Rick's Cabaret RICK
January 15, 2002 - 8:52pm EST by
2002 2003
Price: 2.95 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 14 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Rick's Cabaret International, Inc. (RICK) is the first publicly-traded operator of adult entertainment clubs. Below 10x trailing P/E, the stock provides a cheap way to buy explosive growth, fueled by Internet operations that are demonstrating increasing profitability.

Company Description
RICK currently owns and operates six nightclubs under the name "Rick's Cabaret" and "XTC" that offer live adult entertainment, restaurant and bar operations in Houston, Austin and San Antonio, Texas, and Minneapolis, Minnesota. In addition, RICK recently opened an all-adult "couples" night club in Houston called "Encounters," which is a club for adult couples who enjoy the swingers' lifestyle. RICK also owns and operates premiere adult entertainment Internet web sites in two categories: online entertainment and online auctions of adult products and erotica.

Investment Highlights
*Impressive growth in cash flow demonstrated in past fiscal year: Revenues increased over 50%, with EPS increasing over 500% in 2001 and cash flow from operations increasing over 180%. Operating margins improved from under 7% to over 11%.
*Profitable Internet business: Operating margins have improved to (positive) 10% from negative 20% in 2000 – contributing 30% of RICK's operating income in fiscal 2001.
*Growth opportunities in new locations and new concepts: With only six clubs, RICK has ample opportunity to acquire or build new locations while developing new concepts such as ‘Encounters’.
*Seasonality: RICK has entered its strongest seasonal period, which encompasses October through March.
*Significant insider ownership: Insiders own almost 50% of the company’s stock.
*Reasonable valuation: RICK trades at only 10x trailing P/E and 7x trailing EBITDA.

Investment Risks
*Aftermath of 9/11: Revenues declined in September but are reportedly stabilizing.
*Litigation: Current lawsuit in Minnesota attempts to reduce club hours and reflects general cultural controversy associated with adult entertainment.
*Management depth: Currently spread somewhat thin for a public company, with the CEO serving as CFO, but the company is still relatively small.
*Micro-cap: Float is limited due to market cap size as well as heavy insider ownership.

Business detail

Revenue breakdown 2000 2001
Alcoholic beverages 37.3% 29.6%
Food & merchandise 10.3% 7.9%
Services 38.6% 26.5%
Internet 12.4% 34.6%
Other 1.4% 1.4%
Total 100.0% 100.0%
Nightclubs subtotal 87.6% 65.4%

Operating income breakdown 2000 2001
Nightclubs 136.7% 70.4%
Internet -36.7% 29.6%
Total 100.0% 100.0%

Operating margins 2000 2001
Nightclubs 10.3% 12.0%
Internet -19.5% 9.6%
Total 6.6% 11.2%

Valuation detail

Current valuation
Stock price $2.95
Shares (mm) 4.595
Mkt.Cap. $13.6
Cash $0.7
Debt $3.8
Net debt $3.1
Enterprise value $16.7

Financials (TTM thru 9/30/01) Growth
Revenues $19.660 54%
EBITDA $2.380 240%
Operating income $1.530 1235%
Cash flow from operations $2.169 180%
Free cash flow (CFO - capex) $0.433 95%
Net income $1.315 549%
EPS $0.30

Multiples (TTM thru 9/30/01)
EV/Revenue 0.85
EV/OpInc 10.9
P/CFO 6.2
P/FCF [31.3]
P/E 9.9

Note: FCF is understated in 2001 due to capex more than tripling as a result of acquisitions and investment in the ‘Encounters’ concept, which opened in November 2001 (i.e. after fiscal year-end).


*Continued operating improvement, with increasing contribution from profitable Internet operations.
*Share buyback: Announced in 2001 intention to repurchase $500,000 in stock, with about $75,000 completed by September fiscal year-end.
*Improved coverage of stock: currently no brokerage publishes estimates on RICK.
*Industry consolidation: For example, Internet Advisory Group has begun negotiations to acquire the NYC-based club 'Scores'(the most profitable strip club in the U.S.).
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