Business Context and Reporting Period
First Cash Financial Services, Inc. (now associated with FirstCash Holdings) filed its Form 10-K for the fiscal year ended December 31, 2013, filed February 27, 2014. The company operated retail pawn stores and smaller consumer finance operations in the United States and Mexico. At year-end, it had 906 locations: 821 pawn stores and 85 consumer loan or credit-services locations, including 309 U.S. locations and 597 Mexican locations.
Pawn operations represented approximately 93% of continuing-operations revenue. Revenue was geographically concentrated in Mexico, which contributed 55% of total revenue, versus 45% from the United States. The fourth quarter was the strongest quarter of 2013, with revenue of $185.2 million and diluted income from continuing operations of $0.87 per share.
Key Financial Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $660.8 million | $592.1 million | +12% |
| Net revenue | $369.6 million | $335.5 million | +10% |
| Income from continuing operations | $84.5 million | $80.9 million | +4% |
| Net income | $83.8 million | $80.4 million | +4% |
| Diluted earnings per share | $2.84 | $2.70 | +5% |
| Cash flow from operating activities | $106.7 million | $88.8 million | +20% |
| Free cash flow | $79.6 million | $49.6 million | +60% |
| EBITDA from continuing operations | $138.7 million | $136.4 million | +2% |
Revenue consisted of retail merchandise sales of $367.2 million, pawn loan fees of $181.6 million, consumer loan and credit-services fees of $43.8 million, and wholesale scrap-jewelry revenue of $68.3 million. Retail merchandise sales increased 28% and pawn loan fees increased 19%, while consumer loan and credit-services fees declined 10% and scrap-jewelry revenue declined 34%.
Net revenue margin was approximately 55.9%, compared with 56.7% in 2012. Income from continuing operations represented approximately 12.8% of revenue, compared with 13.7% in 2012. Retail merchandise gross margin declined to approximately 39.7% from 41.9%, and the store-level operating margin declined to approximately 26.6% from 29.7%.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $70.6 million, compared with $50.3 million at year-end 2012.
- Working capital was $241.5 million, and the current ratio was 5.95x.
- Pawn loans were $115.2 million, up 12%; inventories were $77.8 million, up 19%.
- Total assets were $659.0 million, including $251.2 million of goodwill.
- Total liabilities were $244.6 million and stockholders’ equity was $414.4 million.
- The company had $182.0 million outstanding under its 2012 revolving credit facility and $23.0 million available at December 31, 2013. The facility bore interest at 2.19% and was scheduled to mature in February 2015.
- Acquisition-related notes payable totaled $8.4 million at year-end, with scheduled maturities through 2017.
Investing cash outflows were $140.7 million, including $113.6 million for pawn-store acquisitions and $26.7 million for capital expenditures. Financing cash inflows were $54.6 million, including net revolver borrowings, partly offset by $38.7 million of share repurchases.
Material Changes Versus the Prior Comparable Period
- The company added 111 locations during 2013, consisting of 69 new stores and 42 acquired stores, resulting in an 11% year-end increase in total locations.
- 2013 acquisitions included 34 U.S. pawn stores and eight Mexican pawn stores for an aggregate purchase price of approximately $115.3 million. These acquisitions added approximately $84.5 million of goodwill.
- Core same-store pawn revenue, excluding wholesale scrap jewelry, increased 8% overall; Mexico increased 12%, while U.S. same-store core revenue was flat.
- Consolidated pawn receivables increased 12%, but same-store pawn receivables declined 6%, reflecting store additions as the principal growth driver.
- Store operating expenses increased 22% to $181.3 million, primarily because of store-count growth and the stronger Mexican peso. Administrative expenses decreased 1% to $49.5 million.
- Interest expense increased to $3.5 million from $1.5 million because of higher revolver borrowings.
- The average annualized pawn-loan yield declined to 163% from 168%, and pawn-store inventory turnover declined to 3.6x from 4.2x.
- The company repurchased 729,000 shares for $38.7 million, leaving 771,000 shares authorized for future repurchase.
- The company discontinued the Cash & Go joint venture, which operated 37 Texas kiosks. The company recorded an after-tax discontinued-operations charge of $844,000 and expected to wind down the operation during the first six months of 2014.
Guidance, Outlook, Commentary and Risks
Management expected continued pawn-revenue growth in 2014 from acquisitions, new-store openings and maturation of existing stores. The company planned to open approximately 75 to 85 additional pawnshops in 2014 and expected capital expenditures at a rate similar to 2013. Management stated that available borrowing capacity, operating cash flow and working capital should fund anticipated requirements for at least the next 12 months.
In February 2014, after year-end, the company replaced the 2012 Credit Facility with a $160.0 million revolving facility maturing in February 2019, with an accordion feature of up to $50.0 million. At closing, $145.9 million was outstanding and $14.1 million was available. The new facility carries higher pricing and includes a leverage covenant of no more than 2.5 times defined EBITDA.
- Regulatory restrictions remained a significant risk, particularly for Texas credit-services products and consumer lending. Houston and El Paso ordinances were scheduled to become effective in 2014, and prior local restrictions had reduced transaction volumes and led to store closures.
- The Consumer Financial Protection Bureau could impose additional supervisory, disclosure or operational requirements on short-term consumer lending.
- Gold-price volatility affected jewelry collateral, inventory values, loan balances and scrap-jewelry margins. The average gold price declined 16% in 2013, while scrap-jewelry gross margin fell to 14% from 26%.
- Mexico accounted for 55% of revenue, creating exposure to Mexican economic conditions, regulatory changes, political and security risks, and foreign-currency movements.
- The company had a maximum potential exposure of $14.0 million under outstanding CSO letters of credit, against an accrued liability of $580,000.
- Goodwill totaled $251.2 million, creating potential future impairment risk; no impairment was recorded at year-end.
- Variable-rate debt exposed the company to interest-rate risk. Management estimated that a 100-basis-point increase would have increased 2013 interest expense by approximately $1.2 million.
Most Important Facts to Verify
- Whether post-year-end regulatory changes in Texas and Mexico materially reduce credit-services revenue or require additional store closures.
- Whether the 2014 refinancing and leverage covenant provide sufficient capacity to fund the planned 75 to 85 store openings and future acquisitions.
- Whether the decline in same-store pawn receivables, inventory turnover and retail margins persists as the store base expands.
- Whether gold prices, jewelry collateral values and scrap volumes recover or continue to pressure margins.
- Whether acquisition integration generates the expected earnings contribution relative to the substantial goodwill added in 2013.
- Whether CSO credit losses and guarantee obligations remain consistent with the recorded $580,000 liability and historical loss assumptions.
- The effect of the approximately $4.0 million one-time tax benefit recognized in 2013; management indicated an ongoing effective tax-rate range of approximately 32% to 33%.