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 in September. 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 like Hooters." 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.  URL for ths article http://online.wsj.com/article/SB113937634763368183.html Copyright 2006 Dow Jones & Company, Inc. All Rights Reserved