Business Context and Reporting Period
Company: First Cash Financial Services, Inc. (First Cash)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: First Cash is a leading operator of pawn and consumer finance stores in the United States and Mexico. As of March 2010, the Company operated over 550 locations. The primary business model involves pawn lending (collateralized by personal property) and retail sales of forfeited collateral. The Company also offers short-term loans and credit services, though it has been strategically exiting the short-term loan business in several markets to reduce regulatory risk.
Key Financial Metrics
| Metric (in thousands) | 2009 | 2008 |
|---|---|---|
| Total Revenue | $365,954 | $320,639 |
| Net Revenue (Gross Profit) | $213,480 | $192,729 |
| Income from Continuing Operations | $41,851 | $36,848 |
| Net Income (Loss) | $49,764 | $(21,536) |
| Diluted EPS (Net Income) | $1.65 | $(0.71) |
| Operating Cash Flow | $79,986 | $57,549 |
| Free Cash Flow | $56,948 | $27,129 |
| Working Capital | $101,295 | $95,577 |
| Total Assets | $256,285 | $265,343 |
| Total Liabilities | $43,846 | $110,893 |
| Stockholders' Equity | $212,439 | $154,450 |
Liquidity and Debt: As of December 31, 2009, the Company held $26,777,000 in cash and cash equivalents. The Company fully repaid its $90,000,000 revolving credit facility during the year, leaving $90,000,000 available for borrowings. Long-term liabilities decreased significantly from $78,075,000 in 2008 to $8,555,000 in 2009.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 14% to $365.9 million, driven by a 17% increase in pawn retail merchandise sales and a 22% increase in pawn scrap jewelry sales. Foreign revenue (Mexico) grew 24% to $175.0 million.
- Profitability Turnaround: The Company reported a net income of $49.8 million in 2009, a significant improvement from a net loss of $21.5 million in 2008. The 2008 loss was primarily due to a $59.4 million non-cash charge related to the discontinued Auto Master operation.
- Discontinued Operations: In 2009, the Company recorded a $6.7 million after-tax gain from the collection of receivables from the discontinued Auto Master operation. Conversely, the Company recorded charges of $1.1 million associated with the closure of short-term loan stores in Michigan and Texas.
- Strategic Exit: The Company agreed to sell all 22 of its payday/short-term loan stores in California, Washington, and Oregon in December 2009, recording a gain of $901,000 on the sale.
- Store Expansion: The total store count increased to 546 locations (383 pawn stores, 163 short-term loan stores). The Company opened 66 new stores in 2009, primarily in Mexico.
Guidance, Outlook, and Risks
Outlook and Strategy: Management anticipates opening approximately 65 to 75 additional pawnshops in fiscal 2010, primarily in Mexico. The Company does not anticipate opening new U.S. short-term loan stores. The strategy remains focused on expanding pawn operations and reducing exposure to regulatory risks associated with payday lending.
Key Risks and Contingencies:
- Regulatory Risk: The Company faces significant regulatory scrutiny in both the U.S. and Mexico regarding short-term loans and credit services. Proposed legislation in Texas, Maryland, Illinois, and South Carolina could restrict or prohibit these products, which comprised approximately 25% of total revenue in 2009.
- Foreign Operations: Approximately 48% of revenue is derived from Mexico. Risks include currency exchange rate fluctuations (the Mexican peso depreciated against the U.S. dollar in 2009), political instability, and potential changes in Mexican consumer finance regulations.
- Gold Price Volatility: A significant portion of inventory and collateral is gold jewelry. A sustained decline in gold prices could negatively impact inventory valuations, loan collateral values, and profit margins.
- Credit Losses: The profitability of short-term loan and credit services operations depends on the collection of returned checks and ACH withdrawals. The Company maintains an allowance for credit losses, but actual losses could exceed estimates if economic conditions deteriorate.
Investor Verification Checklist
- Regulatory Status: Verify the status of pending legislation in Texas and Mexico that could restrict credit services and short-term loan products, which represent a material portion of revenue.
- Discontinued Operations: Confirm the timeline and remaining cash flow potential from the Auto Master receivables, which contributed significantly to 2009 net income but are expected to decline in 2010.
- Debt Covenants: Review the terms of the $90 million credit facility maturing in April 2010 to ensure compliance with financial ratios and renewal terms.
- Gold Exposure: Assess the sensitivity of the Company's inventory valuation and loan portfolio to fluctuations in global gold prices.
- Store Economics: Evaluate the profitability of new store openings in Mexico versus the U.S., given the Company's heavy expansion focus in the Mexican market.