Business Context and Reporting Period
Company: First Cash Financial Services, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: The Company operates pawn shops and offers short-term consumer loans and credit services in the United States and Mexico. As of March 31, 2011, the Company operated 627 locations (223 in the U.S. and 404 in Mexico). Pawn operations accounted for 89% of revenue from continuing operations.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total Revenue | $120,838,000 | $94,660,000 |
| Net Income | $22,556,000 | $12,082,000 |
| Income from Continuing Operations | $15,905,000 | $10,112,000 |
| Diluted EPS (Total) | $0.70 | $0.39 |
| Operating Cash Flow | $25,090,000 | $20,000,000 |
| Cash and Equivalents (End of Period) | $98,169,000 | $47,323,000 |
| Total Debt (Notes Payable) | $1,737,000 | $8,281,000 |
| Working Capital | $200,115,000 | $116,586,000 |
| Current Ratio | 5.88x | 4.35x |
Margins: The gross profit margin on total merchandise sales was 38%. The store-level operating margin for continuing operations was 30% (up from 28% in Q1 2010).
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 28% year-over-year, driven by a 22% increase in same-store revenue in Mexico and 15% in the U.S. Merchandise sales grew 29%, with scrap jewelry sales up 20% due to higher gold prices.
- Profitability: Net income increased 87% to $22.6 million. This includes a significant non-recurring gain from discontinued operations.
- Discontinued Operations: The Company sold all 10 of its short-term loan stores in Illinois in March 2011. This resulted in an estimated gain of approximately $5.9 million (net of tax), contributing $6.65 million to net income from discontinued operations.
- Balance Sheet: Cash and cash equivalents more than doubled to $98.2 million, largely due to proceeds from the sale of the Illinois stores ($12.0 million received in Q1). Total debt decreased significantly as the Company paid down notes payable.
- Acquisitions: The Company acquired six pawn stores in Indiana and Missouri for $3.95 million in cash during the quarter.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary & Outlook:
- Management expects to continue expansion primarily through new store openings, funded by operating cash flows and an available $25 million unsecured credit facility (expandable to $50 million).
- Capital expenditures are expected to remain at a similar quarterly rate (~$5.7 million) for the remainder of 2011.
- The Company repurchased 35,300 shares of common stock in Q1 2011 at an average price of $35.73.
Risks and Contingencies:
- Regulatory Environment: The Company faces significant regulatory risks in both the U.S. and Mexico. Proposed legislation in Texas could eliminate or restrict Credit Services Organizations (CSOs), which generated 13% of net revenue in the trailing twelve months. The Dodd-Frank Act and the creation of the Consumer Financial Protection Bureau pose potential future regulatory burdens.
- Customs Assessment: U.S. Customs and Border Protection (CBP) assessed duties and interest totaling approximately $603,000 on cross-border remelting transactions from 2008-2009. The Company is appealing this assessment but cannot estimate the likelihood of success or potential for additional assessments.
- Market Risks: Operations are exposed to fluctuations in gold prices and foreign currency exchange rates (specifically the Mexican peso).
Unusual Items:
- The sale of the Illinois short-term loan stores is classified as a discontinued operation. The final purchase price is contingent on customer activity through May 15, 2011, with a minimum of $12.0 million already received.
Investor Verification Checklist
- Discontinued Operations Gain: Verify the final purchase price of the Illinois store sale and the resulting adjustment to the estimated gain of $5.9 million in the Q2 2011 filing.
- Regulatory Impact in Texas: Monitor the status of proposed Texas legislation regarding Credit Services Organizations (CSOs) and its potential impact on the 13% of net revenue derived from this segment.
- Customs Appeal: Track the outcome of the appeal regarding the $603,000 CBP assessment and the risk of additional duties on cross-border scrap jewelry transfers.
- Debt Covenants: Confirm continued compliance with the Unsecured Credit Facility covenants, particularly as the Company expands store count and inventory levels.
- Gold Price Sensitivity: Assess the impact of fluctuating gold prices on scrap jewelry margins, which contributed significantly to revenue growth in Q1 2011.