Business Context and Reporting Period
Company: First Cash Financial Services, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: The Company operates pawn shops and short-term loan stores in the U.S. and Mexico. As of September 30, 2009, it operated 553 locations (314 pawn stores and 142 short-term loan stores in the U.S., plus 97 locations in Mexico). Pawn operations generated 82% of revenue from continuing operations for the nine months ended September 30, 2009.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Total Revenue | $94,646 | $261,418 |
| Net Revenue | $55,465 | $157,310 |
| Income from Continuing Operations | $10,610 | $29,648 |
| Net Income (Loss) | $11,974 | $34,767 |
| Diluted EPS (Net Income) | $0.39 | $1.15 |
| Cash and Cash Equivalents | $18,552 | $18,552 |
| Working Capital | $65,613 | $65,613 |
| Debt Outstanding (Credit Facility) | $43,000 | $43,000 |
| Available Credit Facility | $47,000 | $47,000 |
Margins: Gross profit margin on pawn merchandise sales was 39% for the quarter and 41% for the nine-month period. Store-level operating margin for pawn and short-term loan operations was 28% for both the quarter and the nine-month period.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 13% for the quarter and 9% for the nine-month period compared to the prior year. This was driven by a 17% increase in pawn retail merchandise sales and a 12% increase in pawn service fees.
- Profitability: Net income for the quarter was $11.97 million, a significant improvement from a net loss of $46.41 million in the same period in 2008. The prior year loss was heavily impacted by discontinued operations (Auto Master write-downs).
- Discontinued Operations: The Company recorded income from discontinued operations of $1.36 million for the quarter and $5.12 million for the nine months, primarily due to favorable cash collections on the sold Auto Master receivables exceeding estimated fair values.
- Short-Term Loan Decline: Revenue from short-term loan and credit services fees decreased 3% for the quarter and 6% for the nine months, attributed to weakened consumer demand and increased competition in the U.S. market.
- Currency Impact: The weakening of the Mexican peso (from 10.3 to 1 in Q3 2008 to 13.3 to 1 in Q3 2009) reduced translated revenue from Mexico but also lowered reported expenses, resulting in a minimal net impact on earnings.
Guidance, Outlook, and Risks
Outlook and Strategy:
- The Company anticipates continued growth in pawn revenue in the fourth quarter of 2009 due to customer demand and store maturation.
- Expansion plans include opening approximately 15 additional pawnshops in Mexico in Q4 2009. No new U.S. short-term loan stores are anticipated for the remainder of 2009.
- Management is considering the potential sale or disposition of 22 short-term loan stores in California, Washington, and Oregon to focus on pawn operations.
Risks and Contingencies:
- Regulatory Changes: New legislation in Washington and South Carolina is expected to restrict short-term/payday loan products in late 2009/2010. Federal bills proposing caps on APRs and fees are also pending.
- Public Health: The Company notes the risk of future outbreaks (e.g., H1N1) potentially restricting store hours or reducing customer traffic.
- Liquidity: The Company has a $90 million credit facility maturing in April 2010. It intends to seek renewal and reduce the outstanding balance prior to maturity.
Investor Verification Checklist
- Discontinued Operations: Verify the sustainability of income from Auto Master receivables collections, as management expects these results to decline in the fourth quarter.
- Short-Term Loan Exposure: Assess the impact of pending regulatory changes in Washington, South Carolina, and potential federal legislation on the short-term loan segment.
- Currency Sensitivity: Monitor the exchange rate between the U.S. dollar and Mexican peso, as it significantly impacts reported revenue and expenses from the 97 Mexican locations.
- Debt Maturity: Confirm the status of the $90 million credit facility renewal process ahead of its April 2010 maturity.
- Asset Disposition: Track progress on the potential sale of the 22 short-term loan stores in California, Washington, and Oregon.