FirstCash, Inc. — Form 10-Q Summary
Reporting period: Quarterly and nine-month periods ended September 30, 2020. The filing identifies the registrant as FirstCash, Inc. and reports unaudited U.S. GAAP results. The company operated 2,750 pawn stores at quarter-end: 1,030 in the U.S. and 1,720 in Latin America.
Business Context
FirstCash operates retail pawn stores in the U.S., Mexico, Guatemala, El Salvador and Colombia. Pawn operations represented more than 99% of revenue for the nine months ended September 30, 2020. Effective June 30, 2020, the company ceased all unsecured consumer lending and credit services operations in the U.S. and Latin America.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Total revenue | $359.9 million | $452.5 million | (20)% |
| Net revenue | $202.7 million | $251.0 million | (19)% |
| Income before taxes | $17.7 million | $49.0 million | (64)% |
| Net income | $15.1 million | $34.8 million | (57)% |
| Diluted EPS | $0.36 | $0.81 | (56)% |
| Approximate net margin | 4.2% | 7.7% | Down |
| Metric | 9M 2020 | 9M 2019 | Change |
|---|---|---|---|
| Total revenue | $1.239 billion | $1.366 billion | (9)% |
| Net revenue | $685.1 million | $751.1 million | (9)% |
| Income before taxes | $100.6 million | $153.1 million | (34)% |
| Net income | $73.9 million | $110.5 million | (33)% |
| Diluted EPS | $1.77 | $2.55 | (31)% |
| Approximate net margin | 6.0% | 8.1% | Down |
- Q3 revenue declines reflected lower pawn loan fees, lower inventory-driven retail sales and the wind-down of consumer lending. Pawn loan fees fell 30% to $99.6 million; retail merchandise sales fell 16% to $235.0 million.
- Retail gross margins improved: U.S. retail margin was 44% versus 38% in the prior-year quarter; Latin America was 37% versus 34%.
- Q3 adjusted EBITDA was $46.3 million versus $70.2 million in the prior-year quarter. Nine-month adjusted EBITDA was $174.9 million versus $214.0 million.
- Cash flow from operating activities was $177.4 million for the nine months, versus $163.8 million in the prior-year period. Reported free cash flow was $295.4 million versus $127.7 million.
- Cash and cash equivalents were $78.8 million at September 30, 2020, compared with $46.5 million at December 31, 2019.
- Pawn loans were $270.6 million, down from $369.5 million at December 31, 2019 and $385.9 million at September 30, 2019. Inventories were $168.7 million, down from $265.3 million at year-end 2019 and $281.9 million a year earlier.
Debt, Liquidity and Capital Allocation
- Total debt carrying value was $532.8 million, consisting of $40.0 million under the revolving credit facility and $492.8 million of senior notes. Outstanding principal was $540.0 million.
- In August 2020, the company issued $500.0 million of 4.625% senior unsecured notes due 2028. Proceeds were used to redeem the $300.0 million of 5.375% notes due 2024, reduce revolver borrowings and pay related costs.
- The debt refinancing produced an $11.7 million loss on extinguishment of debt, including redemption premiums, other costs and write-off of unamortized issuance costs.
- The $500.0 million revolving facility had $40.0 million drawn and $3.0 million of letters of credit outstanding, leaving $457.0 million available subject to covenants. The company was in compliance with its covenants.
- Liquidity sources included $78.8 million of cash, $483.7 million of available and unused revolving facilities, $307.0 million of customer loans and fees receivable, and $168.7 million of inventory. Working capital was $371.4 million.
- The reported Net Debt Ratio was 1.7:1, compared with 1.9:1 at September 30, 2019.
- The company repurchased 981,000 shares for $80.3 million during the first quarter before suspending repurchases. In October 2020, it lifted the temporary suspension and reported approximately $48.5 million of remaining authorization.
- The board declared a $0.27 per share fourth-quarter dividend, payable November 27, 2020. Future dividends remain subject to liquidity, covenants, business conditions and COVID-19 impacts.
Material Changes Versus the Prior Comparable Period
- COVID-19 reduced pawn loan originations and balances as customers benefited from stimulus payments, forbearance programs, enhanced unemployment benefits and remittances. Originations improved from approximately May through September, but balances remained materially below the prior year.
- U.S. retail demand benefited from stay-at-home products and stimulus-related spending, while lower inventory levels constrained Q3 sales. Latin American sales were more adversely affected by store closures, retail restrictions and a slower economic recovery.
- U.S. segment pre-tax operating income declined 33% in Q3 to $37.4 million; Latin America segment pre-tax operating income declined 35% to $24.0 million. Segment margins declined to 16% and 19%, respectively, from 20% and 22%.
- The Mexican peso weakened 14% on average against the U.S. dollar in Q3, reducing translated Latin American results. Nine-month currency translation adjustments reduced comprehensive income by $67.9 million.
- The company acquired 40 pawn stores in Mexico for an aggregate purchase price of $7.2 million and opened 64 stores during the nine months.
Guidance, Outlook, Risks and Unusual Items
- Management expected COVID-19 conditions to limit 2020 store openings to approximately 70 to 75, compared with 64 openings through September 30.
- Management stated that pawn originations were recovering, but the duration and severity of the pandemic, government restrictions, stimulus programs, consumer behavior, store access and economic conditions remained highly uncertain.
- Key risks include prolonged reductions in customer traffic and pawn demand, additional store closures, regulatory changes, foreign currency volatility, gold-price movements, interest-rate exposure and reduced borrowing capacity if earnings or EBITDA decline.
- The company had contractual commitments to deliver 30,500 gold ounces between October 2020 and August 2021 at a weighted-average price of $1,734 per ounce. Management expected historical scrap volumes to be sufficient to meet the commitments.
- Q3 and nine-month results included the $11.7 million debt extinguishment loss, $6.5 million of lease-intangible and other asset write-offs and impairments for the nine-month period, and foreign-exchange effects related primarily to U.S.-dollar-denominated Mexican leases.
- No material changes to previously reported legal proceedings or risk factors were disclosed. Management concluded that disclosure controls and procedures were effective as of September 30, 2020.
Investor Verification Items
- Verify the sustainability of recovering pawn originations and whether pawn loan balances can return toward pre-pandemic levels without renewed stimulus-related reductions in demand.
- Assess whether improved retail and scrap-gold margins can offset lower pawn fees and reduced inventory availability.
- Review the effect of additional COVID-19 restrictions, Latin American economic conditions and Mexican peso movements on reported results.
- Reconcile adjusted EBITDA, free cash flow and Net Debt Ratio calculations to GAAP results and review the company’s non-GAAP adjustment methodology.
- Monitor compliance with debt covenants, the 2028 notes’ restricted-payment provisions, dividend policy and resumed share repurchases.
- Evaluate the liquidity implications of lease obligations, gold delivery commitments, planned store openings and potential acquisitions.