First Cash Financial Services, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2011; filed July 25, 2011. The filing identifies the registrant as First Cash Financial Services, Inc. The company operated 646 locations across eight U.S. states and 22 Mexican states, with pawn operations representing approximately 89% of continuing-operations revenue for the first six months.
Financial Performance and Position
| Metric | Q2 2011 | Q2 2010 | Change |
|---|
| Total revenue | $120.6 million | $95.0 million | 27% |
| Net revenue | $68.9 million | $55.6 million | 24% |
| Income from continuing operations | $15.2 million | $10.3 million | 48% |
| Net income | $15.3 million | $11.8 million | 30% |
| Diluted EPS | $0.48 | $0.38 | 26% |
| Net margin | 12.7% | 12.4% | Improved |
| Metric | Six months 2011 | Six months 2010 | Change |
|---|
| Total revenue | $241.4 million | $189.7 million | 27% |
| Income from continuing operations | $31.1 million | $20.4 million | 53% |
| Net income | $37.9 million | $23.9 million | 59% |
| Diluted EPS | $1.18 | $0.78 | 51% |
| Operating cash flow | $35.4 million | $33.1 million | 7% |
- Q2 revenue growth reflected merchandise sales of $77.4 million, pawn loan fees of $30.6 million and consumer loan and credit services fees of $12.4 million.
- Six-month revenue consisted of $155.7 million of merchandise sales, $59.5 million of pawn loan fees and $25.6 million of consumer loan and credit services fees.
- Merchandise gross margin declined to 37% in Q2 from 40% and to 38% for the six-month period from 39%, primarily because of a greater mix of lower-margin hard goods in Mexico and lower scrap-jewelry margins.
- Store-level operating margin improved to 29% in both Q2 and the first six months, compared with 27% in the comparable periods.
- At June 30, 2011, cash and equivalents were $68.3 million, total assets were $371.2 million and stockholders’ equity was $322.7 million.
- Pawn loans were $79.7 million, up 31% from June 30, 2010; inventories were $54.6 million, up 57%.
- Working capital was $188.3 million, the current ratio was 6.02x and debt-to-equity was 15%.
- Debt consisted primarily of $1.6 million of notes payable related to a 2010 pawn-store acquisition. No borrowings were outstanding under the $25 million unsecured credit facility.
- Investing cash outflows were $17.1 million, including $15.0 million of capital expenditures, $10.3 million of pawn-loan funding and $4.0 million for six acquired U.S. pawn stores, partially offset by $12.0 million from the sale of Illinois consumer-loan stores.
- Financing cash outflows were $18.1 million, including $22.4 million used to repurchase 588,241 shares at an average price of $38.08.
Material Changes Versus the Prior Comparable Period
- Revenue growth was supported by same-store revenue increases of 26% in Mexico and 7% in the U.S. during Q2; six-month same-store growth was 23% in Mexico and 11% in the U.S.
- The company added 48 locations year-to-date, including 42 pawn stores, and ended the period with 646 locations, a 15% increase from the prior year.
- Mexico generated 57% of Q2 revenue and 54% of year-to-date revenue. The stronger Mexican peso increased reported U.S.-dollar revenue, although management stated that natural cost hedges limited the effect on net income and EPS.
- Store operating expenses increased 15% in Q2 and 16% year-to-date, but declined as a percentage of revenue from 29% to 26%. Administrative expenses increased 18% in Q2 and 19% year-to-date, while declining from 10% to 9% of revenue.
- The consumer loan and credit services loss provision declined to 22% of related fee revenue in Q2 from 29%, and to 19% year-to-date from 23%. Q2 results benefited by $576,000 from the sale of fully written-off bad-debt portfolios.
- The company sold ten Illinois consumer-loan stores in March 2011 and recorded an estimated $5.9 million after-tax gain. The final purchase price remains contingent and the gain is expected to be adjusted in the third quarter.
- Discontinued operations contributed $6.8 million of after-tax income year-to-date, compared with $3.5 million in the prior year, primarily due to the Illinois disposal gain.
Outlook, Risks, Contingencies and Unusual Items
- Management expected operating cash flow and available cash and credit to fund current operations and 2011 expansion. Capital expenditures were expected to continue at approximately the first-half quarterly rate.
- The $25 million unsecured credit facility expires in April 2012 and may be increased to $50 million subject to lender approval. The company reported compliance with covenants as of July 21, 2011.
- Management plans continued expansion primarily through new pawn-store openings and may pursue additional acquisitions, although no materially significant acquisition commitments existed at June 30, 2011.
- Regulatory risk remains significant for pawn, consumer-loan and credit-services products in the U.S. and Mexico. The Dodd-Frank consumer-protection framework was still being implemented, and Texas legislation regulating credit-access businesses becomes effective January 1, 2012.
- The company faces potential regulatory exposure from U.S. Customs and Border Protection assessments of approximately $609,000, including interest, relating to cross-border scrap-jewelry transactions. The assessments are being appealed, and the likelihood of success or additional assessments was unclear.
- Forward sales commitments covered approximately 12,000 gold ounces through September 2011 and 60,000 silver ounces through December 2011; these commitments were not recorded as derivatives because they qualified for the normal-sales exemption.
- Key operating sensitivities include consumer demand and repayment behavior, credit losses, gold prices, Mexican peso exchange rates, competition, inventory availability, store expansion execution, licensing and regulation, interest rates, and the renewal of credit facilities.
- The filing states that disclosure controls and procedures were effective as of June 30, 2011, with no material change in internal control over financial reporting during the quarter.
Facts Investors Should Verify
- Confirm the final purchase price and any third-quarter adjustment to the estimated Illinois-store disposal gain.
- Assess whether the 57% increase in pawn inventories is translating into sustainable sales and loan growth without higher markdowns or losses.
- Evaluate the effect of lower merchandise margins and the changing Mexico product mix on future profitability.
- Monitor consumer-credit loss trends, the $14.4 million maximum exposure under CSO letters of credit and the adequacy of related reserves.
- Review the outcome of the Customs and Border Protection appeal and any additional duty assessments.
- Track implementation of Texas credit-access regulations, broader U.S. consumer-finance rules and proposed Mexican pawn-industry legislation.
- Reconcile reported net income and EPS with continuing operations because the year-to-date results include a significant discontinued-operations disposal gain.
