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Rick’s Cabaret Stock Soaring

Houston- Shares of Rick’s Cabaret International (RICK) leapt 33% to $3.78 Wednesday after the adult-entertainment outfit reported nearly doubling its profits for fiscal 2004 on a moderate rise in revenue. The recovery in business travel, an improving economy and a growing acceptance of pornography all contributed to the Houston company’s financial performance.

“Interest in porn has been increasing because it’s become less taboo than it was in the past,” says Eric Wold, an analyst at Merriman Curhan Ford, a San Francisco investment bank. “There are more adult-theme shows on TV, even with the government’s crackdown. That’s because acceptance of watching adult movies and going to adult clubs has increased.”

For its fiscal year ended Sept. 30, Rick’s reported a 77% surge in net income to $775,253, or 21 cents a share, from $438,294, or 12 cents, a year earlier. Revenue rose 6% to $16 million. Earnings before interest, taxes, depreciation and amortization rocketed 198% to $1.1 million from $357,947 in fiscal 2003.

Rick’s currently owns and operates seven strip clubs under the names Rick’s Cabaret, Club Onyx and XTC in Texas and Minnesota, as well as a sports bar, Hummers, in Houston. The company also licenses a Rick’s Cabaret in New Orleans. About 95% of sales are derived from the clubs, with the remainder coming from Internet operations. The sale of alcoholic beverages is the single biggest revenue generator. The company plans to open a new club in New York City later this year.

For fiscal 2004, same-location/same-period operating income jumped 34.2% to $2.5 million. That compares to a 5.9% increase a year earlier. The cost of goods sold in clubs dropped to 12.6% of total club revenues from 14.4% last year. Rick’s attributed the improvement to better inventory management, wider margins from liquor and food sales and the addition of an XTC club, which has a lower cost structure. Total payroll and related costs for the year edged up 2% to $5.5 million because of the new XTC club opening. As of Sept. 30, Rick’s had 529 employees. Insiders own about 51% of the company’s stock.

When we looked at Rick’s two years ago, the drop-off in business travel was taking a toll on the company’s bottom line, and shares seemed destined to fall below $1 apiece. But a stabilizing economy and the return of lucrative business travelers since have had an appreciable impact on business, says Rick’s Chief Executive Eric Langan.

“Our clubs closest to airports are up the highest percent in year-over-year sales,” says Langan. “Depending on the club, business travelers make up between 35% and 60% of revenues. But local customers are also spending more, as people are more optimistic and feel more confident about the economy. People are willing to spend more money on entertainment, and I think that trend will continue in 2005.”

The company has focused on cutting costs by negotiating better deals with liquor distributors and credit-card processors. Rick’s has also kept a tight watch on spillage and excessive pouring of alcohol at the bars. The company is trying to cut its electricity costs by $60,000 to $80,000 this year as well as lower its insurance expenses.

The conversion of the original Rick’s Cabaret in Houston into Club Onyx, which caters to African-Americans with black entertainers and hip-hop music, was a particular bright spot for the company. In December, sales at Club Onyx climbed 25%, and Langan expects that number to rise even more by summer.

As for Rick’s Internet operations, fiscal 2004 revenues fell 24.4% year-over-year as the company moved away from subscription-based Web sites offering photos, videos and other adult content. Rick’s operates two membership Web sites for swingers, couplestouch.com and otherstouch.com. The monthly fee is $7.95. The company also has a network of nine online auction sites under the flagship site naughtybids.com. Sellers of adult-oriented items are charged a fee for each successful auction. According to Langan, the membership and auction sites are becoming more attractive because of their lower-cost structures. Auction-site revenues have been flat, says the CEO, hampered by eBay’s (EBAY) decision to cut off Rick’s access to PayPal, the payment-exchange service acquired by eBay. Revenue from the membership sites is rising, though Langan didn’t break out the figures.

At the end of September, Rick’s cash and cash equivalents had fallen to $278,185 from $604,865 a year earlier. The company said the decline was a result of placing $800,000 in an escrow account in connection with the purchase of the property for the new New York City club.

“We have not done real projections [for 2005],” says Langan, “but everything looks better every quarter. We have preoperational costs in New York that may hurt earnings, but cash flow will still increase on a year-over-year basis. At 33rd and Broadway, the New York club is at an incredible location, and I think once it opens our revenues will double.”

Quote:”On the surface, the fact that business travel is picking up makes a lot of sense for rising revenues,” says Merriman’s Wold. “All sectors of the porn industry are seeing growth. You have more usage of in-room movies at hotels, and that’s related to business travel. The number of cable operators and satellite companies taking on adult channels and video-on-demand is increasing. They know the demand is there because the idea of it being forbidden has lessened. As a result of that, one of the largest groups of people renting porn is women. That’s a new group of customers that could go to strip clubs.” (Wold doesn’t own shares of Rick’s Cabaret International; Merriman Curhan Ford doesn’t have an investment-banking relationship with the company.)

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