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Rick's Cabaret Builds Empire Entirely on One-Dollar Bills

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Gentlemen's club looking nearly recession-proof.

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Eric Langan, CEO of Rick's Cabaret (RICK), the national gentlemen's-club chain, told a reporter, "I wouldn't say we're recession-proof, but we're recession-resistant."

Langan started his own club with $40,000 he earned from selling his baseball-card collection, and eventually acquired a controlling interest in Rick's, which was launched in 1983 and taken public in 1995.

"Men will never grow tired of the high-class strip-club experience," said Rick's spokesman Lonnie Hanover. "When times are tough, there is no better form of escapism than a night at a gentlemen's club."

One estimate of the economic impact of gentlemen's clubs in the Atlanta area lands somewhere between $200-$240 million -- more than the economic impact of the Braves, Hawks and Falcons combined -- according to Georgia state economist Donald Ratajczak.

The upside potential of the industry doesn't escape the notice of large institutional investors like Barclays (BCS) and Goldman Sachs (GS): Both firms hold shares of Rick's.

Allan Priaulx of Rick's points to a "flight to quality," meaning that customers are choosing to spend their discretionary income at high-end clubs like Rick's, rather than trading down to local clubs, which could leave "discerning" patrons disappointed.

Rick's certainly seems to have proven that quality is something people can expect. Thirteen performers have gone on to be Penthouse Pets; 3 have become Playboy Playmates.

Does the idea of investing in the skin trade cause you discomfort? Your portfolio won't mind. A study published by Germany's University of Regensburg found "that the risk-return characteristics of sin stocks are superior in comparison to regular stocks as well as socially responsible stocks."

Marc Lowlicht, an adviser with Further Lane Asset Management, explained to Forbes.com that "When people stress, they drink and eat more. I believe this to be true. I also find that vices such as smoking are called vices because they persist regardless of how the market or the economy does."

Small-cap growth-stock specialist Ian Cooper says, "Even in bad times, folks are often not prepared to relinquish their 'pleasures.' "

The theory seems to hold up. For fiscal 2008, which ended in September for Rick's, revenue jumped 87% to $32.01 million. Earnings grew 151% to $7.7 million, or $0.91 a share.

It's not hard to see why. Any company that buys Coors Lite for $0.63 a bottle and charges customers $12 is firmly on the path to profit.

So, whatever your investing proclivities, Rick's is certainly a horse of a different color from, say, Johnson & Johnson (JNJ) or Wal-Mart (WMT).

Recession-proof?

Maybe, maybe not. But Rick's provided a spectacular return for one person that has nothing to do with the company's stock price.

Anna Nicole Smith worked the day shift at Rick's in Houston, Texas, where she met the billionaire oilman, J. Howard Marshall, in 1992.

They married 2 years later, when Smith was 26 and Marshall was 89.


Sadly, the couple only spent 14 months together before Marshall died.

The late Anna Nicole was left $88.5 million. And though the money remains tied up in a protracted legal battle with the Marshall family, that has to be one of the most generous "tips" in Rick's history.
No positions in stocks mentioned.
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