FirstCash Holdings, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
FirstCash operates retail pawn stores in the United States and Latin America and provides lease-to-own and other retail point-of-sale payment solutions through American First Finance (AFF). The filing covers the unaudited three months ended March 31, 2023, compared primarily with the three months ended March 31, 2022. At quarter-end, the company operated 2,877 pawn stores and AFF served approximately 9,800 active merchant locations.
Financial performance and key metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $762.7 million | $659.8 million | 16% |
| Net revenue | $348.1 million | $291.2 million | 20% |
| Income before taxes | $63.2 million | $37.0 million | 71% |
| Net income | $47.4 million | $28.0 million | 69% |
| Diluted EPS | $1.02 | $0.58 | 76% |
| Operating cash flow | $110.6 million | $120.1 million | (8%) |
| Adjusted EBITDA | $109.6 million | $101.3 million | 8% |
| Free cash flow | $116.6 million | $130.6 million | (11%) |
Revenue growth reflected higher pawn fees, retail merchandise sales, leased merchandise income, finance-receivable interest and wholesale scrap jewelry sales. Net income benefited from stronger segment results and the absence of the $2.6 million contingent acquisition consideration revaluation loss recorded in Q1 2022. The consolidated effective tax rate was 25.0%, compared with 24.3%.
Net revenue margin was approximately 45.6%, compared with 44.1% in the prior-year quarter. U.S. pawn segment pre-tax operating margin improved to 24% from 23%; Latin America pawn margin declined to 18% from 19%. AFF reported pre-tax segment income of $23.2 million, compared with $4.6 million, but Q1 2022 was materially affected by AFF purchase-accounting adjustments. On an adjusted basis, AFF segment pre-tax income decreased to $23.2 million from $25.1 million.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $100.8 million at March 31, 2023, including $35.2 million held by foreign subsidiaries.
- Working capital was $766.2 million and the current ratio was 3.5:1.
- Total debt was $1.34 billion, consisting of $308.0 million drawn on the revolving credit facility and $1.04 billion of senior unsecured notes.
- The $590.0 million revolving facility had $279.1 million available, after $2.9 million of letters of credit, subject to covenants. The weighted-average borrowing rate was 7.34%.
- The company was in compliance with its credit-facility covenants. The consolidated total debt ratio was 2.6:1.
- Cash flow used in financing was $116.0 million, including $67.2 million for share repurchases, $15.3 million of dividends and $31.0 million of net debt repayments.
Material changes versus the prior comparable period
- U.S. pawn revenue increased 9% to $339.7 million and segment pre-tax income increased 11% to $81.0 million. U.S. pawn receivables rose 6%, while same-store pawn fees increased 11%.
- Latin America pawn revenue increased 20% to $186.7 million and segment pre-tax income increased 11% to $32.9 million. On a constant-currency basis, revenue increased 11% and segment income increased 6%. The Mexican peso contributed a favorable 9% translation effect.
- AFF gross transaction volume increased 35% to $249.6 million. Leased merchandise income increased 22%, while interest and fees on finance receivables increased 29% as reported.
- AFF allowances increased to $93.1 million for lease losses and $88.6 million for loan losses. Provisions increased 23% and 19%, respectively, driven primarily by higher originations, although provision rates and net charge-off trends improved on certain vintages.
- Interest expense increased 29% to $20.9 million because of higher floating rates and higher average revolving-facility balances.
- Finance receivables, net declined 27% year over year to $102.1 million on a reported basis, primarily reflecting purchase-accounting effects and higher allowances. AFF leased merchandise, net increased 26% to $148.9 million.
- Cash flow from investing changed from $0.2 million provided in Q1 2022 to $13.2 million used in Q1 2023, including $13.8 million of capital expenditures, $17.5 million for store real estate and $1.7 million for pawn-store acquisitions.
Guidance, outlook, risks and unusual items
- Management expects approximately 60 new pawn stores in Latin America and four new U.S. stores during 2023. Three U.S. pawn stores were acquired during Q1.
- Management expects net deleveraging by year-end 2023 but anticipates higher 2023 net interest expense because of elevated floating rates. It believes operating cash flow and available revolver capacity will meet liquidity needs over the next 12 months and longer term.
- The board declared a second-quarter dividend of $0.33 per share, payable May 31, 2023. Approximately $43.6 million remained available under the share-repurchase authorization at March 31.
- The company remains subject to extensive pawn, lease-to-own and retail-finance regulation. The CFPB lawsuit alleging Military Lending Act violations remains stayed pending resolution of related Supreme Court proceedings; the company has not accrued a material amount because the potential loss cannot currently be estimated.
- A shareholder securities class action was dismissed with prejudice in the company’s favor on March 31, 2023. A related derivative action remains stayed.
- Gold forward contracts required delivery of 70,500 ounces from April 2023 through February 2025 at a weighted-average price of $1,999 per ounce; management expects sufficient historical scrap-gold volumes to satisfy the commitments.
- Key risks include regulatory and litigation outcomes, consumer credit demand, inflation, interest rates, labor costs, credit and lease losses, AFF integration and performance, foreign-currency movements, competition and the ability to maintain liquidity under leverage covenants.
Most important facts for investors to verify
- Whether AFF growth produces sustainable adjusted profitability after elevated lease and loan-loss provisions and excluding purchase-accounting effects.
- The trajectory of AFF delinquency, charge-off and allowance metrics, particularly for newer retail-finance products.
- The effect of higher SOFR-based borrowing costs on interest expense, deleveraging and share repurchases.
- Whether planned store expansion and acquisitions generate sufficient returns while operating expenses and labor costs rise.
- Developments in the CFPB litigation and any resulting redress, penalties or regulatory restrictions.
- The company’s ability to maintain covenant compliance and adequate liquidity while funding growth, dividends, repurchases and debt service.
- The impact of Mexican peso and other foreign-currency movements on reported Latin America results and comprehensive income.