There is a definite slowdown in Rick’s Cabaret International’s (NASDAQ: RICK) business as a result of the overall market forces and economic malaise, but all things being equal, the company still reported fantastic numbers for 2008, but failed to give forward guidance as a result of the down economy finally peeking its head at the company’s strip clubs.

As I wrote about previously, I wanted to see Rick’s results come in where they said they would (they did for the most part), and show continued execution on the cash flow and free cash flow side of the business (which they also did). Finally, I was looking for Rick’s forward guidance to be cautious with respect to the headwinds that they are facing, and that also came to pass.

In fact, Rick’s failed to give forward guidance based on the precipitous slowdown in their business within the last month.

So what does this mean for our investment? Is Rick’s still a good place to put new money to work? Is the business flawed or coming under pressure that would prevent the company from continuing as an ongoing concern? What about Rick’s cash reserves and liquidity?

In this post I’ll be breaking down Rick’s full earnings release, as well as their analyst conference call, and round out my post with what you should do with Rick’s stock.

New to the Rick’s story?

Rick’s Cabaret International, Inc., owns and operates upscale adult nightclubs serving primarily businessmen and professionals.

Rick’s differentiates themselves by providing an atmosphere where they can offer a unique quality entertainment environment that includes highly experienced and well screened entertainers, high quality managers hired from within the adult entertainment industry, and finally, providing an atmosphere and ambiance, including exclusive VIP rooms, that appeal to upscale clientele.

Rick’s also owns and operates several online and offline media properties that produce adult websites as well as cater to owners and operators of intimate apparel and adult retail stores.

Rick’s nightclubs offer live adult entertainment, restaurant, and bar operations in Houston, Austin, San Antonio, Minneapolis, Minnesota, New York, Dallas Fort Worth, Charlotte, and other cities under the names Rick’s Cabaret, XTC, and Club Onyx.

As of September 30, 2008, Rick’s operated 19 adult nightclubs.

Want more?

• Read my last company update here.
• OR: Read my initial company buy recommendation here.

I’ll break down this report into 4 parts:

• Hit Me With The Numbers: Sales Higher, Same-Club Sales Also Accelerate
• Other Business Highlights: Strong Cash Flow, No Forward Guidance
• Conference Call Highlights: Management Shows Caution, Assures Investors, Especially About Liquidity
• Bottom Line: Hold if Already Own, Dip Toes In if You Don’t

Hit Me With Some Numbers

Sales Higher as A Result of Acquisitions, Same-Club Sales Very Strong

(Growth from previous year’s Q4 or Full Year 2008/analyst’s estimates where applicable [only 2 analysts cover Rick’s]):

• Q4 sales of $17.23 million (up 92% from $8.97 million prior year/vs. $17.29 million projected by analysts)
• Q4 net income of $1.44 million (up 22% from $1.18 million prior year)
• Q4 earnings per share of $0.15 (down 17% from $.18 per share prior year/vs. $.23 per share projected by analysts)
• Q4 net income margin of 8.4% (down from 13.1% in the prior year)
• Full year 2008 sales of $59.93 million (up 87% from $32.01 million prior year/vs. $59.99 million projected by analysts)
• Full year 2008 net income of $7.66 million (up 151% from $3.05 million prior year)
• Full year 2008 earnings per share of $.91 (up 82% from $.50 per share prior year/vs. $1.00 per share projected by analysts)
• Same-club sales increased 14.8% for 2008
• Full year 2008 net income margin of 12.8% (up from 9.5% in prior year)

My Take: These are certainly wonderful results across the board, brought about mostly as a result of Rick’s acquisition spree in 2008.

One note is that earnings per share for the 4th quarter of 2008 were lower than in 2007 mainly because of a much higher share count used to help Rick’s in acquiring new locations.

Total shares outstanding were 9.38 million at the end of 2008, and 6.87 million at the end of 2007.

In addition, the same-club sales growth was tremendous and represents pure organic growth at clubs owned longer than 1 year.

The true test, and where Rick’s is already seeing some problems, is right now in Q1/2009 and beyond. More on that later.

Also, net margins were higher across the board, except for the 4th quarter which is typically Rick’s slowest time of the year, but overall net margins for the entire fiscal year came in at a stellar 12.8%, which is unheard of for a retail/bricks and mortar business.

As you’ll also see in the following section, most of this net income drops straight to the bottom line in the form of free cash flow, and in fact, Rick’s typically generates MORE free cash flow than net income!

Other Business Highlights

Strong Cash Flow, Stock Buy Back Update

• Cash flow from operations for 2008: $14.8 million
• Free cash flow for 2008: $11.66 million
• 2008 marked the first time Rick’s paid a full year of taxes with no left over tax loss carryforward, thus decreasing their earnings per share figure from previous years.
• Stock repurchase program update: up to $5 million total, and of that Rick’s has purchased 48,200 shares from $3.54 - $5.95. They will continue to purchase shares depending on stock price and cash levels. CEO stated that when the stock gets below $4.00 it’s just too cheap to pass up, and they will look to purchase more if that happens, depending on cash flow and their current cash on hand.
• Forward guidance: Due to the economic uncertainty in the coming year, especially in certain markets like Las Vegas, they are not giving forward guidance for 2009, but the CEO did state that they feel they will exceed their 2008 revenues and EPS numbers, but they aren’t yet comfortable giving any guidance for the time being.
• Forward operating cash flow projections: $1 million cash flow per month run rate as of now, still cash flow positive and still gaining cash in their coffers.
• Cash/Debt on hand: $5.6 million vs. $33.6 million in debt due over the next 5+ years, with $2.6 million due in 2009.

My Take: At first glance it may look like Rick’s is carrying way too much debt, but one look at their ability to generate free cash flow ($11.66 million in 2008), in addition to their current cash on hand of $5.6 million, shows that they can easily meet their current debt requirements in 2009 of $2.6 million, even if they generated NO additional free cash flow if the economy and market decline even further from current levels.

Also, as we’ll discuss more below, Rick’s has an obligation of about $13.9 million for all the put options that they gave to the businesses that they bought in 2008 in lieu of cash, if their stock went to $0, and the full amount were due immediately.

I’ll explain this in more detail below, but it seems that the market is having a hard time with this, and understanding that Rick’s is indeed doing fine in terms of liquidity, cash position, and debt financing that is due in the coming year and beyond.

Now, as for the forward guidance, that’s fine with me, as I never like companies giving guidance anyway, so I think it is prudent for Rick’s to suspend guidance especially in these difficult times when they are having a hard time gauging their future sales, especially at certain locations that are struggling mightily.

We’ll go into this in more detail below.

Now let’s take a look at the conference call highlights…

View original at: PeakStocks.com

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