RCI Hospitality Holdings, Inc.
Q1 2007 Earnings Call Transcript

Published: 16 Mar 2007

[Operator:]

Greetings, ladies and gentlemen, and welcome to the Rick's Cabaret International earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, Mr. Allan Priaulx, Investor Relations. Thank you. You may begin.

[Allan Priaulx:]

Thanks, Jen. Before we begin, I would like to remind you of our Safe Harbor statement. In this conference call, you may hear or see forward-looking statements that involve a number of risks and uncertainties that could cause the company’s actual results to differ materially from those indicated in this call, including the risks and uncertainties associated with operating and managing an adult business, the business climates in New York City and elsewhere, the success or lack thereof in launching and building the company’s businesses in New York and elsewhere, the company’s ability to identify and secure suitable locations for new nightclubs on acceptable terms, open the anticipated number of new nightclubs on time and within budget, achieve anticipated rates of same-store sales, hire and train additional nightclub personnel and integrate new nightclubs into its operations. Also, unexpected increases in the cost of sales or employees, pre-opening or other expenses, the economic conditions in the new markets into which the company expands and possible uncertainties in the customer base in these areas. Also, fluctuations in quarterly operating results, the impact of any negative publicity or public attitudes, competitive pressure from other national or regional nightclub chains, risks and uncertainties relevant to the operational and financial results of our websites, conditions relevant to real estate transactions and numerous other factors, such as laws governing the operation of adult entertainment businesses, competition and dependence on key personnel. Rick's has no obligation to update or revise the forward-looking statements to reflect the occurrence of future events or circumstances and for information, please go to our website, www.ricks.com. Now it is my pleasure to introduced Eric Langan, our President and CEO, who will discuss our first quarter results and other topics. Eric.

[Eric S. Langan:]

Thank you, Allan. Good afternoon. I want to begin today with an overview of today’s presentation. We will be reviewing our first quarter ’07 results, drivers of our sales increases, effects of openings on our income, our acquisition strategy update, talking about Montgomery Street Research that we hired as a consultant, and review guidance for ’07 and ’08 fiscal years. Starting with our first quarter 2007 highlights, revenue increased to $7 million, compared to $5.8 million in the first quarter of ’06, for a total revenue increase of 21.6%. Same club same period sales reached $6.1 million, up nearly 9.72% from 2006. Net income of $353,000, or $0.07 per basic share, versus $525,396 in the previous year. Income was affected by costs associated with club openings and relaunches, estimated to be in excess of about $400,000. Thus, if you do the math, you will realize our earnings excluding these club openings and relaunchings, were up approximately 40%. First quarter 2007 driving factors include

[Operator:]

(Operator Instructions) Our first question comes from the line of Chris Lage with Daily Trends. Please proceed with your question.

[Chris Lage:]

I want to be the first to congratulate you guys. When I analyzed the company and bought shares, you guys were at $3. You showcased the light upon me. Congratulations on all your success. Everything is going as you planned and I think the best is yet to come.

[Eric S. Langan:]

Thank you very much. That is what we think as well.

[Chris Lage:]

My question, Eric, is I am still trying to figure this out. Say there is a slowdown in the economy; do strip clubs in general do better when the economy goes south, or is it one of those things that have a correlation with how the economy is doing?

[Eric S. Langan:]

Well, really we have to adjust. It really depends on how quickly you adjust to the slowdowns. Our business changes a little bit in good times and bad times. Obviously when things are bad, people tend to drink more but we lose some of our higher-end customers because they are under hard times, they are out working trying to return their business back to the good times. But we pick up a huge volume influx of just standard people through the door. So while our per ticket goes down during the slower times, the number of tickets go up. So as long as we adjust to that, and we have to run specials. People look for specials in hard times, so as long as you are running the proper drink specials and happy hours and the kinds of things that it takes to motivate those, it is basically just a matter of us noticing the change in the economy and people’s way of thinking and adapting to it. We have gotten pretty good at it. Most of the time, our slowdowns are a few weeks and then we have adapted and adjusted and run right along with it.

[Chris Lage:]

I have one more question. I know in specific with the New York club, you guys are trying to reach a higher-end clientele. What type of distinctive mechanisms do you have that can’t be replicated in the strip club industry, in the sense that what are you guys doing to get a higher-end customer that is different than other competitors?

