comps are the same with the marketing costs. To give you an idea of Las Vegas, as I said, we lost $370,000 this year versus $500,000 last year, but on revenues of $1.1 million this year versus $3.1 million revenues last year.

Also, we purchased in the last quarter 90,800 shares of our stock in the open market at prices between $7.03 and $7.43. We'll continue to watch our stock price, and when we think that it's way under value, continue to buy part of those shares back as part of our stock repurchase program.

A clustering of clubs in the Dallas-Fort Worth market is paying off, and our buying abilities, our managing efficiencies, and of course, in marketing, where we're able to do some great things with some of the radio stations there in advertising seven different locations in the same radio market. That's helped considerably.

Our cash on hand at the end of the quarter was $18.7 million, so we're still continuing very strong cash holdings, which will help us in our acquisition strategy. And we've met our goals of continuing to increase our top line revenue growth and continued to push the strong cash flow. And that's really what we're focused on right now, is creating more and more cash flow from our operations.

The Las Vegas losses are manageable. We would like to see that club stop losing money. As you know, the taxicab marketings remain low. It's the longest truce, I think, that the Vegas market has seen since 2000. And we don't see any reason at this time why that truce is not going to continue.

Overall, Vegas traffic is up. However, the casinos have gotten very, very aggressive at keeping guests on premises and not letting them leave the casinos through discounting at their restaurants and other things. So hopefully, as Vegas starts to rebound, the casinos will stop being so aggressive on keeping people in the casinos, and we'll see our business go up as well.

We'll see the true comps in the summer of 2011. And really, that will be the time when we decide whether this location can be profitable or whether we'll look to do something different with this location.

The nice thing about the quarter is our Rick's Cabaret in New York and our Tootsie's in Miami Beach remain very strong, with record numbers in the New York City club, and we've had some great January and February in those clubs as well.

Our new location in the DFW Metroplex is doing very good. It's a BYOB club. We still believe the best use for that premises is a upscale Rick's Cabaret with full liquor services. There's an expected TABC hearing that will happen in June against, to fight the protest, and we expect a ruling shortly thereafter on whether that club will receive its liquor license or not. If we do not receive a liquor license, we'll probably rebrand the club, take the Rick's Cabaret name off of it this summer, and run it as a BYOB club.

As the BYOB clubs we have in the Dallas-Fort Worth Metroplex right now, most clubs are profitable, and we believe this club will do just as well as a BYOB club as far as making a profit, so it won't cost us money. But we believe it will be an opportunity lost to have a real flagship location at that location. So we'll see what happens in June.

The TABC has not at this time joined in the protest and are actually recommending for the license being issued. American Airlines is the main protester right now, which we don't really understand why American Airlines has a problem with us selling liquor when they sell more liquor than we do. But we'll see what happens as we get through June and we get through the discovery stages of the protest.

We're going to close the Indianapolis location some time in the future, still. When we went to do our final due diligence on this, we decided that it would be best to do an asset purchase instead of purchasing an existing operation and existing LLC there. So we're changing the documents. We've applied for our own liquor license, and we'll really be awaiting our liquor license to be issued before we can close the transaction. But the attorneys are estimating some time between 6 to 8 weeks for that.

Address the Super Bowl this weekend in Dallas. We had a fantastic weekend. Sales this weekend were great. The clubs were packed. It couldn't have been better. However, earlier impacting the week was the snow and ice did have an impact on our overall sales. And we had originally estimated, if we had the right teams in the Super Bowl, to be a $2 million Super Bowl for us. Obviously, New York and Chicago were not in the Super Bowl. The teams that did make it to the Super Bowl did have a great traveling fan basis. However, the cold weather kept a lot of people out of Dallas early in the week. And so I estimate that our Super Bowl results were probably around the $700,000 range and probably would have been closer to $1.25 million to $1.5 million had the weather cooperated. But nonetheless, it was a fantastic week, and our total sales for Super Bowl week this year beat our total sales for Super Bowl week the previous year when the Super Bowl was in Miami. So we're very happy with that.

