[Seeking Alpha.com]- The economy might be going down the proverbial toilet, and consumer stocks on most people’s radars are getting crushed, but one industry that is bucking the trend, at least up till now, is the adult entertainment industry.

I guess something about the escapism that a beautiful woman provides to those in times of stress has led PeakStocks.com portfolio recommendation Rick’s Cabaret (NASDAQ: RICK) to report pretty amazing results, despite all the turmoil going on today.

Rick’s will be posting their Q4 and full year 2008 earnings and hosting their analyst conference call after the market closes on December 29th.

But because their stock was getting hammered along with the rest of the market, and small and micro cap stocks in particular, Rick’s took the unusual step a few weeks back of pre-announcing their latest results to sooth Wall Street’s concerns over the rapid deterioration of the nation’s economy.

Aside from a brief pop in the stock, it hasn’t seemed to help.

In this post I’ll go over the important aspects that we need to be aware of before Rick’s announces earnings and then break them down into the following parameters:

* What went right in the quarter: What were some of the positive developments that occurred within the company in the last 3 months.
* What went wrong in the quarter: What were some of the negative developments that occurred within the company in the last 3 months.
* What I want to see: All things considered, what I realistically want to see from the company as it relates to their business.
* What we need to see: At the minimum, what we need to see for our investing thesis to still hold and an investment in this company to be prudent.
* What we’ll probably see: After weighing what’s been going on for the last 3 months, what we can realistically expect when they do announce their earnings.
* Bottom Line: What it all means, and what you should do.

Rick’s Cabaret International, Inc., owns and operates upscale adult nightclubs serving primarily businessmen and professionals.

Rick’s differentiates themselves by providing an atmosphere where they can offer a unique quality entertainment environment that includes highly experienced and well screened entertainers, high quality managers hired from within the adult entertainment industry, and finally, providing an atmosphere and ambiance, including exclusive VIP rooms, that appeal to upscale clientele.

Rick’s also owns and operates several online and offline media properties that produce adult websites as well as cater to owners and operators of intimate apparel and adult retail stores.

Rick’s nightclubs offer live adult entertainment, restaurant, and bar operations in Houston, Austin, San Antonio, Minneapolis, Minnesota, New York, Dallas Fort Worth, Charlotte, and other cities under the names Rick’s Cabaret, XTC, and Club Onyx.

As of September 30, 2008, Rick’s operated 19 adult nightclubs.

Q4 and Full Year Results Should be Good

Focus will be on outlook, current quarter’s results

Rick’s had a lot happen in the last few months, not the least of which was continuing to deliver spectacular results when everyone has expected them to fall flat on their face.

Let’s take a look at the quarter that was, and what I expect in their next earnings announcement.

What Went Right In the Quarter

Rick’s continues to deliver despite tough economic times

In mid November, Rick’s took the unnecessary step of preannouncing their same store, or same-club sales for the month of October.

Rick’s surprised many, including myself, when they announced that not only did sales increase 113% year over year in October (mostly due to acquisitions), but more importantly, same-club sales which measure sales at clubs that have been operated for one year or more, rose a stunning 8%.

The top line figure was obviously goosed via the acquisitions that Rick’s has been folding into its operations, but the same-club comps are irrespective of the acquisitions since they don’t include recent purchases less than 12 months old.

Rick’s further went on to say that sales were up nearly 30 percent at the company’s flagship New York City club, which had a record month and that each of the company’s brands — Rick’s Cabaret, XTC Cabaret and Club Onyx — reported sales increases over the previous year.

Also, Rick’s recently increased their stock buyback program to $5 million, which represents about 10% of the shares outstanding at current prices.

Rick’s also recently pre-announced Q4 and full fiscal year 2008 (ended September) earnings and results which were mostly very positive, including or excluding Rick’s recent acquisitions.

In fact the company still had positive same-store (or same-club) sales growth in what is an extremely difficult retail environment.

