EZCORP, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2021. EZCORP operates pawn stores in the U.S. and Latin America, and sells merchandise, primarily forfeited collateral and goods purchased from customers. Unless noted otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended June 30, 2021 | Prior-year quarter | Nine months ended June 30, 2021 | Prior-year period |
|---|---|---|---|---|
| Total revenue | $174.0 million | $210.2 million | $537.1 million | $655.9 million |
| Net revenue | $108.0 million | $102.2 million | $330.2 million | $359.6 million |
| Operating income (loss) | $3.7 million | $(4.3) million | $23.4 million | $(21.5) million |
| Net income (loss) | $(2.6) million | $(5.5) million | $7.1 million | $(45.1) million |
| Diluted earnings (loss) per share | $(0.05) | $(0.10) | $0.13 | $(0.81) |
| Operating cash flow | Not presented for the quarter | Not presented for the quarter | $33.1 million | $56.4 million |
Quarterly total revenue fell 17%, while net revenue rose about 6% as merchandise and jewelry scrapping costs declined. The company moved from an operating loss to operating income and narrowed its net loss. For the nine-month period, total revenue fell 18%; reported profitability improved substantially, in large part because the prior-year period included $47.1 million of impairment charges. Management said nine-month segment contribution excluding those impairments declined 3% year over year.
Quarterly merchandise gross margin improved to 46% in U.S. Pawn from 35% and to 35% in Latin America Pawn from 21%. In Latin America, constant-currency quarterly net revenue increased 43% and segment contribution was $3.2 million, compared with a $0.7 million loss. For the nine months, Latin America constant-currency net revenue declined 4%; its contribution improved to $10.7 million from a $22.8 million loss, primarily reflecting the prior-year impairment charge.
Cash, debt and liquidity
- At June 30, 2021, cash and cash equivalents were $283.7 million and restricted cash was $13.8 million, for combined cash and restricted cash of $297.5 million. Cash and cash equivalents were $304.5 million at September 30, 2020.
- Nine-month operating cash flow was $33.1 million, down from $56.4 million. Investing activities used $37.1 million, versus $110.4 million provided in the prior-year period; financing activities used $16.2 million. Combined cash and restricted cash decreased $15.1 million.
- Debt carrying value was $260.6 million, against $316.3 million principal outstanding in convertible notes due 2024 and 2025. No current debt maturities were reported. Lease liabilities totaled $196.6 million, of which $47.2 million was current.
- Management said available capital and projected operating cash flow were adequate for working capital, anticipated capital expenditures and growth, taxes, and debt service. It noted that repayment of longer-term debt may require refinancing or new financing, depending on acquisitions and other factors.
Material changes, developments and outlook
- EZCORP acquired Mexican pawn operator Bajio on June 9, adding 128 stores. Total consideration was $23.6 million, including cash, shares and accrued restricted cash; sellers may receive up to an additional $4.6 million based on store performance. EZCORP also repaid $14.9 million of assumed debt. Bajio contributed $1.7 million revenue and $0.1 million net income through June 30. The company also acquired 11 Houston-area pawn stores and opened 10 Latin America stores year to date.
- The company ended the quarter with 1,143 pawn stores: 516 in the U.S. and 627 in Latin America. It closed 11 Peru stores, citing uneconomic rate caps and limited platform synergies, and recorded $0.5 million in related charges.
- COVID-19 continued to affect customer borrowing, store traffic and operations. Management expected pandemic and recovery effects to continue adversely affecting net revenue and earnings in fiscal 2021, while noting the duration and financial consequences could not be estimated. No specific earnings or revenue guidance was provided.
- Management attributed lower U.S. and Latin America pawn service charges year to date to reduced new-loan activity and balances amid changed customer borrowing behavior and pandemic-related constraints. It cited improved merchandise margins from lower aged inventory and better inventory turnover.
- The company continued cost-structure initiatives begun in fiscal 2020. General and administrative expense decreased 19% in the nine-month comparison. The share repurchase program remained suspended; no shares were repurchased in fiscal 2021.
Risks, contingencies and unusual items
- EZCORP said pandemic-related uncertainty could adversely affect results, financial position and liquidity. Results are seasonal, and the company cautioned that interim results are not necessarily indicative of the full fiscal year.
- Illinois’s Predatory Loan Prevention Act may affect the company’s 20 Illinois stores if regulators determine it applies to pawn transactions. EZCORP said it believes pawn is not covered and is seeking formal confirmation; application of the law could adversely affect the business and lead to civil penalties.
- The company is involved in legal and regulatory matters but said it did not believe resolution of any particular matter would materially adversely affect financial condition, results or liquidity. The nature, extent and validity of an AlphaCredit indemnity claim related to pre-closing taxes remained undetermined.
- Income-tax expense can vary due to state taxes, nondeductible items and valuation allowances. Market risks include interest rates, gold prices and foreign exchange rates.
Investor verification priorities
- Track pawn loan balances and service charges, particularly whether U.S. and Latin America borrowing activity recovers, and compare reported results with constant-currency trends.
- Assess whether improved merchandise margins and inventory turnover persist, and distinguish operating trends from prior-year impairment and pandemic effects.
- Review Bajio’s post-acquisition performance, purchase-accounting estimates, remaining consideration and potential earn-out payments.
- Monitor operating cash generation, liquidity after acquisitions, and refinancing plans for the 2024 and 2025 convertible notes.
- Follow the Illinois regulatory determination and any material developments in legal or indemnity matters.