Business Context and Reporting Period
Company: First Cash Financial Services, Inc. (First Cash)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: First Cash operates pawn and consumer finance stores in the U.S. and Mexico, offering pawn loans, short-term loans, credit services, and retail sales of forfeited collateral. As of March 12, 2009, the company operated over 535 locations. In September 2008, the company discontinued its "Auto Master" buy-here/pay-here automotive finance business, reclassifying it as discontinued operations.
Key Financial Metrics
| Metric (in thousands) | 2008 | 2007 |
|---|---|---|
| Total Revenue | $333,528 | $280,261 |
| Net Revenue (Gross Profit) | $202,764 | $172,492 |
| Income from Continuing Operations | $38,120 | $30,483 |
| Net Income (Loss) | $(21,536) | $35,288 |
| Diluted EPS (Continuing Ops) | $1.26 | $0.93 |
| Diluted EPS (Net) | $(0.71) | $1.08 |
| Working Capital | $98,039 | $121,750 |
| Total Assets | $265,343 | $291,548 |
| Total Liabilities | $110,893 | $90,339 |
| Stockholders' Equity | $154,450 | $201,209 |
| Cash and Cash Equivalents | $29,006 | $14,175 |
| Revolving Credit Facility Outstanding | $68,500 | $55,000 |
Key Margins & Ratios:
- Net Revenue Margin: 60.8% (2008) vs 61.5% (2007)
- Store-level Operating Margin: 28% (2008) vs 26% (2007)
- Short-term loan loss provision as % of fees: 28% (2008) vs 28% (2007)
- EBITDA (Continuing Ops): $72.5 million (2008) vs $58.2 million (2007)
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 19% to $333.5 million, driven by a 39% increase in foreign (Mexico) revenue and a 13% increase in same-store revenue for pawn and short-term loan operations.
- Discontinued Operations Impact: The company recorded a significant non-cash charge of $51.8 million (net of tax) related to the disposal of the Auto Master automotive business, resulting in a net loss for the year despite profitable continuing operations.
- Acquisitions: Acquired 16 pawn stores in Mexico (Presta Max) in December 2008 for $25 million. Opened 56 new stores and acquired 16 stores in 2008, bringing the total location count to 525.
- Gold Market: Pawn scrap jewelry sales increased 64% due to higher gold prices and increased volume sold. Gold jewelry comprised 46% of total inventory.
- Stock Repurchases: Repurchased 1.64 million shares of common stock in 2008 for approximately $17.0 million.
Guidance, Outlook, Risks, and Contingencies
- Expansion Strategy: Plans to open approximately 55 to 60 new stores in 2009, primarily pawn stores in Mexico. No new U.S. short-term loan stores are anticipated after March 2009.
- Liquidity: The company maintains a $90 million revolving credit facility (maturing April 2010) with $21.5 million available as of year-end. Management believes cash flows and the credit facility are sufficient for operations and expansion.
- Regulatory Risks: Significant exposure to legislative changes in the U.S. and Mexico regarding interest rate caps (e.g., proposed 36% federal cap) and restrictions on credit services organizations (CSO), particularly in Texas. Such changes could materially impair revenue.
- Market Risks:
- Gold Prices: A decline in gold prices could reduce inventory value and loan collateral values (56% of pawn receivables are gold-backed).
- Currency: Fluctuations in the Mexican peso impact translation of financial results and transaction exposure.
- Credit Losses: Economic downturns could increase defaults on short-term loans and reduce demand for pawn services.
- Contingencies: The company guarantees loans under its CSO program with a maximum loss exposure of $15.2 million as of December 31, 2008.
Investor Verification Checklist
- Discontinued Operations: Verify the final settlement terms and ongoing collection performance of the Auto Master receivables sold to CarHop.
- Regulatory Environment: Monitor pending legislation in Texas and at the federal level regarding interest rate caps and CSO restrictions, which could impact ~42% of U.S. revenue.
- Gold Inventory Valuation: Assess the impact of current gold prices on the $13.3 million jewelry inventory and the collateral value of outstanding pawn loans.
- Credit Facility Renewal: Confirm the company's ability to refinance the $68.5 million credit facility maturing in April 2010 given market conditions.
- Mexico Expansion: Evaluate the integration and profitability of the Presta Max acquisition and the risks associated with operating in Mexico (currency, security, regulation).