RCI Hospitality Holdings, Inc. (RICK) Q2 2009 Earnings Report, Transcript and Summary

Welcome to the conference call and Web cast for the second quarter of fiscal 2009 of Rick’s Cabaret International. (Operator instructions) As a reminder, this conference is being recorded. Your call today is being hosted by Mr. Eric Langan, President and CEO of Rick's Cabaret. Also on the call is Phil Marshall, CFO of Rick's Cabaret. Here to introduce Mr. Langan is Allan Priaulx, head of Investor Relations for Rick’s Cabaret.

Good afternoon. I’m Allan Priaulx, Investor Relations Counsel for Rick’s Cabaret. Welcome to our second quarter 2009 conference call and Web Cast. In a moment, I will turn the call over to Eric Langan and Phil Marshall, who will present our second quarter results 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 available on our Web site 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 21E of the Securities Exchange Act of 1934. Later this week a complete transcript of this call will be available on SeekingAlpha.com. I would 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 Web site at www.Ricks.com. And now, I’ll turn the call over to Eric Langan.

Good afternoon everyone and thanks for joining us tonight. I will begin the presentation with a quick overview of what we're going to be talking about. We are going to review our second quarter 2009 performance, we're going to discuss the impact from discontinued operations on net income, we're going to update you on our steps to improve our performance, including our focus on Las Vegas. I want to discuss the renegotiation process that we went through on the put options and how we think that's going to help the company going forward, give a slight outlook for the remainder of the year on how we think things are heading with the current economy, and then end the call with a question and answer session to allow you to ask questions on anything I don't touch on. The second quarter versus our first quarter, we had total revenues of $18.36 million this quarter versus $17.1 million last quarter, or up about 7.9%. A lot of that increase was due to the last couple of weeks in Las Vegas, when we started a very aggressive marketing program around March 17. Our income from continuing operations rose to $1.51 million versus $1.31 million, or up 33.5%. Our net income rose to $839,000 versus $790,000 in the first quarter, so what we're seeing is quarter-over-quarter improvements and that's really what we're focused on more right now that year-over-year simply because it's just a different economy now than it was a year ago. Our same store sales were still down for the quarter but we are starting to see them trend up a little bit, as you've seen from our April revenue numbers that we put out a week ago, and our cash flow continues to be strong. The highlight of our second quarter…

(Operator Instructions) Your first question comes from Eric Wold – Merriman Curhan Ford. Eric Wold – Merriman Curhan Ford: I guess two questions on your comments toward the end. One on Vegas, you talked about what experience you've seen in the past when there has been cab wars in the past and you've had some market shares shift and then you kind of revert back to maybe more normalized cab [inaudible] what happens to market shares after that? Do customers return back to where they were before or do they tend to stay to where they are going to now?

Well, you've got to remember, in our industry it's all about the girls. So he who has the girls can have customers and he who has customers have the girls, so it's really a chicken and egg and which came first. So the trick is, of course, keeping the girls and the customers on a platform. So as the marketing costs come down, some of the customer count may come down initially, but it's just really more of a matter of keeping the girls happy and keeping the girls there and then the customer base will always return. The guys go where the girls are. Eric Wold – Merriman Curhan Ford: What's happened with the payments the girls are making to work at the clubs during this trip in Vegas?

They are probably some of the highest levels they've been. Eric Wold – Merriman Curhan Ford: Do you think that's sustainable? Once the war ends.

