Business Context and Reporting Period
Company: First Cash Financial Services, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: The Company operates pawnshops and short-term loan/credit services locations in the United States and Mexico. As of June 30, 2010, it operated 570 locations (216 in the U.S., 354 in Mexico). Pawn operations generated 86% of revenue from continuing operations for the six months ended June 30, 2010.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2010 | Six Months Ended June 30, 2010 |
|---|---|---|
| Total Revenue | $97,676 | $194,889 |
| Net Revenue | $57,845 | $115,398 |
| Net Income | $11,783 | $23,865 |
| Diluted EPS | $0.38 | $0.78 |
| Cash and Cash Equivalents | $45,838 | $45,838 |
| Working Capital | $124,652 | $124,652 |
| Debt (Notes Payable) | $7,065 | $7,065 |
| Operating Cash Flow (6mo) | N/A | $32,900 |
Margins: Gross profit margin on total pawn merchandise sales was 40% for the quarter and 39% for the six-month period. Store-level operating margin was 28% for both periods.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 19% year-over-year for the quarter and 20% for the six-month period. This was driven by a 12% increase in same-store pawn revenue and revenue from new store openings (26 new stores in Mexico YTD).
- Profitability: Net income increased slightly for the quarter ($11.8M vs $11.6M) and by 5% for the six-month period ($23.9M vs $22.8M). Income from continuing operations grew 22% for the quarter and 21% YTD.
- Discontinued Operations: Income from discontinued operations (primarily Auto Master collections) declined significantly compared to the prior year. Auto Master contributed $1.7M YTD in 2010 versus $4.8M in 2009.
- Receivables: Pawn receivables increased 16% to $60.9M. Short-term loan receivables remained relatively flat at $2.8M.
- Inventory: Inventories increased 13% to $34.9M, reflecting growth in pawn receivables, particularly in Mexico.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects cash flows from operations and available credit facilities to be sufficient to fund operations and expansion. The Company plans to continue opening new stores, primarily in Mexico.
- Regulatory Risks:
- Maryland: New legislation effective October 2010 severely affects credit services products. The Company expects no earnings from its Maryland CSO program in Q4 2010.
- Illinois: Legislation adopted in June 2010 reduces allowable rates for installment loans, effective March 2011, potentially making the product unfeasible in that state.
- Dodd-Frank Act: The creation of the Bureau of Consumer Financial Protection introduces uncertainty regarding future regulations on consumer credit products.
- Customs and Duties: U.S. Customs and Border Protection (CBP) assessed duties of approximately $584,000 plus interest on cross-border remelting transactions from late 2008 and 2009. The Company intends to appeal but cannot estimate the likelihood of success or additional assessments.
- Subsequent Events: In early July 2010, the Company acquired six U.S. pawn shops for $7.6 million ($5.6M cash, $2.0M notes payable).
- Unusual Items: The Company recorded a gain of $293,000 in Q1 2010 from the sale of commercial real estate associated with discontinued Auto Master operations.
Investor Verification Checklist
- Regulatory Impact: Verify the specific financial impact of the new Maryland and Illinois legislation on future revenue streams.
- Customs Dispute: Monitor the status of the CBP appeal regarding the $584,000 duty assessment and potential for further liabilities.
- Discontinued Operations: Confirm the declining trend of cash collections from the Auto Master receivable portfolio, which is expected to diminish in the remainder of 2010.
- Currency Exposure: Assess the impact of the Mexican peso exchange rate on future translated revenues and expenses, noting the strengthening peso in 2010.
- Acquisition Integration: Review the performance of the six U.S. pawn shops acquired in July 2010 upon their inclusion in Q3 results.