And while we will miss the NBA All-Star Game later this month, I believe that overall, we're still continuing to see an increase in the return of customers back into our business and that discretionary spending. So we look very forward to seeing how the next few months play out. And if the economy continues to rebound, then we'll continue to see strong results.

Our growth strategy moving forward is going to be continuing the emphasis on our organic growth, and really maximizing our existing locations so that we continue to generate free cash flow. Obviously, every dollar in our clubs where our costs are already fixed, a lot more of that flows to the bottom line, so that's where our focus is right now.

We are reviewing several strong acquisition candidates and are always open to looking at other acquisitions as well. And we have plenty of cash on hand, but we're going to continue to choose the acquisitions, try to do one each quarter, and seek property that we believe will be immediately accretive and try to stay away from startup locations like the DFW location. However, every now and then, we find that needle in the haystack and will have to make that choice to do what's best for our long-term growth.

Like I said, we're very happy with our January and February sales so far. We believe that the new clubs are going to be doing fantastic numbers for us. Austin has come into a very nice growth spurt, having record weeks for about the last 7 or 8 weeks. We're continuing to see growth as well at the Fort Worth locations.

We hope to continue to perform well and keep the legal costs lower. We are looking at some other stuff coming up in the New York case, and we may see some additional costs in that case, but in the tax ruling case, depending on how that goes, whether it will have to be appealed to the Supreme Court or not. It could have some additional costs. But overall, I think they're very manageable. And either of those cases being disposed would have a very positive impact on future revenues.

We will continue to report our gross nightclub sales after each quarter. We are not going to go back to a monthly report on that. We've had some people ask, but we're going to stick with the quarterly, which means the second Tuesday or second Thursday of April, we will put out this quarter's revenue numbers, so you can be looking for that.

We are not going to issue any formal guidance at this time because we're just not sure. We are very optimistic, and we do believe that we will see the positive trends continue. But we need a much longer period of time than a quarter or two before we're going to be willing to go out on a limb with any formal guidance.

That concludes my formal presentation. I will take any calls at this time for questions. And the operator can tell you how to get in the queue for that. Thank you.

Thank you. (Operator Instructions.) Jennifer Sung, Brean Murray.

Hi. This is Jennifer Sung filling in for Eric Beder today. I wanted to start just in terms of looking at your results from last year, January, February, and March. That was like a time when you did see a pickup in trends and the big spender was coming in. What's your sense of spending patterns now versus last year at the same time? Could you just comment on that?

Sure. I don't think we're seeing as much of the really big spenders coming in. I just think we're seeing the average spending increasing right now. And I'm hoping that as the average spend increases and the business cycle picks up a little bit, that we'll start seeing some of those big spenders back in as well, which could be a really big boost to earnings.

Are you pulling back on a lot of your marketing, your $2.00 drink specials or other things?

No, we're not. Actually, we are actually pushing those even more. We've increased some of our radio marketing and really have gone, in those clubs where we're doing those types of specials, really gone to a just domination of those specific nights -- $2.00 Tuesdays, the $1.75 beer Wednesdays -- and just really trying to dominate the markets on those evenings. And it's working very well for us.

And what we're doing is we're seeing those customers come in on the Tuesdays and Wednesdays, and we're bringing in a lot of new talent and new girls that are coming to perform. And the customers are meeting those girls and then they're coming back on the weekends, which is -- it's kind of like taking our lunch from that. We do the cheap lunches and the discounted lunches to bring guys in for lunch so that they fall in love at lunch and come back at happy hour, two or three guys from the office. It's kind of the same format that we're using for the Tuesdays and Wednesdays at night, where we're bringing lots and lots of people in on Tuesdays and Wednesdays when we'd normally be very slow, which brings a lot of entertainers from other clubs to come work at our clubs for those days, and then carrying that over into the weekends. And it's working very well for us right now.