We're still below everyone else so I think our numbers are sustainable. I don't know if some of the other clubs are. Some of the other clubs offset have gone to like $50 to get in the club, 2 drink minimums, they have raised the house fees on the girls $50. They've done a lot of things that’s hard to offset those expenses. We've just kind of kept right on eating the losses that we had been sustaining before. We are happy. When I set out to do this I really thought that we would increase our losses by about $250,000 a month. And I figured they would last about three or four months. What has been amazing to me is not only have I not seen those losses, I have actually lost less money than I was losing before. And when I went out there and we talked about doing this and we did all the numbers and I crunched everything, I could not foresee how rapidly the change would be. I'll give you an idea. The week of March 10 to March 17, we probably did $120,000 in sales. The week of March 17, the day we started the program, through March 24, we did $400,000 in sales. The next week we did $500,000+ in sales. So you want to talk about something that is immediate, I don't know any place in the world you can spend marketing like that and the response be so rapid. And we were running 60 girls. We had 8 waitresses on the first Friday night trying to serve 1,400 guests. I mean, we were just underprepared for how quickly it happened that I don't know how we didn't lose more money. Everything I know about the business says we should have lost more money, not less. But when we sit down and crunch the numbers and you see the sales, it's amazing. You go to nightclubs and you walk in and they're completely dead and you go, wow, this is a very nice place. You would think that's where people would want to go party. But no, they'll go down the street to a place where they're standing shoulder-to-shoulder and they can't move in the place, and spend more money. And that's just the nightclub business. And that's what we're seeing in Vegas. The busier that we are, the more people want to be there and the more people stay and the longer they stay, and the higher and higher average per head goes up. Eric Wold – Merriman Curhan Ford: On the M&A side, once you start getting back in the M&A picture is it likely to be in the kind of flagship type stores, like Miami, like Vegas, or are you going to go to more smaller locations and maybe more price—

Right now I'm looking, to be honest with you, because of where our equity is, we're not going to be using equity even at $7 a share, probably not even at $10 a share would we be looking to do anything with equity. So I think really what we're going to be looking at is more Ft. Worth-type locations. Locations we can go in and buy for anywhere from $3.0 million to $5.0 million and that are making $1.0 million a year. And we can go in and buy two or three of those with $1.0 million, $2.0 million, $3.0 million cash down, finance the rest through the owner, and make the acquisitions easy and just basically sit there and continuously add to our cash flow.

Your next question comes from Jamie Clement – Sidoti & Co. Jamie Clement – Sidoti & Co.: The year-over-year increase in advertising and marketing, I think some of that probably had a little something to do with Dallas and Philly. Can you give us a sense of roughly how much the year-over-year increase was specifically related to Vegas?

About $1.0 million. We did about $470,000 last year and about 1.67 this year. So I would say about $1.0 dollars, that's about $200,000 of that is probably associated with Dallas and Philly with the bulk of that in Dallas. Dallas is where we spent the real advertising dollars. Jamie Clement – Sidoti & Co.: A lot of consumer companies noticed a seemingly scary period of time in February. There was a lot of bad news headlining the newspapers and that sort of thing. Did you guys see the same thing and since that time have you seen—it seems like you've seen some sense of stabilization.

To be honest with you, December was like we thought we were in a black hole. January it looked like there was a light at the end of that tunnel. And that light was the Super Bowl. Super Bowl came we saw our numbers getting better. In December and January it was like it was almost un-American to go out and party or go out and have any fun. Like the media had everyone convinced that it was wrong to go have any fun or go party or go spend money drinking and partying. When the Super Bowl came it's like everybody let out a big sigh and said, hey, it's Super Bowl, we can party again. So that's really where we started seeing it. And then right as that was wearing off, about three or four weeks into February, at the end of February, then March Madness hit. And then all of a sudden all the college basketball got everybody crazy again and all of a sudden it was okay to party again. So that's what we've seen. And that has not slowed down. It's been pretty steady because I think the media out there is now picking up and the government has kind of changed their tune to things are getting better. And if things are getting better then it's okay to have that occasional drink, it's okay to go out and have that, you know, that one blow-out night. Maybe not as much as you would as you did last year, but you're still going out a little bit. And I think that's what we're seeing. Jamie Clement – Sidoti & Co.: Can you talk a little bit more about the partnership with the Hard Rock. Obviously I saw the press release about it this week, but what other forms is that going to take?

Like I said, we have done two corporate tournaments with them. The first corporate tournament was one of their biggest nights in their poker room it had since it opened. This last turnout was completely sold out. In fact, we even had people that wanted to play that couldn't. So it's been a great deal for them. They added like seven more table to the tournament. So it's been a great turnout. It's been a lot of fun. We're doing some parties at their pool. On Monday we take a bunch of the girls out to Relaxed Mondays now and the girls hang out at the poolside. So it's just a lot of fun stuff, get their name out there, and it has benefits to the girls. The girls got to play in the poker tournament and they got a little excitement and they got on VegasTV.com and a few other things. So it's just exposure really is what it is. It's building the brand and letting people know that not only is Rick's in Vegas but how Rick's is different. You know, what our customer service is and the things that we care about and the things we do for the girls and with the entertainers out there. Jamie Clement – Sidoti & Co.: Is having a club on the strip at one of the casinos still an achievable long-term goal?

