Tuesday, August 19, 2008

Rick’s Cabaret – a Gentlemen’s Establishment with a private jet






Cash and cash equivalents


Accounts receivable



Other, net


Marketable securities




Prepaid expenses and other current assets


Total current assets



Buildings, land and leasehold improvements


Furniture and equipment



Accumulated depreciation


Total property and equipment, net



Goodwill and indefinite lived intangibles


Definite lived intangibles, net




Total other assets


Total assets




Accounts payable – trade


Accrued liabilities


Current portion of long-term debt


Total current liabilities


Deferred tax liability


Other long-term liabilities


Long-term debt, less current portion


Long-term debt-related parties


Total liabilities












Additional paid-in capital


Accumulated other comprehensive income (loss)


Retained earnings


Less 908,530 shares of common stock held in treasury, at cost


Total permanent stockholders’ equity


Total liabilities and stockholders’ equity




















So what have we got?

  • A company whose tax returns do not match their GAAP accounts

People own this stock? Search me as to why…


A positive: the company has a code of ethics

I can’t be all negative.





I thought you could.



John Hempton said...

There is so much more I could add.

For instance the assets include over a million in trade.

Who precisely does a strip club sell services to that are not paid immediately in cash? Why does it need to collect money?

In a past quarter they wrote off some bad debt.

Can anyone with more experience than me tell me if a strip club will sell you things on credit?


John Hempton said...

And why could you possibly have 11 million net - maybe 15 gross in furniture and equipment.

That is a lot of couches...


Huntington Hartford said...

I don't know this to be the case but they likely have "licenses" to operate these strip clubs. These licenses are probably hard to come by. They may be counted as intangibles for accounting purposes but they might have an incredible amount of intrinsic value. I bet it's hard to get a strip club open these days ... the religious neighbors will eat you alive. But if you've been in business for a while they have a hard time throwing you out. Lastly, many normal, hardworking religious folk will visit a strip club for a bachelor party... so they are relevant businesses with lasting appeal (i.e. prostitution is the oldest biz, etc.).

Analysts are putting out $1.20 and $1.91 eps for 2008 and 2009. There are plenty of companies that trade only on earnings (and earnings potential) as the balance sheet is ignored.

I'm not long, just taking a 2 minute stab at a bull case.

John Hempton said...

Huntington Hartford is probably right to some extent. The company has some licenses - and in some instances they have actually broken the intangibles into a value for the license and a value for the rest.

But this would suggest Vegas and Houston (where there are not large license requirements) would be worth less. The company is dominated by Vegas and Houston...

Huntington Hartford said...

I wouldn't mind doing some channel checks... to check product quality, customer satisfaction, etc.

Mikey said...

"Indeed despite selling considerable common stock in unregistered sales to institutional investors..."

Wouldn't this be naked shorting the traditional way?

John Hempton said...

Apologies. I accidentally deleted a comment from someone who lives down the road and promised to do some due diligence for me.

I won't pay you for it - and don't spend too much because I am short a token number of shares!


As for the person who thinks this might be naked shorting - I know little here.

The sale of unregistered letter stock was common enough amongst scam companies in the go-go era. The stock was sold at a discount to face - with a "letter" promising best efforts to get the stock registered.

The unscrupulous fund manager would mark the stock they purchased at a discount to market up to market - and book a performance fee.

Sometimes they would short the common to lock in the profit - which could only be locked in finally if the company could actually register the shares... but it worked enough...


Peter Phan said...

I can probably accept 11 m in furniture and equipment. The fitout will cost quite a bit, plus the music system, the lights, the signs, etc etc. It depends on how many venues they have on their books. What I cannot understand are firstly, the receivables as pointed out by John, and the inventory. One can speculate that the inventory is just booze, but well, again depends on how many venues there are.

Anonymous said...

You certianly have a bias. They aren't any seedier than the BANKS that you clowns have reccomended to your clients.

what do we ahve herer. An analyst tht didn't get his kick?

Anonymous said...

Taxable income is lower that GAAP because you can amortize and deduct acquisition intangibles for tax purposes.

Anonymous said...

John, I'm not going to explain my position, but good luck with your short. The fact that you haven't done channel checks and don't understand the value of exclusive licenses is laughable, but go ahead, short some stock! I'll take all your shares.

By the way, you ask who does a strip club sell services to that is not immediately paid in cash? Have you heard of credit cards? You think people pay at the bar using just cash?

Let me shed a little light on what's happening with this company: return on invested capital has increased from 5% in 2000 to 11% in 2007. Operating margin has increased from 1% in 2000 to 13% in 2007. Free cash flow has increased from $220K in 2000 to $3.2M in 2007.

I do understand that most people buying and selling this stock don't understand how to read a balance sheet, but I don't understand why you haven't bothered to do a single channel check!! Take a look my friend! Do some homework!


John Hempton said...

Some replies to anonymous:

First Anon said "Taxable income is lower that GAAP because you can amortize and deduct acquisition intangibles for tax purposes."

That is specifically disavowed in the accounts. So dismiss. But I would like to know.

Second anon asked me why I hadn't done channel checks. (Well I would - but I need to explain it to my wife...) But seriously then went and quoted some numbers. The accounts make no sense... but of course you can use the ROIC figures straight anyway...

The thing started with some clubs it owned. It then purchased clubs at a premium - presumably because licenses/sites are valuable. Those should have lower ROIC because they needed to purchase the goodwill. But the ROIC goes up? I do not get it - there is no explanation I can see.

