Can Undressing for Success Work? Two Strip Club Chains Are Trying
By KRIS HUDSON
Staff Reporter of THE WALL STREET JOURNAL
February 9, 2006
Wall Street's two publicly traded strip-club chains have ambitious
expansion plans and established, if rocky, track records, but their
stocks have failed to attract much attention from investors.
Rick's Cabaret International Inc. based in Houston, which made
its debut on the Nasdaq National Stock Market in 1995, operates 10
clubs in four states and just opened its flagship club in Manhattan
VCG Holding Corp., Lakewood, Colo., which became listed on
the American Exchange in 2003, operates six clubs in four states.
Both chains envision adding dozens of new venues in the coming years.
"We'd like to be in about 30 large metropolitan areas with somewhere
between 30 and 50 locations so that we have a national brand," said
Eric Langan, Rick's president, chief executive and chief financial
officer. "The real key is the national branding. I want to get into
the merchandising like Hard Rock Cafe and the national recognition
They'll need to attract more attention from investors first. Rick's
stock, which the Nasdaq threatened to delist in 1999 for trading below
$1 for 90 consecutive days before Rick's consolidated its shares to
boost the price, rarely has topped $5 since then. However, it has
climbed roughly 70% since July, putting it near $4.75 a share, in
anticipation of the New York club's debut and first year of results.
Meanwhile, VCG's stock, which hovered around $3 for most of its 2+
years, has sunk to nearly $1 since May.
Two primary issues weigh on the companies: First, adult-entertainment
companies in general have struggled to consolidate their niches in
the industry and produce consistent profits. "It's amazing how high-profile
the category is, but at the same time, these companies have not made
fabulous amounts of money," said Matt Harrigan, an analyst with boutique
investment firm Janco Partners in Denver.
Second, Rick's and VCG are relatively small companies, with market
values of $20.4 million and $8.9 million, respectively. "I think the
public markets want to see $100 million a year in sales or a $100
million market [value], and we're just not there yet," said Troy Lowrie,
VCG's CEO. "We're working toward it."
Mr. Lowrie, who inherited some of VCG's clubs from his late father,
has chosen nationally and locally known names for his clubs, some
through licensing deals. Yet the clubs' results have been scattershot.
For example, his club in Indianapolis and his Penthouse Club in Denver
posted sales losses of 3.8% and 4.5%, respectively, in January. His
Penthouse Club in Phoenix posted an even larger loss for the month:
41%. Yet his clubs in Denver -- The Diamond Cabaret and Centerfolds
-- posted January gains of 39% and 12%, respectively. Overall, VCG
has reported sales for the first nine months of 2005 of $12.8 million,
up 52% from the same period a year earlier, and net income of $472,045,
down from $772,609 a year earlier. Mr. Lowrie owns seven clubs outside
of the VCG umbrella, some of which the company manages.
VCG bought three clubs last year, including its $6 million purchase
of the Diamond Cabaret in Denver. To finance the expansion, the company
raised $10 million in debt from 40 individual investors in Denver,
Mr. Lowrie said.
VCG has made headlines in recent years for reasons other than its
expansion. Mr. Lowrie made a $100,000 donation in 2004 to the Denver
affiliate of the Susan G. Komen Breast Cancer Foundation to be a main
sponsor of the affiliate's annual Pink Tie dinner. After "thoughtful
discussion" about the source of the donation, the affiliate's board
accepted it because of the services the money would fund for cancer
treatment, executive director Valerie Chilewski said.
Last summer, Mr. Lowrie contended with a potentially damaging investigation
by the Minneapolis police department. As part of the city's review
of VCG's application to open a second club there, two Minneapolis
officers visited VCG clubs in several states and reported witnessing
sex acts and offers of prostitution. Mr. Lowrie denies the findings,
though VCG eventually withdrew the Minneapolis application. "This
was all fabricated to keep us from expanding adult entertainment in
Minneapolis," he said.
For its part, Rick's went through an ordeal to open its Manhattan
club. The company spent $11 million over five years to open the club
in the former venue of the Paradise Club on 33rd Street. In December,
the fourth month in operation for the New York club, Rick's reported
monthly revenue of $1.89 million, a 77% jump from a year earlier.
In its latest fiscal year, Rick's recorded a 7% increase in revenue
to $14.8 million and a $215,148 net loss.
Mr. Langan plans for Rick's 10,000-square-foot Manhattan club to stand
apart from dozens of other clubs in the city by offering "Texas hospitality."
That entails performers learning three things of their choosing about
each guest they meet. Rick's trains its new performers in the "art
of conversation" in training sessions every other month.
With the Manhattan club hitting full stride, Mr. Langan intends to
lobby for more attention from Wall Street. He plans to host Rick's
first conference call with investors in five years on Feb. 14 -- Valentine's
Day -- to discuss the company's quarterly results.
In recent years, Mr. Langan, dressed
in a tailored suit, has used Power Point presentations to outline
Rick's plans for investors at conferences and restaurants. As he spoke
at a Dec. 1 conference at Manhattan's Yale Club, two Rick's performers
wearing business attire with short skirts and plunging necklines handed
out Rick's brochures. In November, Mr. Langan spoke at the Manhattan
Rick's to 120 members of the Bull and Bear Club networking group for
analysts, fund managers and investors. Some Bull and Bear members
complained before the event about the choice of venue, but others
mingled and partied until 4 a.m. "If it's good enough for Nasdaq,
it's good enough for us," said Jeffrey Friedland, managing director
of Friedland Capital Inc., the main sponsor of the Bull and Bear Club.
A third publicly traded company, Scores Holding Co., licenses the
Scores name for use by adult-entertainment clubs. The stock trades
around a penny a share.
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