It's definitely a goal. Whether it will ever happen is unknown. There's a lot of pressure out there right now. There's a lot of the regular night clubs that have some major problems and some law suits out there because of those problems and they are getting a little bit of backlash I think from the gaming board on who's liable and who's responsible for these types of things and there's talk in the newspapers of trying to make the gaming license holder responsible for some of those things. So depending on how that plays out will probably have an effect on that. It's just hard to say. If they're found that they are actual tenants and not part of the gaming licensee, then I think we could do it tomorrow. Otherwise, if they start ruling in the other direction like they are responsible for the nightclubs that are on their premises, then I think we could be farther away. So it's just really difficult to tell at this time if and when that will ever happen.

Your next question comes from David Fore – Montgomery Street Research. David Fore – Montgomery Street Research: Do you have a close date for the Austin club right now for us?

We don't have a date yet. It could be any day. It could be tomorrow, it could be next Friday, it could be a week from now. We just don't know at this time. All of our stuff is done, we are waiting on the other side to finish up some of their last licensing stuff and what not and once all that's done I hope we will get that done. David Fore – Montgomery Street Research: And back on the M&A front, are you seeing more of an uptick in private owners approaching you now in this current market?

What we are getting is, everyone knows we are a serious buyer and so we are starting to get calls from brokers when they first get a property. So it's nice because we're starting to get a lot of first looks. So I guess we'll go out, we'll see if they're just using us to test the waters or if they're serious about selling their clubs. I believe that there are two or three guys that we are dealing with right now and stuff that we are looking at right now that could become very serious in the next 60 to 90 days. David Fore – Montgomery Street Research: On a larger scale, are you seeing M&A among some of the larger private guys out there, looking to buy clubs as well in this current environment.

You know, there are guys out there that are talking but it's like the old days, everybody wants to steal your clubs. I don't think there's a lot of real serious guys out there right now. If you owner finance you could probably—like for example, the Austin club, when we tried to sell it, first we wanted to do an all-cash deal, the problem is people are having too much difficulty coming up with large amount of cash, so we went ahead and carried some paper on it. We got a very significant down payment and we will carry the paper on the rest of it. David Fore – Montgomery Street Research: It may be too soon for this, but are you giving some type of outlook for the June quarter right now?

No, we haven't. You know, April is gone, we put out the sales numbers for April. I think we're definitely starting to do better and I think that we will continue to see that happen. I just got something handed to me and I don't know if it's—it looks like the Senate passed the repeal of the patron tax today. So that might be really good news for us. I'll have to look into it. It goes to the governor so it will just depend on if the governor signs it or not. Someone just handed me an article from the Houston Chronicle that came out today. That will be big for us. That's a huge amount of revenue for us. It's been set there in limbo. We've been expensing it out the whole time. So if enacted, we will income that back in and have a credit here. We'll have to talk to the auditors how we list that, but basically it will show up on our balance sheet as some type of prepaid tax asset.

Your next question comes from David Cooper - Private Investor.

I have several questions and some comments regarding the Las Vegas club in particular. Specifically relating to the marketing campaign, as it were. I haven't seen anything in sent to me, in any press releases delineating or explaining exactly what that marketing campaign is or how it works. But as I understand it, and I'm involved in this industry, I've heard some inaccuracies in things you've described as far as what's happening industry-wide with house keys going up and different things. I know those things are inaccurate and clubs have increase their cover, not the $50 with the two-drink minimum on top of that, but that's $30 plus two-drink minimum—

Correct. That's $50 to get in.

What the marketing campaign really is, is a cab pay out war. It's diversionary by state law which is by definition illegal, but it's been going on so long, there's a lot of litigation. I've never heard Rick's talk about anything on that. There is serious litigation happening now with respect to that. But I was shocked when I saw Rick's elevate this cab war up to previously unknown levels—

I guess you work for one of our competitors, I take it.

