FCFS

Business Context and Reporting Period

Company: First Cash Financial Services, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: The Company operates pawn shops and short-term consumer loan stores in the U.S. and Mexico. As of June 30, 2009, it operated 539 locations (299 pawn stores and 143 short-term loan stores in the U.S., plus 97 locations in Mexico). Pawn operations generated 82% of revenue from continuing operations.

Key Financial Metrics

Note: Debt Outstanding includes $43,500 in revolving credit facility and $4,612 in current notes payable.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 7% year-over-year for the quarter and 7% for the six-month period. This was driven by a 14% increase in pawn retail merchandise sales and a 10% increase in pawn service fees.
• Discontinued Operations Impact: Net income significantly benefited from discontinued operations. The Auto Master automotive unit generated $2,131,000 in net income for the quarter (vs. a loss of $2,305,000 in the prior year) due to favorable cash collections on receivables exceeding fair value estimates.
• Short-Term Loan Decline: Revenue from short-term loan and credit services fees decreased 8% for the quarter and 8% for the six-month period, attributed to weakened consumer demand and increased competition in U.S. markets.
• Currency Effects: The Mexican peso weakened against the U.S. dollar (from 10.4 to 1 in Q2 2008 to 13.3 to 1 in Q2 2009). While this reduced translated revenue, it also lowered translated expenses, resulting in a minimal net impact on income.
• Acquisitions: The Company acquired two pawn stores in Dallas, Texas, in June 2009 for $1.3 million. The 16-store acquisition in Mexico (Presta Max) completed in late 2008 continues to contribute to growth.

Guidance, Outlook, and Risks

• Expansion Plans: The Company plans to open approximately 55 to 60 new stores in 2009, primarily pawn stores in Mexico and a limited number in the U.S. No new U.S. short-term loan stores are anticipated for the remainder of 2009.
• Liquidity: The Company maintains a $90 million credit facility with $46.5 million available as of June 30, 2009. Management intends to reduce debt prior to the facility's maturity in April 2010.
• Discontinued Operations Outlook: Management expects continued positive results from Auto Master receivable collections in the second half of 2009, though at a declining rate. A total charge of $0.04 to $0.05 per share is expected for 2009 related to the closure of Michigan and Texas short-term loan stores.
• Risks:
  • Regulatory: New legislation in Washington and South Carolina may restrict short-term loan products in late 2009/2010. Broader regulatory scrutiny of pawn and payday lending exists in both the U.S. and Mexico.
  • Public Health: The H1N1 influenza outbreak poses a risk of restricted store hours or reduced customer traffic.
  • Market Risks: Exposure to fluctuations in gold prices, interest rates, and foreign currency exchange rates.

Investor Verification Checklist

• Discontinued Operations Sustainability: Verify the remaining balance of Auto Master receivables ($37.2 million gross, $5.6 million fair value) and the sustainability of the "excess collection" income model.
• Short-Term Loan Trends: Monitor the continued decline in U.S. short-term loan revenue and the impact of new state-level regulations in Washington and South Carolina.
• Currency Exposure: Assess the impact of further peso devaluation on future revenue translation versus expense savings.
• Debt Covenants: Confirm continued compliance with the Credit Facility covenants, specifically the 300% EBITDA coverage ratio, as the facility matures in April 2010.
• Inventory Composition: Review the 47% gold jewelry composition of pawn inventories against current gold price volatility.