Business Context and Reporting Period
Company: First Cash Financial Services, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: First Cash is a leading operator of retail-based pawn and consumer finance stores in the United States and Mexico. As of February 2011, the Company operated over 620 locations across nine U.S. states and 21 Mexican states. The primary business model involves pawn lending (collateralized by personal property), retail sales of forfeited collateral, and fee-based credit services. The Company has strategically reduced exposure to payday lending, discontinuing operations in Maryland and selling West Coast and Michigan short-term loan stores.
Key Financial Metrics
| Metric (in thousands) | 2010 | 2009 |
|---|---|---|
| Total Revenue | $431,147 | $363,058 |
| Net Income | $57,658 | $49,764 |
| Income from Continuing Operations | $54,255 | $41,156 |
| Diluted EPS (Net Income) | $1.86 | $1.65 |
| Operating Cash Flow | $73,645 | $85,213 |
| Free Cash Flow (Non-GAAP) | $31,612 | $56,873 |
| Total Assets | $342,446 | $256,285 |
| Working Capital | $170,376 | $101,295 |
| Long-Term Debt | $1,386 | $5,265 |
| Cash and Equivalents | $67,240 | $26,777 |
Margins: Net revenue margin was 59.0% in 2010 (up from 58.2% in 2009). Income from continuing operations margin was 12.6% (up from 11.3%). Pawn merchandise gross profit margin remained stable at 40.0%.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 19% year-over-year, driven by a 27% increase in foreign (Mexico) revenue and an 11% increase in domestic revenue. Pawn service fees grew 26% and pawn retail sales grew 25%.
- Profitability: Net income increased 16% to $57.7 million. Income from continuing operations rose 32% to $54.3 million, reflecting strong same-store revenue growth (12% in Mexico, 8% in the U.S.) and store expansion.
- Discontinued Operations: The Company recorded $3.4 million in income from discontinued operations in 2010, primarily from the collection of receivables from the sold Auto Master automotive business. This compares to $8.6 million in 2009.
- Store Count: Total locations increased from 546 to 612. The Company opened 58 new stores in Mexico and 12 in the U.S., while closing or consolidating 4 locations.
- Debt Reduction: The Company repaid significant notes payable related to prior acquisitions, reducing long-term debt. The $25 million unsecured credit facility remained undrawn.
Guidance, Outlook, and Risks
Outlook and Strategy: Management anticipates opening approximately 70 to 80 additional pawnshops in fiscal 2011, primarily in Mexico. The Company does not anticipate opening new short-term loan stores. Expansion is expected to be funded by operating cash flows and the available credit facility.
Key Risks and Contingencies:
- Regulatory Environment: The Company faces significant regulatory risk in both the U.S. and Mexico. New legislation in Texas could severely restrict credit services operations (which generated 11% of 2010 revenue). Illinois legislation effective March 2011 reduces allowable rates for installment loans. The Dodd-Frank Act and the creation of the Consumer Financial Protection Bureau pose potential future regulatory burdens.
- 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.
- Foreign Operations: Approximately 52% of revenue is derived from Mexico. Risks include currency exchange fluctuations (Mexican peso vs. U.S. dollar), political instability, and potential changes in Mexican consumer finance regulations.
- Customs Duties: U.S. Customs and Border Protection assessed duties totaling approximately $597,000 on cross-border gold remelting transactions from 2008-2009. The Company is appealing these assessments but cannot estimate the likelihood of success or future assessments.
Investor Verification Checklist
- Regulatory Impact: Verify the status of pending Texas legislation regarding credit services organizations and its potential impact on the 11% of revenue derived from this segment.
- Gold Exposure: Assess the sensitivity of earnings to fluctuations in gold prices, given that 42% of inventory and 47% of pawn receivables are gold-related.
- Customs Dispute: Monitor the outcome of the appeal regarding the $597,000 customs duty assessment and the risk of additional assessments on cross-border gold transfers.
- Discontinued Operations: Confirm the timeline for the final collection of Auto Master receivables, which contributed $2.6 million to 2010 net income but is expected to be completed in 2011.
- Store Expansion Costs: Review capital expenditure requirements for the planned 70-80 new store openings in 2011 against projected free cash flow.