No, I don't. I'm a shareholder.

Oh, okay.

At any rate—and you would know that if you look through your rolls. I have an interest in what's going here because $100 payout—my concern is you're supposed to go down to $30 with these clubs on the 15th—

I don't know anything about that.

Well, it's out there so we'll see if it happens on the 15th, but the market share is going to drop significantly when that occurs because it's not a chicken and egg theory in Las Vegas about who has got the girls, who has the customers, it's who has dominion over drivers. Drivers bring people, divers influence people, people staying on the strip don't read magazines, they don't see billboards, they don't listen to radio, but they do listen to drivers and that's why I think when it goes down to $30 I think we'll see returns largely to [inaudible] retaining, and treasurers, retaining large market shares on so I'm very interested in what we'll see at Rick's. A couple of more questions I have are regarding—

That's more than of an opinion than a question, but go ahead.

I have a question concerning the payout.

Okay.

What can you tell me, for instance, about this payout?

I won't discuss on an open line our marketing program. I'm sorry, it's not going to happen.

Well, I'm glad you said that. Let's move on. Is there any plan to 1099 these drivers that are getting paid all this money?

I am not going to discuss our marketing program in any form or fashion about Las Vegas on an open line. It's not going to happen.

Okay. Another question I have for you is are the entertainers still being charged in addition to their house fee a 15% to 20% of their earnings nightly?

A what? I don't know what you're talking about.

Do you want me to repeat the question.

I know, but I don't know what you're talking about. No, we don't charge entertainers 15% or 20% of anything.

Well, okay, that should be looked into but largely what—

Are you from Minnesota?

No.

You sound like Plaintiff's counsel.

At any rate, what I'm looking at here is I wouldn't call that an aggressive marketing campaign if it's just paying cabs because anybody can do that.

Okay.

In other words, anybody can come along and pay $100 or $110 or $150 per head, charging a $30 to $50 cover, if that was what they wanted to do, and get the market share—

Anybody can rent a billboard, anybody can put an ad in the newspaper.

Right.

Anybody can stand on a street corner and pass out flyers. I mean, I don't understand your point.

Well, the point is this is not nearly—I don't even know that—I'm going to be curious to see how this whole thing gets written off. The reason I ask, or the reason I comment is I read your article in Forbes magazine going back to—maybe it was, I don't know if it was the fourth quarter or somewhere in the first quarter, but there was a real decidedly aggressive stance in that article against cab drivers and paying out and say they were gauging and I come to find out that that's entirely the opposite of what's actually transpired since that article came out. So I think you should be more forthcoming and have transparency with respect to questions you refuse to answer, you should answer.

I think that's trade secrets I don't think that's—

I don't think it's trade secrets. But I think this is how you're doing business and I think it needs to be disclosed. And I think there is likely some—

I think you can see exactly how we disclose what we do.

I think you are inflating stock prices and I think something is going to happen with this.

You think I'm what?

I said I think you are manipulating stock price by what you're doing in Las Vegas and I don't think there is any transparency here. I think people deserve to know where the money is going.

Well, I'm sorry you feel that way. And I'll take the next call operator. I'm not going to argue over that with you. I appreciate your time. Thank you.

Your next question comes from Ben Lichtenberg - Noble Financial.

Just one quick question. It looks like you restructured your put options and a more favorable outcome to the company. What incentivized the holders to actually do that?

What incentivized them? I guess my kind voice and pretty face—the reality is they had no obligation to do it whatsoever. You know, we called, we asked, we had purchased their clubs from them, we had built relationships with these individuals over time and said, look, here's the deal. I guess the biggest incentive is of course, if the stock trades for $29 a share, they make more money on it. So it's just a matter of if the stock was—if they believed when we did all this and we merged our company in that the combined assets were going to create more value and then you believe that this is just a recession and the markets will return to a more normal period at some time in the future, obviously the longer they have on those put options the better chance they have of getting more money for them than the $20 per share. So that's one of their motivations. But I think the biggest motivation is I called and said, hey, can you help me out.

Got it. Okay. Obviously it's a favorable transaction to the company.