Okay, great. Just focusing a little bit on your weaker markets, can you give an update on Philadelphia? And then also, just for Vegas -- ?

Yes, the weather's been a big factor, obviously, in a lot of the markets. Even the Houston and Dallas markets have just, this ice and snow has been really weird. And so we're not seeing a lot of regularity in our weeks right now, where people are getting stuck indoors for two or three days, and then they're coming out on the weekends and going crazy. So we're not really sure how the trend's going to go as we move into the spring, and that's really what we're watching for right now. But we've been very, very pleased with, even on some of the snow and ice days, we're actually doing some pretty decent numbers. And it's surprising, it's very surprising to us that we're seeing that type of increase in sales right now. So we're happy to see it.

Okay. And then just finally on Vegas, what are you looking for? Like what metric are you focusing on that will help you make that decision in the summer to see whether you're happy with it or not?

I'm really looking at whether or not, I'm weighing out tax benefits. It would be a very significant tax base for us. We're a full taxpayer now, so that has to be paid out every quarter now to the government. So if we take that loss, we wrote it off on the balance sheet, so we actually took it and sold the location, we would get it in on our tax returns as well. So we're looking at those benefits and how quickly we get that immediate cash, the sales price plus the tax base versus how long we think we're going to have to -- how much more we're going to have to invest and how long we're going to have to wait to get that return on investment. And that's really what we're weighing right now. And the real trick is to knowing when we think we're going to steady off, because right now it's still building a little bit. We lost a little bit less money, we're seeing a little bit of return of customer base.

Typically, November and December are not really big months in Vegas because of the holidays. And so we're watching January, February, and March very close to see what our revenues and losses are for this quarter. And as I said, it's March 31 is really going to be a, when we get that quarter done and we see this convention traffic and how much that convention traffic actually pulls into the club, we'll get a much better feel for what we think our timeframe is for return on investment is compared to selling it and taking the tax benefit.

Okay, thank you.

Mike Rindos, Rodman and Renshaw.

A couple of things. Can you discuss what's going on with the Indy club and why you're changing your purchasing strategy from -- or to an asset purchase from just buying the entity?

Recently there were some issues with whether the license could be transferred to a new corporation, and we were unsure of whether that could happen or not. After the lawyers had more time to work on it, they decided that it would not be a problem, that we could do that. And so that was part of it.

And the rest of it is just because of the owner had passed away, so we were actually buying it from the estate, and so when we really started looking at some of the stuff, we just decided that it would be a much cleaner transaction for Rick's if we just did an asset purchase. And the fact that 6 to 8 more weeks is not the end of the world, we just decided to eliminate any possible past liabilities or problems by just forming the new corporation and starting new.

Okay. And as far as your strategy to acquire new clubs and the targeting of perhaps one club per quarter, can you tell us a little bit about how the pricing environment has changed over the past few quarters, what the supply-demand looks like for these properties?

Well, there's not a lot of buyers out there, and definitely not a lot of cash buyers out there, so that's been, obviously, weighing very favorable for Rick's. And we've been able to keep the prices considerably lower, for I think as much as 5 times EBITDA at the peak of our acquisition trend there in 2008, and now we're paying much closer to 3 times.

Okay.

In EBITDA multiple. And we're staying pretty tight on that. We actually started making offers in the 2.5 range or so, but most everything we're looking at right now is right in that 3 times range. And I think that's, even some of the other transactions where there's been owner financing on these transactions, they pretty much stayed in that 3 times range, that I know of. There may be some out there that I don't know of. But the majority of the transactions I believe we do know of, and we're on top of it. But I haven't seen much selling for more than 3 times right now.

Can you share with us which markets are higher up in the priority list?