In addition, Rick’s finalized and reopened their most recent acquisition of a club in Las Vegas, and will continue to look for acquisitions in the coming year as now is a perfect time to pounce on some well-performing competitors that might be struggling somewhat in the current environment, and while valuations are obviously going to be lower.
What Went Wrong in the Quarter

Lawsuit brings a cloud over otherwise good quarter

There was one bit of bad news in the last quarter as Rick’s was sued by the mother of a man who was killed by a Rick’s dancer on her way home from the club where she worked.

The lawsuit claims that Rick’s encourages its dancers to drink with patrons, and thus was responsible for sending the dancer home while intoxicated and without taking proper precautions to ensure that the dancer was not driving home drunk.

While a civil lawsuit has already been filed against the dancer in question on charges of wrongful death, the charges against Rick’s have only recently been added.

I’m no legal expert, and Rick’s won’t comment for obvious reasons, so I’m not sure what the company’s take on the whole situation is.

The monetary ramifications aren’t clear either because there were no specific amount of damages noted in the filing.

Continued execution in spite of downturn

It’s obvious that things are collapsing around us in certain segments of the market.

One look at this year’s Christmas shopping tells us all we need to know with bargain hunters out in droves and same-store and year-over-year sales at many retail locations coming under attack.

What has seemed to happen thus far however, is that Rick’s has been able to not only survive, but even thrive in this market.

It has been amazing that they were able to raise their same-club comps at all.

So, with all of that being said, what I want to see is the full year numbers at Rick’s, including cash flow and free cash flow are continued positive results with an eye towards the bottom line.

This includes their current debt levels, as well as their covenants for paying off the shares of stock that they traded in exchange for their acquisition spree last year.

As their stock price has declined, Rick’s will have to make up the difference on puts that it gave to the owners of the acquired clubs in lieu of cash payments up front.

I want to see this under control, liquidity not be an issue, and forward guidance to remain reasonable, even if it is on the cautious side.

I think that investor’s fears will be calmed as long as Rick’s doesn’t trip us up with anything untoward.

Basically we need to see that Rick’s is still doing well, despite the economy, and if they are seeing a slowdown in their business, which frankly I feel is inevitable, that it is reasonable and manageable, and that the company will be able to meet it’s current debt obligations, and perhaps look to close or restructure any locations that are underperforming, or that aren’t cash flow positive.
What We’ll Probably See

Great 2008, uncertain 2009

Because Rick’s already preannounced their 2008 numbers, we’ll see exactly what they told us we would see, which is solid numbers for 2008.

We’ll also probably see somewhat of a moderation in their current operations as a result of the outside headwinds finally rearing their head in Rick’s neck of the woods.

Bottom Line:

Small position for the past, small position for the future.

I have only allocated a small position in Rick’s because of the uncertainty of their business mode, their micro cap status and because they are typically not owned by many large institutional investors as a result of their “sin” stock status.

That being said, I believe that Rick’s is still operating profitably, in fact creating gobs of free cash flow, and if this were any other business, even one selling tires, they would be much higher in terms of their valuation and stock price.

I’m not sure what valuation metrics Wall Street uses to value a company like Rick’s, if they value them at all based on their aversion to a stock like this, but one thing is certain, whatever valuation metric they choose to use, Rick’s is WAY below fair value, and this doesn’t even include the premium valuation the company should garner as a result of their best-in-breed status in a largely fragmented market.

If you are looking for a solid long term play that might still have some rough times ahead, then Rick’s is for you.

I can promise one thing: When valuations rise for riskier stocks (they are already starting to do so), company’s like Rick’s will far outpace the overall averages and you will be well rewarded for your patience.

If you want to wait until after the earnings and conference call to see what is happening with Rick’s, that is also entirely reasonable as it will give us all some more ammunition to make a better informed investing decision.

Let’s see what type of “entertainment” Rick’s will deliver for investors in about a week.