FirstCash, Inc. 10-Q Summary
Business Context and Reporting Period
FirstCash operates more than 2,700 retail pawn stores in the United States and Latin America, generating revenue primarily from merchandise sales, pawn loan fees and wholesale scrap jewelry sales. The filing covers the unaudited three months ended March 31, 2020, compared with the three months ended March 31, 2019. Pawn operations represented more than 99% of consolidated revenue in the 2020 quarter.
At March 31, 2020, the Company operated 2,740 locations: 1,052 in the U.S. and 1,688 in Latin America. The Company opened 31 stores and acquired 36 Mexican pawn stores during the quarter, while closing or consolidating six locations.
Financial Performance and Liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $466.5 million | $467.6 million | Down 0.2% |
| Net revenue | $259.3 million | $255.8 million | Up 1.4% |
| Income before taxes | $45.7 million | $58.8 million | Down 22% |
| Net income | $32.9 million | $42.7 million | Down 23% |
| Diluted EPS | $0.78 | $0.98 | Down 20% |
| Cash flow from operations | $77.4 million | $71.7 million | Up 8% |
| Adjusted EBITDA | $74.6 million | $76.7 million | Down 3% |
Net income margin was approximately 7.1% of revenue, compared with 9.1% in the prior-year quarter. Net revenue represented approximately 55.6% of revenue, compared with 54.7% in Q1 2019.
- Retail merchandise sales increased 4% to $296.6 million, supported by seasonal tax refunds. U.S. same-store retail sales increased 4%, and the U.S. retail gross margin improved to 39% from 37%.
- Pawn loan fees increased 1% to $142.1 million. Consolidated pawn loans declined to $314.3 million at March 31, 2020, from $345.2 million a year earlier.
- Wholesale scrap jewelry sales declined 17% to $26.4 million, although margins improved with higher gold prices.
- Consumer loan and credit services fees declined 87% to $1.4 million, principally following the Ohio regulatory changes, the exit from Ohio consumer lending and the broader reduction of consumer lending activities.
- Store operating expenses increased 5% to $153.5 million, while administrative expenses increased 2% to $32.9 million.
- The effective tax rate was 28.0%, compared with 27.5% in Q1 2019.
Cash flow from investing activities was $26.6 million provided, compared with $14.1 million used in the prior-year period, primarily because loan receivables decreased and generated $52.3 million of cash. Financing activities used $72.8 million, including $80.3 million of share repurchases and $11.3 million of dividends.
At March 31, 2020, cash and cash equivalents were $75.5 million, working capital was $466.1 million and unused availability under the primary revolving credit facility was $166.7 million. Total debt at principal amounts was $655.5 million, consisting primarily of $355.5 million of revolving credit facilities and $300.0 million of senior unsecured notes. The Net Debt Ratio was 1.9:1, compared with 1.8:1 a year earlier. The Company was in compliance with applicable debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue was broadly stable, but net income fell 23% because of higher corporate costs, foreign-exchange losses and asset write-offs and impairments.
- Corporate foreign-exchange expense increased to a $2.7 million loss from a $0.2 million gain, primarily because of the Mexican peso decline and the remeasurement of U.S.-dollar-denominated Mexican leases.
- The Company recorded $5.5 million of write-offs and impairments, including a $3.6 million write-off of merger-related lease intangibles and a $1.9 million impairment of another asset.
- U.S. segment pre-tax operating income declined 5% to $64.4 million; Latin America segment pre-tax operating income declined 2% to $32.0 million as reported, but was approximately flat on a constant-currency basis.
- Latin America revenue increased 4% as reported and 7% on a constant-currency basis, while the Mexican peso weakened 4% on average and 21% at period-end against the U.S. dollar.
- The Company repurchased 981,000 shares for $80.3 million during the quarter, compared with $29.6 million in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
Management originally expected to open approximately 90 to 100 new full-service pawn locations in Latin America during 2020. After 31 openings in the first quarter, the Company stated that COVID-19-related uncertainty made it impractical to estimate the ultimate number of openings and related capital expenditures.
COVID-19 was identified as a material uncertainty. Most U.S. stores remained open as essential businesses, while approximately 30 Mexican stores were closed, approximately 100 Mexican stores had retail restrictions, and 27 Central and South American stores were closed at the time of filing. The Company warned that further closures, reduced customer traffic, changes in consumer behavior, weaker loan demand, recessionary conditions and currency volatility could adversely affect results, liquidity and cash flows.
Early April trends were mixed. U.S. pawn loans declined approximately 14% from the beginning of April, while collected pawn fees increased approximately 12% year over year during April to date. U.S. same-store retail sales increased approximately 29% in the first three weeks of April, supported partly by stimulus payments and demand for stay-at-home products. Mexican pawn loans declined approximately 8% from the beginning of April.
The Company temporarily suspended its share repurchase program to preserve liquidity. The Board declared a $0.27 per share second-quarter dividend, expected to total approximately $11.2 million, but future dividends remain subject to liquidity, results, debt covenants and COVID-19 conditions.
The Company had contractual commitments to deliver 36,500 ounces of gold between April 2020 and February 2021 at a weighted-average price of $1,533 per ounce. After quarter-end, it committed to an additional 10,000 ounces between September 2020 and July 2021 at $1,720 per ounce.
Important Facts for Investors to Verify
- Whether COVID-19-related store closures, operating restrictions and changes in customer behavior materially affect pawn balances, retail sales and fee income after March 31, 2020.
- The sustainability of the early-April retail sales strength and the effect of lower new pawn loan originations on future fee revenue.
- Liquidity headroom, borrowing availability and compliance with financial covenants as operating conditions evolve.
- The impact of Mexican peso and other Latin American currency movements on reported earnings, equity and lease-related foreign-exchange losses.
- Whether the suspended share repurchase program resumes and whether quarterly dividends continue at the current rate.
- The timing and economics of planned Latin American store openings and the integration of the 36-store Mexican acquisition.
- Gold prices, scrap volumes and the Company’s ability to satisfy its gold delivery commitments.
- The composition and recurrence of the $5.5 million of write-offs and impairments and the distinction between GAAP results and management’s non-GAAP adjusted measures.