First Cash Financial Services, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2015; unaudited. The filing identifies the registrant as First Cash Financial Services, Inc. The company operates retail pawn stores and consumer-lending locations in the United States and Mexico. Pawn operations generated approximately 96% of continuing-operations revenue. At March 31, 2015, the company operated 1,011 locations, up 10% year over year.
Financial Performance and Position
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $176.0 million | $169.8 million | Up 4%; up 10% constant currency |
| Net revenue | $98.8 million | $96.5 million | Up 2% |
| Income before taxes | $24.4 million | $29.0 million | Down 16% |
| Net income | $16.8 million | $22.7 million | Down 26% |
| Diluted EPS | $0.59 | $0.77 | Down $0.18 |
| Operating cash flow | $27.4 million | $25.2 million | Up 9% |
| EBITDA from continuing operations | $32.6 million | $34.6 million | Down 6% |
| EBITDA margin | 19% | 20% | Down 1 percentage point |
Retail merchandise sales increased 12% to $110.5 million, while pawn loan fees increased 2% to $48.7 million. Consumer loan and credit services fees declined 22% to $7.6 million, and wholesale scrap jewelry revenue declined 32% to $9.3 million. Retail merchandise gross margin declined to 38% from 39%, reflecting a greater mix of general merchandise. Store-level operating margin declined to 24% from 26%.
At March 31, 2015, cash and cash equivalents were $75.8 million, pawn loans were $114.3 million, consumer loans were $1.0 million, and inventories were $82.6 million. Working capital was $258.5 million and the current ratio was 7.19:1. Total liabilities were $256.3 million and stockholders’ equity was $449.0 million.
Debt consisted of $200.0 million of 6.75% senior unsecured notes due April 2021 and $14.5 million outstanding under the U.S. revolving credit facility. The U.S. facility had $145.5 million available, and a new $10.0 million Mexico facility had no borrowings outstanding. Total available and unused credit facilities were $155.5 million. The company was in compliance with applicable debt covenants.
Cash Flow, Capital Allocation, and Liquidity
- Investing activities provided $2.4 million, including $8.3 million of net loan receivable repayments, offset by $4.4 million of capital expenditures and $1.6 million for pawn-store acquisitions.
- Financing activities used $20.4 million, including $7.9 million of net revolving-credit repayments and $17.0 million for treasury-stock repurchases, partially offset by $4.5 million from stock-option exercises and related tax benefits.
- The company repurchased 336,000 shares at an average price of $50.58, with 1.664 million shares remaining under the authorization.
- Management stated that cash on hand, operating cash flow, available credit, and working capital should fund operations and planned expansion for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by higher retail sales, store additions, and maturation of existing pawn stores, but was partly offset by currency translation from a weaker Mexican peso.
- Constant-currency international revenue increased 17%, compared with reported growth of 4% for international revenue.
- Consumer-lending revenue fell because of increased competition and additional regulatory restrictions. Its share of consolidated revenue declined to 4% from 6%.
- Scrap jewelry revenue and gross profit declined substantially because of lower gold prices, lower volumes, and reduced customer gold selling activity.
- Net income was pressured by higher interest expense following the 2014 senior-notes issuance, foreign-exchange effects, lower scrap-jewelry and consumer-lending results, and the absence of a $3.7 million nonrecurring tax benefit recognized in Q1 2014.
- Comprehensive income declined 45% to $12.2 million, primarily because of a $4.5 million after-tax foreign-currency translation loss.
- Pawn inventories increased 14% to $82.6 million; 6% of inventory had been held for more than one year versus 3% a year earlier, primarily due to recent acquisitions.
Guidance, Outlook, Risks, and Unusual Items
- Management expected to add approximately 75 to 90 stores during 2015; 17 locations were added and 11 closed or consolidated during the first quarter, for net growth of six.
- Management expected a 2015 effective tax rate of approximately 31% to 32%.
- Management expected capital expenditures to continue at a similar annualized rate for the remainder of 2015 and planned to continue expansion through acquisitions and new store openings.
- The CFPB had proposed rules affecting payday and other small-dollar lending products. The proposals were not final and could materially restrict consumer-lending operations, although the proposal did not then target qualifying non-recourse pawn loans of 45 days or less.
- Key exposures include Mexican peso fluctuations, gold prices, interest rates, consumer demand and repayment behavior, pawn forfeiture rates, inventory values, competition, access to financing, acquisitions, cybersecurity, litigation, and changing pawn, consumer-lending, banking, anti-money-laundering, firearms, tax, and other regulations in the United States and Mexico.
- The filing states that there were no material changes in previously reported legal proceedings, no material changes in market-risk exposure, and no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Reconcile reported revenue growth with constant-currency growth and quantify the continuing effect of Mexican peso depreciation.
- Assess whether retail and pawn growth can offset ongoing declines in consumer-lending and scrap-jewelry revenue.
- Monitor the 38% retail merchandise margin, 24% store-level margin, and 19% EBITDA margin for further compression.
- Review debt covenants, refinancing requirements, interest-rate exposure, and the company’s ability to maintain liquidity while funding expansion and share repurchases.
- Track inventory aging, pawn-loan balances, collateral values, gold prices, and consumer credit-loss reserves.
- Evaluate the eventual scope and implementation timing of CFPB and other regulatory changes affecting consumer lending and pawn operations.
- Consider the nonrecurring $3.7 million Q1 2014 tax benefit when comparing earnings trends.