Friday, August 17, 2007

Overheard: The Starbucks of Strip

Fridays are for poking fun at CEOs. Here at CC, we’ll be running Overheard: What CEOs are Telling Their Investors. Using the earnings call transcripts generously posted over at Seeking Alpha, we’ll be bringing you some choice cuts from exchanges between corporate executives and investment analysts. For the non-business types out there, earnings calls happen four times a year when companies report to the SEC exactly how much money they pulled from the world and into their coffers. They are a goldmine of information on all things that have to do with buying and selling stuff. They are also great corporate theater. Yeah, I said it, Corporate Theater.

Nothing is more mass market than sex, which might be why it sells, so first up is Rick’s Cabaret (NASDAQ: RICK), “one of the nation's premier operators of upscale adult nightclubs.” The company is going to generate over $30 million in 2007 from its 13 adult clubs and a few naughty websites. (I note that Rick is an abbreviation for Richard, and wish that the original owner, this Richard, had chosen the other common shortening of that name. Truth in tickers.)

The way Overheard goes is that I dig up a good exchange like this one from August 14th and then we mine it for useful information. As the hedge fund manager at my first job said, “Executives don’t lie, analysts just don’t listen.”

David Yamamoto - Montgomery Securities: So how have customers responded to the new VIP Suite and Skybox, Skyboxes in your Austin locations?

Eric Langan, CEO Rick’s Cabaret: Its unbelievable. The thing about the Austin locations in that we are working on, we finally got the pictures and I think they should be on our website sometime tomorrow afternoon. And you will actually be able to see the difference in this location. It is just a phenomenal location, Austin. There is nothing to compete with the facility itself. It's a little over 20 some thousand square feet. Its two storey; most of the clubs that are in Austin were built in the late 1980s, early 1990s and they have had very little modernization. And this club is probably one of the nicest club that we own, very modern and really built with the VIP customer in mind.

DY: Right.

EL: And the response was, I mean, everybody was just, they couldn't believe that something like that existed in Austin, Texas.

DY: Right. And Eric, you had mentioned a little bit about just seasonality with regards to club owners and them contacting you with the possibility of acquiring them. How would you characterize the acquisition by them right now?

EL: It's very active. There are a lot of people, there are a lot of people shopping… I do believe that there are some very serious sellers out there as well. People looking how to monetize their asset and figure out what their escape route is or their exit strategy is, because, you know, this is not something they want to do forever.

So, first, if you are looking for a sweet ultramodern strip club, Austin hasn’t really been your town (try Portland, not Seattle). Your options have been dingy and, quite frankly, bearing that early 90s color palette that liked mixing teal and purple. It’s hard to receive a lap dance in that sort of environment. Everyone knows.

Second, Yamamoto does a good job maintaining his dignity, considering the circumstances. I mean, the Skyboxes. What a term. Celestial.

Third, you have to feel a bit for Langan. You can imagine it is tough for him at CEO conferences when all the well-known companies can hide the evil that they do and he has to proudly walk in and announce that he bought his yacht with stripper bills. And do we detect a hint of sadness in Langan pronouncement that “you know, this is not something that [I] want to do forever.” Perhaps he imagines that he’ll move on to bigger and better things. Like, maybe, Red Robin management. Or Magic Mountain (oddly, not named after the Thomas Mann’s The Magic Mountain).

Enough clowning. There is real information about what is going on in our world in this call. First, the strip club market is experiencing consolidation as individual owners find their “escape route” by selling to corporate consolidators like Rick’s. Second, fancy clubs have always existed in places like New York (e.g. Scores), but increasingly savvy “VIP customers” in all geographies want that high-end experience. The strip club market, like everything else in our country, is increasingly segmented. Out: the trenchcoated, harried businessman ducking into a grimy place called The Sandy Jug to rub elbows with truckers. In: The architect of the strip club deserving several dozen one dollar bills.

Rick’s wants to be the Starbucks of strip clubs. As Eric put it elsewhere in the call:

“If you go major cities right now, throughout the country and if that comes, about a gentlemen’s clubs which one to go to, where is the best bet. You are going to get well about 30 different answers, and we hope to take that and create a brand, so that when you go to these different markets Rick's is the brand that hear about each and every time.”

(Oh, in case you are wondering, Montgomery Securities is actually part of Bank of America.)

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