Firstcash Holdings, Inc. quarterly report, Q1 FY2012

Business Context and Reporting Period

First Cash Financial Services, Inc. reported unaudited results for the three months ended March 31, 2012. The company operates pawn, consumer loan and credit services businesses in the United States and Mexico, with 732 locations at quarter-end. Pawn operations generated approximately 90% of continuing-operations revenue. Approximately 50% of revenue was generated in the United States and the balance in Mexico.

Financial Performance and Position

Metric	Q1 2012	Q1 2011	Change
Total revenue	$135.1 million	$120.8 million	12% reported; 16% constant currency
Net revenue	$78.4 million	$70.3 million	12%
Income from continuing operations	$17.5 million	$15.9 million	10%
Net income	$17.5 million	$22.6 million	Decrease due to prior-year discontinued operations
Diluted EPS from continuing operations	$0.58	$0.50	16%
Diluted net EPS	$0.58	$0.70	Decrease due to prior-year discontinued operations
Operating cash flow	$29.1 million	$25.1 million	16%
Free cash flow, trailing twelve months	$49.3 million	$33.0 million	49%

Net revenue margin was approximately 58.0% in both periods. Pre-tax margin was approximately 19.8% in Q1 2012 versus 20.2% in Q1 2011; net income margin was approximately 13.0%.
Merchandise sales increased 11%, pawn loan fees increased 21%, and consumer loan and credit services fees decreased approximately 2% on a reported basis.
Constant-currency same-store revenue increased 6% in the United States and 4% in Mexico. Excluding scrap jewelry, same-store sales increased 8% and 6%, respectively.
Total pawn loans were $81.0 million at March 31, 2012, up 13% reported and 18% on a constant-currency basis. Inventories were $47.1 million, down 4% reported from the prior year.
Total merchandise gross margin was 38%, unchanged from the prior-year quarter. Retail merchandise margin was 41%; scrap jewelry margin declined to 28% from 33%.
Store-level operating margin was 29%, compared with 30% in the prior-year quarter. Store operating expenses rose 15% to $36.3 million, while administrative expenses rose 7% to $12.3 million.
Cash and cash equivalents were $30.4 million at March 31, 2012. Working capital was $134.5 million and the current ratio was 4.22x.
Total debt included $18.0 million drawn under the unsecured revolving credit facility and $4.6 million payable on the January 2012 acquisition note. The facility was amended and extended through February 2015, increased to $50 million, and had $32.0 million available at quarter-end.
Liabilities-to-equity was 24%, compared with 16% at March 31, 2011. Management stated that the company was in compliance with facility covenants as of April 24, 2012.

Material Changes Versus the Prior Comparable Period

Continuing-operations earnings improved, but reported net income and total EPS declined because Q1 2011 included $6.7 million of income from discontinued operations, including a $5.9 million after-tax gain from selling ten Illinois consumer loan stores.
The company acquired 29 pawn stores in western Mexico for $46.9 million, including $42.0 million in cash and a $4.9 million seller note. The acquisition generated approximately $39.4 million of preliminary goodwill.
The company also acquired three Texas stores for $2.3 million and opened 22 new pawn locations, resulting in 54 total new or acquired locations during the quarter.
Investing cash outflows increased to $49.9 million, primarily because of $43.9 million spent on acquisitions, compared with investing cash inflow of $2.9 million in Q1 2011, which benefited from the Illinois store sale.
The company repurchased approximately 963,000 shares for $38.8 million during the quarter. It completed the authorized 1.5 million-share program in April 2012 after repurchasing an additional 537,000 shares.
Cash declined by $39.8 million during the quarter to $30.4 million, despite stronger operating cash flow, reflecting acquisitions and share repurchases.
The Mexican peso weakened against the U.S. dollar, reducing reported Mexican revenue and assets. Management stated that natural currency hedges, including U.S.-dollar scrap jewelry sales, limited the effect on net income and EPS.

Outlook, Commentary, Risks and Unusual Items

Management expected to open approximately 110 to 120 stores, including acquisitions, during 2012 and expected capital expenditures to continue at approximately the Q1 quarterly rate.
Management believed operating cash flow, cash balances and available credit would fund current operations and planned expansion. It also stated that there were no definitive commitments for materially significant future acquisitions or capital expenditures.
As of April 24, 2012, additional borrowings reduced availability under the revolving facility to $8.4 million, with $41.6 million outstanding.
Credit loss provision was 18% of consumer loan and credit services fee revenue, compared with 17% in Q1 2011; excluding proceeds from bad-debt portfolio sales, the current-period ratio would have been 19%.
Outstanding CSO letters of credit exposed the company to a maximum potential loss of $13.3 million at March 31, 2012. The recorded fair-value liability was immaterial, while estimated net exposure included in accrued liabilities was $625,000.
New Austin and Dallas, Texas ordinances affecting credit services transactions were scheduled to become effective in May and June 2012. Management could not estimate their impact, although the affected locations represented less than 1% of consolidated annualized revenue.
U.S. Customs and Border Protection assessed approximately $625,000 of duties and accrued interest on certain 2008 and 2009 cross-border scrap jewelry transactions. The company is appealing and cannot assess the likelihood of success or additional assessments.
The company had forward commitments through April 2012 to sell 500 ounces of expected scrap gold at $1,660 per ounce. These commitments were treated as normal sales and were not recorded on the balance sheet.
Key ongoing risks include consumer credit losses, regulatory restrictions on pawn and consumer lending, acquisition integration, store expansion execution, gold prices, foreign exchange, interest rates, liquidity, competition, import/export rules and potential litigation.

Facts an Investor Should Verify

Reconcile continuing-operations growth with the year-over-year decline in reported net income and EPS caused by the discontinued Illinois operations.
Assess the effect of the 29-store Mexico acquisition on revenue, earnings, goodwill valuation and future cash requirements.
Monitor credit-facility availability, covenant compliance and the effect of post-quarter share repurchases on leverage and liquidity.
Evaluate whether the planned 110 to 120 store expansion can sustain growth without further deterioration in store-level margins or cash generation.
Track consumer-lending regulation in Texas and other jurisdictions, including the Austin and Dallas ordinances.
Confirm the resolution and potential additional exposure related to the Customs and Border Protection duty assessments.
Separate reported results from constant-currency and other non-GAAP measures when evaluating Mexico trends and operating performance.