Business Context and Reporting Period
FirstCash, Inc. filed an unaudited Form 10-Q for the quarter ended March 31, 2019. The company operated 2,630 retail pawn and consumer-lending locations across the United States and Latin America, with approximately 98% of revenue generated by pawn operations. The filing was signed May 3, 2019.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $467.6 million | $449.8 million | +4% |
| Net revenue | $255.8 million | $239.1 million | +7% |
| Income before taxes | $58.8 million | $55.8 million | +5% |
| Net income | $42.7 million | $41.6 million | +2% |
| Diluted EPS | $0.98 | $0.90 | +9% |
| Operating cash flow | $71.7 million | $91.3 million | -21% |
| Adjusted EBITDA | $76.7 million | $72.5 million | +6% |
Adjusted pre-tax margin was 12.5% in both periods. Adjusted net income margin was 9.1%, compared with 9.3% in Q1 2018. The effective tax rate increased to 27.5% from 25.4%.
- Retail merchandise sales increased 5% to $284.2 million; pawn loan fees increased 9% to $141.2 million.
- Wholesale scrap jewelry sales decreased 9% to $31.7 million, while consumer loan and credit services fees decreased 32% to $10.5 million.
- U.S. segment pre-tax operating income increased 5% to $67.9 million, with a 21% margin versus 20%.
- Latin America segment pre-tax operating income increased 19% to $32.7 million, with a 22% margin in both periods. Constant-currency revenue growth was 25%.
- Cash and cash equivalents were $49.7 million at March 31, 2019, compared with $71.8 million at December 31, 2018 and $110.4 million at March 31, 2018.
- Working capital was $508.3 million and the current ratio was 3.4:1. Comparability with 2018 is affected by the new lease accounting standard.
- Total debt was $551.1 million on a carrying-value basis, consisting of $255.0 million drawn on the revolving facility and $296.1 million of senior notes. Outstanding principal was $555.0 million.
- The $425.0 million revolving facility had $166.3 million available after $3.7 million of letters of credit. The weighted-average borrowing rate was 4.94%, and the company was in compliance with its covenants.
- The net debt ratio was 1.8:1, versus 1.0:1 in the prior-year comparable period.
Material Changes Versus the Prior Comparable Period
- Latin America drove growth: reported revenue increased 22%, pawn receivables increased 30%, and 154 net locations were added through openings and acquisitions.
- U.S. retail margins improved to 37% from 35%, reflecting continued optimization of legacy Cash America locations. U.S. inventories declined 7% and pawn receivables declined 1%, while pawn fees increased 2%.
- U.S. consumer lending continued to contract because of regulatory constraints and internet-based competition. Revenue fell 30%, and the number of U.S. pawn stores offering consumer lending products declined to 261 from 311.
- Administrative expenses increased 15% to $32.2 million, and interest expense increased 35% to $8.4 million because of higher average debt and borrowing rates.
- Operating cash flow declined primarily because Q1 2018 included a $21.4 million merger-related income tax refund.
- Financing cash outflows declined to $80.5 million from $134.3 million, reflecting lower share repurchases. The company repurchased 343,000 shares for $29.2 million versus 1.378 million shares for $105.6 million in Q1 2018.
Outlook, Commentary, Risks and Unusual Items
- Management expected to add approximately 80 to 85 full-service pawn locations in Latin America during 2019, including 55 to 60 in Mexico, 15 in Guatemala and 10 in Colombia.
- Excluding discretionary real estate purchases, 2019 furniture, fixtures, equipment and improvement expenditures were expected to total approximately $35.0 million.
- Management believed cash on hand, operating cash flow and available credit capacity would fund operations and planned expansion for at least the next twelve months.
- Following Ohio’s Fairness in Lending Act, the company ceased unsecured consumer lending and credit services in 119 Ohio locations and expected to close approximately 54 Cashland stores. It expected approximately $1 million to $2 million of after-tax non-recurring charges in Q2 2019 and did not expect the closures to materially affect full-year consolidated results.
- The company adopted ASC 842 prospectively on January 1, 2019. This added a $298.2 million right-of-use asset and $273.9 million of lease liabilities at March 31, 2019, with no material income-statement or cash-flow impact.
- The company had commitments to deliver 33,000 gold ounces from April through December 2019 at a weighted-average price of $1,299 per ounce.
- Key exposures include interest-rate movements, gold prices, foreign-currency fluctuations, regulatory changes affecting consumer lending, credit losses, inventory values, seasonality and acquisition execution.
- The company acquired 118 pawn stores in Mexico and 10 in the United States during the quarter for an aggregate purchase price of $23.5 million, net of cash acquired.
Investor Verification Points
- Verify the sustainability of Latin American same-store growth and the effect of currency movements on reported results.
- Assess whether improved U.S. retail margins and pawn yields offset continued declines in consumer lending.
- Monitor debt reduction, interest expense, covenant headroom and the 1.8:1 net debt ratio.
- Reconcile operating cash flow with reported earnings after considering seasonality, tax payments and loan portfolio movements.
- Track the financial effect of Ohio store closures, including the expected $1 million to $2 million charges.
- Evaluate acquisition-related goodwill and the integration and performance of recently acquired stores.
- Consider the effect of ASC 842 lease liabilities when comparing leverage and liquidity with prior periods.
- Confirm future dividend and share-repurchase capacity against cash needs, acquisition plans and debt restrictions.