An Adult Chain Woos Investors, Wall Streeters
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.
Rarely have I heard a couple of Wall Street brokers so excited. Surprisingly, the subject of their discussion was not a killing on a hot new issue or achieving $1 million a year in commissions, but rather a visit to a nightclub called Rick’s, which bears no resemblance to the memorable club of the same name that was frequented by Humphrey Bogart and Ingrid Bergman in “Casablanca.”
Rick’s Cabaret, located at 50 W. 33rd St., is part of a publicly owned chain of 11 adult nightclubs (soon to be 12) that is a rising star in a growing $15 billion a year industry comprising about 3,000 adult clubs across the country. While the stock has essentially been a lemon until this year, the club has become an occasional hangout for some Wall Streeters with plenty of dough. Its chief attraction is a bevy of topless dancers.
The parent company, based in Houston, is 23-year-old Rick’s Cabaret International, which also operates clubs in Texas, North Carolina, and Minnesota.
New York’s Rick’s, a three-level, 10,000-square-foot club, opened last September, replacing another adult club, the Paradise Club. Its top floor contains VIP suites that offer private dancing at $200 an hour, and there is a pricey steakhouse on the second floor. The club, which has a $20 admission charge after 7 p.m., is open until 4 a.m. seven days a week.
Located within a few blocks of such city landmarks as the Empire State Building, Madison Square Garden, and Penn Station, the club turned profitable within three months after Rick’s took it over, the parent company’s CEO, Eric Langan, tells me. “How many nightclubs do you know that can say that?” he asks.
Mr. Langan is Rick’s largest shareholder, with about a 24% ownership of the fully diluted 5 million shares outstanding. He took control in 1999 when he and a Texas businessman, Ralph McElroy, bought the founder’s stock.
Rick’s opened its first club in Houston in 1983. Today, the company has roughly 1,800 employees, of which about 1,200 — the dancers — are independent contractors who earn no salary and work strictly on tips.
Rick’s clubs are generally located in major cities with populations of a million or more and strong business travel and tourism. The chief customers are business owners and working professionals, including financial types. Imperative, Mr. Langan says, are properly zoned locations (areas in which adult clubs are permitted) and a favorable political climate.
In the New York club, Mr. Langan figures the dancers earn on average between $3,000 and $5,000 a week for 40 hours of work, while some rake in as much as $3,000 a night.
A few weeks ago, a hedge fund trader and one of his clients visited the club and I’m told the tab for the evening, including dinner, ran about $1,900, of which nearly $1,500 went for tips for the dancers.”An expensive evening but wonderful ambiance,” the trader said.
What about Rick’s bottom line? It’s on the upswing, according to Mr. Langan. In fiscal 2005, which ended September 30, Rick’s lost $300,000 on sales of $14.8 million. Mr. Langan attributes that loss to start-up expenses related to the opening of new clubs in Charlotte, N.C., and New York. In the first fiscal quarter of 2006, Rick’s went into the black, posting a profit of $525,000, or 12 cents a share, on sales of $5.8 million.
For all of fiscal 2006, Mr. Langan figures Rick’s should earn about $2.2 million, or 40 cents to 45 cents a share, on sales of between $23 million and $24 million. In June, he notes, the company posted record monthly sales of $2.2 million. For fiscal 2007, in large part reflecting the acquisitions of additional clubs, he estimates the company should add another $15 million in sales.
The goal, Mr. Langan tells me, is to build Rick’s into a chain of 50 adult clubs in 30 major markets with an annual volume of between $150 million and $200 million within five to 10 years, including possibly a second club in New York.
Sounds impressive, but investors, as evidenced by a hardly inspiring stock performance, have reason to be skeptical. In 1995, Rick’s did an initial public offering at $3 a share. Now, 11 years later, the stock is at only $7.35, though it’s up sharply, more than 70%, from its 2005 close of about $4 a share.
The lackluster stock showing over the past decade, some Wall Streeters believe, stems from the seedy reputation surrounding adult clubs. In New York City, for example, some former clubs, including swing clubs, have run afoul of the law over such issues as prostitution, sale of drugs, and tax evasion.
The reaction from Mr. Langan, who owned an adult club in Texas when he was 21: “This is a business like any other business, and you have to treat it that way. The problem is some people have opened adult clubs, treated them as playgrounds, and didn’t pay taxes. Not us. If a dollar comes in, a dollar goes into the cash register, and we police our clubs very diligently to avoid any problems.”