Really, right now we're looking anywhere. Any market we're already in, where we can gain a bigger share of the market, we're looking in those markets. As far as new markets, we're looking at stuff that's easy for us to manage from one of our existing bases. Now that we've got the base in Dallas, we'll start moving north into the Midwest from there. We can also move south, with Minnesota, we have -- so anyplace between Dallas and Minnesota in that Midwest area, we're going to start looking at very hard. And obviously, East Coast, we're still looking very hard in Florida. We'd love to look at other locations in New York City right now or in the New York area. Those are very appealing to us. We'd love to get into Chicago. The Chicago market is a very difficult market to find something we can buy in that market, but it is a market we're very interested in as well.

Great, thank you.

(Operator Instructions.) Tom Lepine, a private investor.

I've listened to your calls, and I missed the last one. And I've never really talked on an investor thing before, so if I'm a little nervous, I apologize. But I know a couple calls ago, you were talking about Vegas and the problems and the rest of it. And the main reason I called this time was to find out about Vegas and how much of a drawdown, what that was.

And my question, after hearing you, you said you wrote off the property, and I don't understand. And then I've got a follow-up. I don't understand when you said you wrote off the property, but you can still have tax losses if you've already written it off. I thought, and I could be, I guess I'm wrong, is that once you write off a property, you write it off.

Well, you've got to understand, there's two forms of accounting. There's tax accounting and there's GAAP accounting. Under GAAP -- the Generally Accepted Accounting Principles -- formula, we wrote it off on a balance sheet. However, from a tax standpoint, a balance sheet write-down of an asset is not a taxable event. So we got no tax benefit from the write-off under GAAP. So it's off of our balance sheet for GAAP, but on our tax forms, it's still on our taxes for what our purchase price is until such time as we dispose of the asset from a tax-paying standpoint. So we would get a tax benefit if we actually disposed of those assets the way that we wrote down the value of those assets on our books. However, our cost basis on those assets for tax purposes is still $18.7 million, even though they're only carried as a value of around $3 million on our current balance sheet.

Okay. Then my next question would be, would it be beneficial just to shut the doors? I know it's harder to sell a business once it's out of business and it's not ongoing, but if you're going to take the tax loss anyway, would you show a bigger loss?

We still believe, and so did independent appraisers, that the license and the business is still worth about $3 million. So why would we just close the doors and throw away $3 million more? We would try to sell, and it may be worth as much as $5 million. So we'd try to sell some price in that range first before we would just close the doors. Worst case is we could close the doors and take the tax loss.

Yes, but if you closed the doors and still had the license to sell, I'm talking about closing the doors as far as --.

As long as you have the license, as long as you have the asset, you cannot take a tax loss. We have to dispose of those assets to take the tax loss.

Okay, maybe I'm not making myself clear. What I'm saying is, by closing the doors, I mean you're saving money on your employees, you're saving money on your overhead.

Right. Our EBITDA losses were about $370,000. That's not an actual cash loss. You've got to remember there's depreciation and amortization in there, and there's other non-cash expenses that are in there. I haven't done a full cash flow analysis on it, but the cash flow losses are considerably less than $370,000 for the quarter.

Yes, at some point we may decide to quit throwing more cash at this deal, but I believe we would be able to sell the location. There are companies out there that are interested in getting into the Vegas market. We may have to carry some paper or what-not in order to facilitate the transaction, but that's something we could always do, because we can always walk back in if they don't pay it and take the location back.

Right. That was my whole thing. The reason I wanted to listen today was about the Vegas situation you had. And the main thing was that, again, I missed the last conference call, where I guess this was brought up about trying to sell the place or making a decision or doing whatever you had to do.

Right. We haven't made a decision to sell the location at this time. Right now we are basically trying to wait out this quarter, see how this quarter goes, see if we can continue to cut the losses back. And if we can make those locations profitable, then of course we would have no desire to sell the location unless, like I said, we start believing that the return on investment would take so long that the best thing for us would be to sell, take the cash and the tax loss, reinvest that someplace else, get a fast return on our investment. And those are things we're weighing, and I think if we get to the end of this quarter, we'll start having a much better feel for what our feelings are on that.