Yes.

It sound like—

I mean, you know, when you look at it on an individual base it really wasn't that much from each individual. Yet once you add up all the individual changes up, then it becomes a big deal. For example, you take the Dallas one that we just did, there are three parties involved in that. So each one of those parties basically deferred $200,000 in payouts to themselves, so each one of those individuals gets $200,000 less over the next year that they're going to get back over the next year and the next year, however, the company as an aggregate takes $600,000 in tax layouts back this year. Same thing in the Las Vegas deal, where we deferred some of that. It's two different individuals so it's not all one person that did it.

So they went because they got the same deal and it was a handful of different people and even though it seems pretty of a decent dollar size in the whole, individually it was probably less so.

Right. It was less money to each individual but when you add up all the different individuals from the four different transactions. Of course, you take the Philadelphia transaction, that was all one person. I just asked can you help me out and he said yes. And he owns half the real estate with us, we're making the rent payments with him. He's getting his income off of his half of the real estate so for the club to be successful is important to him as well, and for the company to be successful long term is important for him as well. So those are some of the motivations. I mean, you would have to talk to the individuals and find out exactly why, but did we give anything? We gave, on the Dallas transaction, the lawyers had originally messed up one of the collateral documents and we corrected that collateral document for them. Other than that, on the other deals, we just basic amendments to the original purchase agreement. The only thing that really changed was how many shares they could put to us and when.

Your next question comes from William [Stepacher] – Private Investor. William [Stepacher] – Private Investor: I like the how you handled that short investor.

Is that what he is? He's short? I thought he was one of the other club owners that have didn't get picked by this program out there. Let's face it, we didn't increase our business from $200,000 to $1.8 million basically in six weeks time without some enemies out there and we knew that was going to happen. And we tried for six months, in the first six months we were there to get everyone to make an agreement to bring the payouts down, to play fair, to not pay doormen cash on the side, to not do all these things that go on in Vegas, and say let's all play on the same playing field, and nobody wanted to do it. And Rick's took the brunt of the hits for six months and after six months we got tired of it and said okay, you want to play this way, we can play this way, too. And that's just basically how it ended. William [Stepacher] – Private Investor: And the cab drivers I spoke with will actually—they actually prefer the payments to be lower.

Of course, there is no doubt the cab drivers would prefer a $20 payment because then the line guys at the hotels and casinos don't pull people out of line and put them in limos, they just put them in the cabs and the cabs get the rides. I stand out in front of the clubs. I've been there since March 24 and I've been out there almost every day. I was there 17 days straight, from 7:00 p.m. at night to 7:00 a.m. in the morning. I went home for the weekend, I went back out there for 11 more days. I will be back there Friday for the shopping center convention. Probably through Friday of next week because it's going to be one of the biggest weeks in Vegas. That guy had inside information that only six people know about that he was asking questions about on private negotiations. Believe me, he was calling from one of the other clubs. I know he was. Or he's been talking with one of the other club owners and was put up to the call. Which is fine by me. They don't need to know what Rick's is going to do. They'll find out when I do it. That's the way I look at it. William [Stepacher] – Private Investor: My question is about the tax in Texas. Did you say they are proposing a 10% sales tax?

Right it will be a 10% sales tax on the cover in lieu of the $5 fee. William [Stepacher] – Private Investor: So is that something that can be passed on or, well I notice you said you are going to put the proceeds that will be returned towards that tax.

Well, they won't be returned, what we will do is we'll get a credit. The bill calls for a credit to be issued against all future taxes that would be collected and it allows them to immediately release those funds to the victims through the victims' organizations. Which is fine by us as long as we get the credit. I mean so it takes us, you know, we'd pay the money over the next year or two years, or three years anyway, whatever the time frame may be. I'm sorry, we didn't get your name. Could you identify yourself again? William [Stepacher] – Private Investor: William [Stepacher.]

Thank you.

There are no further questions in the queue.

If there are no further questions we can end the call. I would like to invite everyone out, I'll be heading over to 50 West 33rd Street here in New York. Anyone who wants to come out to the due diligence ball, I'll be more than happy to discuss any questions that you might have there.

This concludes today’s conference call.