Business Context and Reporting Period
FirstCash, Inc. filed its Form 10-K for the fiscal year ended December 31, 2020, including fourth-quarter results. The company operated 2,748 pawn stores at year-end: 1,046 in the U.S. and 1,702 in Latin America. Pawn operations generated retail merchandise sales, pawn loan fees and wholesale scrap jewelry sales. The company discontinued all U.S. unsecured payday and installment lending effective June 30, 2020.
Financial Results and Key Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $1.631 billion | $1.864 billion | Down 13% |
| Net revenue | $911.1 million | $1.018 billion | Down 11% |
| Income before taxes | $143.7 million | $224.6 million | Down 36% |
| Net income | $106.6 million | $164.6 million | Down 35% |
| Diluted EPS | $2.56 | $3.81 | Down 33% |
| Adjusted net income | $125.2 million | $167.9 million | Down 25% |
| Adjusted diluted EPS | $3.01 | $3.89 | Down 23% |
| EBITDA | $213.6 million | $299.5 million | Down 29% |
| Adjusted EBITDA | $237.0 million | $303.8 million | Down 22% |
| Operating cash flow | $222.3 million | $231.6 million | Down 4% |
Reported net margin was approximately 6.5%, compared with 8.8% in 2019. Net revenue margin was 55.9%, compared with 54.6%. Retail merchandise sales represented 65.9% of revenue and pawn loan fees represented 28.1%.
- Retail merchandise sales were $1.076 billion, down 9%; the retail gross margin increased to 40% from 36%.
- Pawn loan fees were $457.5 million, down 19%, reflecting lower pawn balances and increased loan redemptions during the pandemic.
- Wholesale scrap jewelry sales were $96.2 million, down 7%, while the higher gold price improved scrap margins.
- Consumer loan and credit services fees declined 90% to $2.0 million following the June 2020 exit from unsecured consumer lending.
- U.S. segment pre-tax operating income was $204.7 million, with a 19% margin versus 20% in 2019. Latin America segment pre-tax operating income was $106.7 million, with a 19% margin versus 22%.
- Year-end pawn loans were $308.2 million, down from $369.5 million; inventories were $190.4 million, down from $265.3 million.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $65.9 million, including $28.3 million held by foreign subsidiaries.
- Working capital was $418.2 million and the current ratio was 3.0 to 1.
- Outstanding principal debt was $623.0 million, consisting primarily of $123.0 million under the revolving credit facility and $500.0 million of 4.625% senior unsecured notes due 2028.
- Available capacity under the U.S. revolving credit facility was $373.6 million after outstanding borrowings and letters of credit. The company was in compliance with its debt covenants at year-end.
- Net debt was $557.2 million and the reported Net Debt Ratio was 2.4 to 1, compared with 1.9 to 1 in 2019.
- Operating cash flow was $222.3 million. Investing cash flow used $20.4 million and financing cash flow used $186.5 million.
- The company repurchased 1.427 million shares for $107.0 million and paid $44.8 million in dividends during 2020.
Material Changes Versus the Prior Comparable Period
- COVID-19-related shutdowns, stimulus payments, enhanced unemployment benefits and remittances increased customer liquidity, causing lower loan originations and higher redemptions. Pawn balances were approximately 39% below the prior year at June 30 before partially recovering.
- U.S. retail sales were approximately flat, but retail margins improved materially due to demand for value-priced merchandise, direct purchasing and lower aged inventory. Latin American retail sales fell 22% as reported, or 13% on a constant-currency basis.
- The Mexican peso weakened approximately 11% on an average annual basis, reducing translated Latin American revenue and earnings. Management estimated that constant exchange rates would have increased 2020 Latin America revenue by $55.8 million and pre-tax operating income by $7.8 million.
- The company issued $500.0 million of 4.625% notes due 2028, redeemed its $300.0 million 5.375% notes due 2024 and reduced borrowings under its revolving facility. The refinancing generated an $11.7 million loss on extinguishment of debt.
- The company recorded $10.5 million of write-offs and impairments, including $7.1 million of merger-related lease intangibles, $1.9 million of other assets and $1.5 million of property and equipment.
- Store count increased from 2,679 to 2,748 after 75 new openings, 62 acquisitions, 13 consumer-loan-store closures and 55 consolidations.
Guidance, Outlook, Commentary and Risks
Management expects COVID-19 to continue affecting operations during 2021. It expects to add approximately 50 to 60 de novo full-service pawn locations in Latin America, subject to pandemic-related construction, licensing, staffing and operating conditions. The company continues to evaluate acquisitions in the U.S. and Latin America.
- Key risks include renewed store closures, reduced customer traffic, changing consumer behavior, additional stimulus programs that reduce borrowing demand, and continued economic weakness.
- Regulatory risk remains significant across the U.S. and Latin America, including limits on pawn fees, licensing requirements, consumer protection rules, anti-money-laundering compliance and potential enforcement relating to discontinued consumer lending products.
- Foreign currency exposure is material, particularly to the Mexican peso. A one-point change in the average peso exchange rate was estimated to affect 2020 annual earnings by approximately $2.0 million.
- Gold price changes affect jewelry inventory values, collateral values, pawn loan balances and merchandise margins. Approximately 51% of inventory and 58% of pawn loans were jewelry-related at year-end.
- The company had commitments to deliver 24,500 gold ounces during 2021 at a weighted-average price of $1,840 per ounce. Management stated that the volume was within historical scrap gold levels.
- Goodwill was $977.4 million, or approximately 41% of total assets. No goodwill or indefinite-lived intangible impairment was recorded in 2020.
- Routine litigation and regulatory matters were not expected by management to have a material adverse effect, although the filing notes that outcomes of future proceedings cannot be predicted.
Most Important Facts for Investors to Verify
- Whether pawn loan balances, originations, redemption rates and fee revenue recover as pandemic-related stimulus and liquidity effects diminish.
- Whether retail inventory levels are sufficient to support sales without eroding the improved merchandise margins.
- Compliance with the amended revolving-credit covenants, particularly as temporary leverage thresholds revert beginning in 2022.
- The sustainability of dividends and share repurchases given debt levels, liquidity needs, acquisition opportunities and covenant restrictions.
- The effect of Mexican peso movements and gold prices on reported earnings, collateral values and inventory margins.
- The execution and returns from the planned 2021 Latin American store openings and future acquisitions.
- The valuation support for $977.4 million of goodwill and the assumptions underlying the $41.1 million accrual for earned but uncollected pawn loan fees.