Okay. And the only other think I've got is, is I haven't read, I haven't looked at, and I probably should before I ask this question, but is there a place on your report, your quarterly, that has your attorney fees and legal fees? Are they broke out?

Yes, they are broke out. Legal and accounting is broke out, but not on a per-club or per-suit basis. But yes, on an overall, the total overall legal and accounting is included on our 10-Q.

Okay. Look, I appreciate your time.

No problem at all. Thanks for calling.

(Operator Instructions.) The next question is a follow-up from Jennifer Sung with Brean Murray. Please go ahead with your question.

Hi. I just want a quick follow-up, just on the cost pressures. Is there anything that you're anticipating in terms of costs going up, because I know that's just a big hot-button issue.

No, the only real costs that we've had go up year over year was labor, and that was because the minimum wage went up. And, of course, we have, our tipped employees are paid minimum wage plus tips. So there was a little bit of cost there. But as a percentage, it was almost nothing. It was like, I think the total increase for the quarter over quarter was about $100,000, and keeping in mind we added three other locations.

So you add those other locations in, and it was like $100,000 out of $3 million. So it went from like $3 million to $3.1 million. So it's really insignificant. And it's all in the Q. You can pull it up there. We actually break it down in the Q on a percentage basis, year over year. You'll see that most of it stayed pretty much in line. The big drop, of course, was legal and accounting, because the New York lawsuit was so highly active last year, a lot of filings, a lot of stuff to do last year in that case.

And you'll also see that our marketing went down by about $1.8 million, and that was all Vegas-related.

Okay. So you're not anticipating any sort of increase in regards to like alcohol or beverages, food and merchandise for looking ahead?

Nothing we couldn't pass on. And actually, we've been able to do very well on the food and beverage stuff by really pushing more national type stuff and showing -- the way our new inventory systems are set up, we can actually go to Grey Goose and say, "Look, we bought 7,000 liters last year of your product, and we bought 2,000 liters of your competitor's. However, if we were to take your competitor and put your competitor on special instead of putting your product on special, we can manipulate that a little bit, and maybe we only sell 4,000 liters from you, and we sell 6,000 liters from your competitor. So what can you do for us?"

And we've been able to do a lot of that type of negotiating with, and national account stuff with the national reps. It's been very good for the Company. And I think we'll continue to be able to do that in the future, especially as we continue to grow and we start selling more and more product. When you've got someone that has that type of purchasing power, the companies tend to want to keep us selling their products.

Sure. Okay, thank you.

Chris McIntyre, First New York.

Just a quick question. Could you please elaborate on the status of the patron tax?

Right now, it's at the Texas Supreme Court. They've already done all of the arguments. We're waiting for them to basically make a ruling. Of course, they're a Supreme Court. They can take as long as they want to make the ruling. So that's basically where we're at. We're just sitting, waiting for them to make a ruling right now.

So basically where we were three months ago?

Pretty much, yes. Nothing's changed since December. We're basically waiting for them to -- hopefully, the attorneys estimated that they would probably rule before the end of the legislative session in Texas this year. We're hoping that they'll get something out soon. Because, like I said, we're sitting here expensing all this and accruing it, and we'd just like to know exactly where we stand on everything.

Okay. And what's left on the buyback right now? I'm sure it's in the numbers somewhere, but I just thought I'd ask.

I don't know off the top of my head, but probably in the $4 million range still. I think we've only spent about $1 million on the stock buyback so far.

Okay, all right. Thank you very much.

There are no further questions in queue. I'd like to turn the call back over to management for closing remarks.

Thank you very much for your participation in our call today. And I also want to just remind everybody in the New York area to be sure to come to Rick's Cabaret at 50 West 33rd Street tonight for our Due Diligence event. It's always a lot of fun and a great opportunity to learn more about our Company.

So thank you, everybody, and feel free to call or to email ir@ricks.com for any follow-up questions.

This concludes the teleconference. You may disconnect your lines. Thank you for your participation.