[Eric S. Langan:]

Well, unfortunately everybody can do what we do if they were to get out there and do it properly. It is all about customer service and customer service is about people. We try to hire the proper staff and train them and basically keep them happy. That is one of the things I think Rick’s does better than any of our competitors, is we are able to bring our employees in and sell them on our entire concept. That concept is customer service.

[Chris Lage:]

Excellent. Thank you so much, Eric, and best wishes moving forward.

[Operator:]

Thank you. Our next question comes from the line of Joe Giamichael with Rodman & Renshaw LLC. Please proceed with your question.

[Joe Giamichael:]

Good afternoon, Eric. Congratulations on the quarter and recent performance in stock. You talked about acquiring $15 million in revenues. Could you just give us some idea of what the typical net margins are of the clubs that you are looking at? Basically what I am trying to get to is what is that $15 million in revenue likely to cost?

[Eric S. Langan:]

Basically what we are looking at is somewhere between three and six times net earnings. So if you take $15 million, if you did the whole $15 million at six times, we would be putting about $2.5 million net to the bottom line.

[Joe Giamichael:]

Got it. And then also, with your currency now, do you have any intention to deleverage? If so, what do you think is an appropriate capital structure?

[Eric S. Langan:]

We are exploring that with Montgomery Street Research right now on what we think some of our best moves are. Obviously we have just recently hired them. We are talking about all of our options right now and we will probably be exploring those in more detail over the next few weeks.

[Joe Giamichael:]

Got it. Congratulations on the quarter.

[Operator:]

Thank you. Our next question comes from the line of Dennis McAlpine with McAlpine Associates. Please proceed with your question.

[Dennis McAlpine:]

Thank you, and good afternoon. I noticed in the first quarter there was a big jump in the alcohol revenue versus food and merchandise, but it seemed to be in line with the increase in service revenue. Is there a reason behind this or was that planned to happen? How do you see that going forward? Then, would you also talk about your experience at Club Onyx in Charlotte as far as turning that around and what that has done for that operation?

[Eric S. Langan:]

Certainly. We generally see in the holidays a big increase in alcoholic beverages due to the fact that you have a lot of parties and a lot of champagne goes out, which in turn increases our service revenues from the number of entertainers -- we end up having more entertainers working and we have more dance dollars sold, which increases our service revenue. That is why you see the big increase in those. You also see that in -- we have added more Rick’s locations versus our XTC locations, which do not sell alcoholic beverages, so you will see a bigger percentage increase in our alcoholic beverage and service revenues from those locations as well.

[Dennis McAlpine:]

And the Club Onyx?

[Eric S. Langan:]

And the Club Onyx in Charlotte, you know, we were very lucky down there. There is a lot of competition in the Rick’s brand market. However, in the Club Onyx, there was barely any competition whatsoever. We were able to get both of the hip-hop radio stations to do some fantastic advertising promotions for us and got some really good rates, and the market was just very, very hungry for that type of entertainment. We were very fortunate in that. We had that club for sale and had thought about selling that location and we started studying some of the demographics and went down there, took a couple of our Club Onyx people to the Charlotte area and they decided immediately that they thought it would be a success if we converted it, so we decided to give it a try.

[Dennis McAlpine:]

You commented that somebody had, you thought had a 2% share. That would be about 60 locations. Can you say who that is?

[Eric S. Langan:]

Well, it is basically the Déjà Vu chain was probably the largest chain. They are privately held. It is Déjà Vu and they own the Hustler clubs as well. They have I think about 85 locations but a lot of their locations are rather small locations. I figure it is probably about 2% of the total market.

[Dennis McAlpine:]

Thank you.

[Operator:]

(Operator Instructions)

[Eric S. Langan:]

Everybody is quiet today.

[Operator:]

Gentlemen, it appears there are no further questions at this time.

[Eric S. Langan:]

I guess we will thank everyone for calling and hopefully we will see a bunch of you at our Due Diligence Ball tonight. I know we had a lot of RSVPs this time. Thank you very much for calling in and see you in about three months.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today’s conference. Thank you for your participation. You may disconnect your lines at this time.