The private jet to me is the gimme. Companies with 3 million in cash flow don't justify full ownership of a jet.

When a long can explain the jet I will get more interested.

As for the short - it is "token". I used that word advisedly. It gives me an incentive to check the stock and an excuse to go on the site and read the press releases!


a yo said...

Response to: 60 million in goodwill on the balance sheet. In the q, it says goodwill and intangibles. Assuming purchase accounting rules, the difference between the market value and book value is added as goodwill. Goodwill if you look at the Q that parses out each deal is not a large part. The larger part are these "SOB licenses" - basically licenses to operate sexually oriented businesses. In addition to that you have property, trademark, liquor licenses. In a highly regulated business, I would assume that the greater part of the value of the deals are intangible related b/c you already have all the stuff to be up and running.

No tangible net worth- when the stock was higher, they used their equity as currency to conduct some of these deals. If you read the Q, shares are issued in conjection with quite a few of these deals.

Deferred tax issues – Here’s what gaap says about DTLs and acquisitive deals.
For a taxable asset transaction, under Section 197 of the Internal Revenue Code, goodwill and
intangibles are generally deductible on a straight-line basis over a period of 15 years.
This is important since a taxable acquisition will lower a company’s cash taxes, and
increase operating cash flow. However, a higher acquisition price may have been
paid for the assets due to the tax shield.

From the Q you can see DTLs were created with the deal which seems ok
From 10Q tootsie proforma valuation
Net current assets $ 390,000
Property and equipment and other assets 4,919,000
Non-compete agreement 200,000
Goodwill 7,546,240
SOB licenses 20,152,000
Deferred tax liability (7,546,240)
Net assets acquired $ 25,661,000
Property and equipment and other assets $ 3,882,885
Non-compete agreement 100,000
Goodwill 1,480,783
SOB licenses 4,002,115
Deferred tax liability (1,480,783)
Net assets acquired $ 7,985,000

I haven’t pulled all the detail on the DTLs but from quick glace there seems to be a difference but it’s closer to 1-3m which I don’t have a good answer for but isn’t that abnormal.

Interest – the terms on financing a jet would have less risk than using the funds to acquire a strip club. There’s no regulatory risk associated with buying a jet. Not sure if this makes sense but that’s the thought. As far as high rates, I would assume if they went to a normal bank the rate would be much higher. But maybe that is naïve.

As far as management, I think we have to draw a distinction between mgmt credibility and a seedy business. There can be seedy management in credible businesses (I can certainly name a few) and there can be strong management in seedy businesses. I’m here to make money not to worry about whether the operations are morally right or not. But I agree there are many people with your view that fail to consider the potential valuation expansion b/c of its operating business.

a yo said...

Receivables – it’s a new day – people use credit cards at strip clubs. I went to their quarterly due diligence ball and can confirm this is TRUE. The drinks in NYC are $18 so after a couple rounds you’d better save your cash for the girls who do not take credit cards…so that makes perfect sense to me.

Trade accounts receivable is primarily comprised of credit card charges, which are generally converted to cash in two to five days after a purchase is made. The Company’s accounts receivable, other is comprised of employee advances and other miscellaneous receivables.

So the other 700k I admit their explanation is vague but 1.3m trade receivables is def credit.

Inventories include alcoholic beverages, food, and Company merchandise. Inventories are carried at the lower of cost, average cost, which approximates actual cost determined on a first-in, first-out (“FIFO”) basis, or market.

In the 10k, here’s the ppe net info. Broken out as 21m for building,land and leashold improvments (things done to leased assets to make them nicer). 5.7m is due to furniture and equipment. Accumulated depr (the contra acct) is 5.6m so that is the 21m.

In the new 10q, the net ppe is 48m. apples to apples now that is 44m for building, land, and lease hold improvements. 11m for furniture and equipment. Accumulated depr is 7.2m

So we can roughly say that’s about double the buildings and double the furniture. Since Sept 07 10k release, 4 major purchases have been made net when was valued at 21m. If you check the Q, they give initial valuations on net ppe for each deal: Miami 4.9m, Philly 3.82m, Dallas Hotel Develop 6.2, Texas Wireway 6m = 20.9m plus the 21 (even though this is now worth a little less) =40 or so….

They don’t breakout the furniture stuff but double the number would make sense to me if the buildings/land/etc looks about

paolo said...

Several comments have already pointed out the extensive use of credit cards by customers in this business. What I want to know is how the orginal assessment of this company did not take into account this obvious explanation for the size of accounts receivable. Was it because the analysis was created to fit the original thesis to short the stock?

Anonymous said...

I am familiar with many of the Rcks properties in Texas as well as the management. I have never owned any Rick's stock but have been a competitor for 20 years.
The 60 million in goodwill is easily explained when you realize that for a relatively small investment in a strip club an operator gets a substantial net cashflow. Before the recession, you could lease a building, spend 500 K on buildout and have net cashflow of 500 K every year. The problem is obtaining a permit from the city. Very few locations qualify and are commercialy viable.

So when a strip club owner wants to sell he can now sell to Ricks for a combination of debt and stock at 5 to 7 times net cashflow before you were lucky to get 3 X from the big operators.

Eric Langan is brilliant. He took a sleazy business added a fresh coat of paint and now he is riding around in a jet. All the big operators before him have done prison time for skimming money but Eric pays all his taxes. He is cleanning up the industry. My hats off to him.


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