Gentlemen’s clubs have huge profit margins, devoted clients, and even the dancers have to pay to get in the door. Enter Eric Langan, a 19-year veteran of the industry and CEO of Rick’s Cabaret. Since first appearing in EQUITIES in 2006, Langan has taken Rick’s from a $15 million company to a $190 million company, with 15 clubs open in the U.S.
Rick’s has announced $40 million in planned acquisitions in 2008, and Langan says earnings will hit $2 per share in 2009. In the next three to five years, he expects his company’s market cap to grow to $1 billion. Nobody questions Rick’s profitability, but can one strip-club chain break the 10-figure mark?
EQUITIES:
How did you get into this
business?
Eric Langan: In 1989, when I was 21, I
opened my first club. It was called
Sheba’s Lounge. It was a 1,600-squarefoot
location in Fort Worth, Texas. It’s
no longer in existence today. But that’s
where I started this.
I kept reinvesting and building more
clubs. In 1997, I went public through a
reverse merger, and then in 1998, I
ended up merging with Rick’s Cabaret. I
took over as CEO in 1999. That was
during the Internet craze, so we started
looking at Internet technologies, and we
changed the company into more of an
Internet company. By the time we
closed our first acquisition on the Internet
company, the Internet bubble
busted. So we had a tough time sorting
out where we wanted to go.
EQUITIES:
So it was back to the basics?
Langan:
Yes. In 2004, we decided that if
we could get into the New York market,
it might make a lot of sense being publicly
traded because we would have exposure
to the capital markets. And that’s
when we looked for and found our New
York City location, which we opened in
September of 2005. Since the New
York location opened, our stock has
gone from the $1.50-to-$2.50 range to
over $20 today, with a 52-week high of
$29.79.
We have three club brands right now.
We have the Rick’s Cabaret brand, which
is the high-end brand; the XTC Cabaret
brand, a blue-collar party club; and Club
Onyx, which caters to African-American
businessmen and athletes. Plus we have
the Tootsies operation in Florida. Normally,
we would rebrand, depending on
the demographics. But Tootsies is a oneof-
a-kind type of location. It’s a 47,000-
square-foot club, and it caters to everyone.
The name is very well known in
Florida, and we decided to just keep
that. We paid for the brand and for the
location, and we didn’t see that putting
the Rick’s name on it would increase its
value. If we can go into a location and
rebrand it and increase the value of it,
that’s when we brand.
EQUITIES:
What’s the benefit of being
public for you?
Langan:
For the last couple of years, as
the regulations in our industry have gotten
stricter and certain locations have
become grandfathered in, we’ve really
started to see consolidation heat up.
Those are the type of locations that
we’re going after. The public markets
give us a currency and the equity to raise
the capital to go out and buy these locations
that a lot of the private sector guys
don’t seem to have.
EQUITIES:
A lot of your clubs are near
airports. Is that part of your strategy?
Langan:
We look for anywhere there are
business travelers. We like to be near any
type of convention business or any
place with international airports.
EQUITIES:
And the idea is that a business
traveler would recognize the Rick’s
name and stop by for a visit?
Langan:
Yeah, absolutely. What we want
to do is create that national brand. If
you go to 30 different cities and ask
about the best clubs to go to, you’re going
to get 25 different answers right
now. We want everyone to know the
Rick’s brand and to prefer to visit us if
they come to a city we’re in.
EQUITIES:
What are some of your other
competitive advantages?
Langan:
Our biggest advantage is our
philosophy on how we treat our entertainers
and our guests. We have more of
a hotel casino concierge philosophy of
taking care of our guests and taking care
of our entertainers. And that’s one of
the things that we do very well. Some of
our competitors try to mimic us, and
some don’t even try. Some have the oldtown
philosophy of, there’s a thousand
guys at the door and if you don’t like
what we’re offering, go down the street
and the next guy will come in. Rick’s has
never had that philosophy. We’ve always
had the philosophy of, every customer
is very important to us, and we try to
take care of those customers and their
needs as best we can.
EQUITIES:
In Texas, a new $5 per person,
per entry tax has been levied on adult
clubs. Has that affected your business?
Langan:
It remains to be seen what type
of affect it’s going to have. It’s only
been a few weeks, so we don’t know if
it’s had a cooling effect on our business
or not. January’s normally a slower
month for us, anyway. We’re suing the
state comptroller right now through the
Texas Entertainment Association, which
is a trade group for our industry. We believe
that the tax is unconstitutional for
several reasons, and we believe, in the
long run, that we will prevail.
EQUITIES:
Does it violate the U.S. or
Texas Constitution?
Langan:
It violates the State of Texas
Constitution because they try and call it
a fee, but it’s actually an occupational
tax. And as an occupational tax, 25% of
all the proceeds must go to the school
fund. Well, they didn’t set it up to do
that, which is a violation. That’s our
biggest claim, and it’s the easiest claim
to recognize and win. It taxes free
speech, which violates both the state
and the federal Constitution, and there
are several other problems with the way
it’s drafted, as well.
EQUITIES:
What’s the biggest challenge
in running this type of business?
Langan:
The biggest challenge, as with any
business, is quality management, hiring
management, teaching them your philosophy,
and having them operate your business
with your philosophy. I don’t think
we have any real operational differences
compared to any other business. We have
regulators. We have a customer base and
an entertainment base where we have
supply and demand, just like any other
business. If anything, our business has
benefits—in that we have such high cashflow
and high margins—which make our
business easier to operate.
EQUITIES:
Have smoking laws affected
your business?
Langan:
We used to sell thousands of
dollars worth of cigar and tobacco
products in our nightclubs in Houston.
In Austin, they write the tickets to the
individual smoking. In Houston, the
club is responsible. So we had to stop all
indoor smoking there, period.
EQUITIES:
What makes Rick’s a good investment?
Langan:
Our growth rate has been fantastic
over the last two years, and we
see that continuing for at least another
three to five years. We think our multiple
is still low. We’re in a consolidating
industry. To give you an example of
the scope of the consolidation and
where we’re at today, our market size is
about $2 billion. All the public companies
combined have less than 1% of
the total industry right now. So, if you
look back at the casino industry 20
years ago, and you had invested in the
casino industry when 1% of that industry
was traded versus where the
consolidation has taken them today,
you’d be retired about five or six times
over. And I think that’s where we’re at
right now in our rollup phase. We’re at
the very beginning, and as public companies
start to own 5, 10, and 20% of
the market share, I think you’ll see the
valuation increase.
EQUITIES:
What are your long-term goals
for Rick’s?
Langan:
Our long-term goal in the next
three to five years is to create a company
with a billion-dollar market cap.
When we get there, we’ll decide what
our next move is. When people are
looking at our stock today, they need
to keep in mind that we closed on our
largest acquisition, which was Tootsies,
in November 2007, and when you look
at our past financials, you have no revenue
and no earnings from that acquisition
in our numbers yet. So you have
to look at our forward-going multiples
instead of our past multiples to get an
idea of where we’re going, because the
Tootsies acquisition was an acquisition
that added $18 million in revenues and
$8.8 million in EBITDA. To give you
an idea of where we’re at, we did $32
million in revenues and $4.4 million in
EBITDA in the previous year, so you
can see that the Tootsies acquisition
was a very, very large acquisition, and
dramatically changed the company and
its earnings.
— By Anthony W. Haddad
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