First Cash Financial Services, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014; unaudited. The filing identifies the registrant as First Cash Financial Services, Inc. and describes operations in the United States and Mexico across pawn, consumer lending and credit services.
Business Context and Reporting Period
- The Company operated 926 locations at June 30, 2014, including 310 domestic and 616 Mexican locations, representing 7% net store growth over the prior twelve months.
- Pawn operations generated approximately 95% of continuing-operations revenue for the six months ended June 30, 2014, compared with 93% in the prior-year period.
- Mexico generated 56% of second-quarter revenue and 53% of six-month revenue. The Mexican peso weakened approximately 4% on average versus the U.S. dollar, reducing reported dollar revenue growth.
- The Company added 24 pawn stores, acquired one store and converted one small-format store during the first six months. Management expects approximately 75 to 85 new stores during 2014.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $165.3 million, up 16% | $335.1 million, up 11% |
| Net revenue | $93.9 million, up 12% | $190.4 million, up 9% |
| Income from continuing operations | $16.0 million, up 2% | $39.0 million, up 9% |
| Net income | $16.0 million, versus $15.7 million | $38.7 million, up 8% |
| Diluted earnings per share | $0.55, versus $0.53 | $1.32, versus $1.21 |
| Operating cash flow | Not separately provided | $48.9 million, up 9% |
| EBITDA from continuing operations | $31.4 million; 19% revenue margin | $66.0 million; 20% revenue margin |
- Second-quarter retail merchandise sales increased 16% to $97.2 million, while pawn loan fees increased 10% to $47.6 million. On a constant-currency basis, the increases were 19% and 13%, respectively.
- Consumer loan and credit services fees declined 17% to $8.4 million in the quarter and 17% to $18.2 million year to date, reflecting competition and store closures.
- Wholesale scrap jewelry revenue increased 129% in the quarter to $12.2 million but decreased 10% year to date to $25.8 million. Scrap gross margin was 17% in the quarter and 18% year to date.
- Retail merchandise gross margin was 39% in the quarter, unchanged year over year, and 39% year to date versus 40% in the prior-year period.
- Store-level operating margin was 25% in the quarter versus 26% and 26% year to date versus 28%, primarily due to lower net revenue from jewelry scrapping.
- Interest expense increased to $3.9 million in the quarter and $5.3 million year to date, compared with $0.6 million and $1.4 million, respectively, due to the new senior notes and higher borrowing costs.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $84.1 million at June 30, 2014, compared with $32.7 million at June 30, 2013 and $70.6 million at December 31, 2013.
- Total assets were $694.7 million, including $123.9 million of pawn loans and $77.6 million of inventories. Pawn loans increased 10% year over year, while inventories decreased 5%.
- Total liabilities were $252.4 million and stockholders’ equity was $442.4 million. The liabilities-to-equity ratio was 57%.
- On March 24, 2014, the Company issued $200.0 million of 6.75% senior unsecured notes due April 1, 2021. Net proceeds were approximately $194.8 million.
- Proceeds from the notes were used principally to repay the revolving credit facility and acquisition-related notes. The Company had no borrowings under its $160.0 million revolving credit facility at June 30, 2014; the facility matures in February 2019.
- Working capital was $269.4 million, the current ratio was 7.35:1, and trailing-twelve-month leverage was 1.4:1 versus 1.1:1 at June 30, 2013.
- Six-month investing cash outflows were $26.4 million, including $12.1 million of capital expenditures, $8.0 million of net loan funding and $6.4 million for acquisitions.
- The Company repurchased 235,000 shares for $13.3 million during the first six months, with 536,000 shares remaining under the authorized program.
- Management stated that cash, operating cash flow, available revolver capacity and working capital should be sufficient to fund operations and planned expansion for at least the next twelve months.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by store additions, maturation of existing stores and stronger retail merchandise and pawn fee revenue; constant-currency revenue growth exceeded reported growth.
- Consumer lending continued to contract, with fees down 17% and the related credit loss provision equal to 22% of fee revenue for the first six months versus 21% in the prior year.
- Interest expense rose materially following the March debt refinancing, although the Company eliminated outstanding revolver and acquisition-related note balances.
- Operating cash flow improved by $3.9 million, while investing outflows declined by $62.8 million because prior-year acquisition spending was substantially higher.
- The effective tax rate for the first six months was 25.6%, including a $3.7 million non-recurring benefit related to the termination of the election to include foreign subsidiaries in the U.S. federal tax return. Excluding that benefit, the tax rate was 32.6%.
- Comprehensive income improved to $39.0 million from $35.6 million, partly reflecting a favorable currency translation adjustment compared with the prior-year loss.
Guidance, Outlook, Risks and Unusual Items
- Management expected an effective tax rate of approximately 32% for the second half of 2014 and planned capital expenditures at a similar annualized rate during the remainder of the year.
- The Company expects seasonal growth in service fees during the third and fourth quarters and higher retail sales during the fourth quarter.
- Key market exposures include Mexican peso fluctuations, gold prices and interest rates. The average gold price declined 15% year to date, while the June 30 ending price increased 10% year over year.
- The Consumer Financial Protection Bureau was expected to begin further rulemaking activity regarding short-term lending products. New ordinances in Bryan and Garland, Texas, were expected to affect credit services operations later in 2014, but the Company could not estimate the financial impact.
- Other risks include competition, pawn forfeiture and credit losses, collateral and inventory valuation, access to merchandise, regulatory restrictions, licensing, foreign operations, litigation, cybersecurity and banking relationships.
- The Company had no material changes to previously reported legal proceedings and stated that disclosure controls and procedures were effective as of June 30, 2014.
Investor Verification Items
- Verify the sustainability of growth from new stores and acquisitions versus same-store performance, particularly the 5% constant-currency decline in U.S. same-store core revenue.
- Monitor the effect of the new 6.75% notes on interest expense, leverage, covenant compliance and future cash available for expansion or repurchases.
- Assess consumer lending trends, including fee declines, competition, loss provisions and potential CFPB or local regulatory actions.
- Track gold prices, scrap-jewelry volumes and margins, which materially affected reported revenue and store-level margins.
- Separate recurring earnings from the $3.7 million non-recurring tax benefit and evaluate the expected approximately 32% tax rate thereafter.
- Confirm progress toward the 2014 target of 75 to 85 new stores and the related capital expenditure and liquidity requirements.