FirstCash Holdings, Inc. — Q2 2023 Form 10-Q Summary
Business context and reporting period
FirstCash operates retail pawn stores in the United States and Latin America and provides lease-to-own and retail finance payment solutions through its American First Finance (AFF) business. The filing covers the unaudited three and six months ended June 30, 2023, compared with the same periods in 2022.
At June 30, 2023, the Company operated 2,889 pawn stores and AFF served approximately 10,500 active merchant locations. The pawn network included 1,101 U.S. stores and 1,788 Latin America stores.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Change | Six months 2023 | Six months 2022 | Change |
|---|---|---|---|---|---|---|
| Total revenue | $750.6 million | $647.6 million | 16% | $1,513.4 million | $1,307.5 million | 16% |
| Net revenue | $352.9 million | $301.0 million | 17% | $700.9 million | $592.2 million | 18% |
| Income before taxes | $60.5 million | $109.6 million | (45%) | $123.7 million | $146.6 million | (16%) |
| Net income | $45.2 million | $86.1 million | (48%) | $92.6 million | $114.1 million | (19%) |
| Diluted EPS | $0.99 | $1.81 | (45%) | $2.01 | $2.38 | (16%) |
| Operating cash flow | Not separately provided | Not separately provided | — | $205.7 million | $226.8 million | (9%) |
Net income margin was approximately 6.0% in Q2 2023 versus 13.3% in Q2 2022, and approximately 6.1% for the first six months versus 8.7% in the prior-year period. The comparison was materially affected by a $65.6 million pretax gain on revaluation of AFF contingent acquisition consideration in Q2 2022, or $63.0 million for the six-month period.
- Revenue mix: Q2 retail merchandise sales increased 8% to $320.9 million; pawn loan fees increased 15% to $154.2 million; leased merchandise income increased 29% to $189.8 million; and finance-receivable interest and fees increased 33% to $58.2 million.
- Segment performance: Q2 U.S. pawn pretax operating income increased 13% to $72.4 million, Latin America pawn increased 13% to $37.7 million, and retail POS payment solutions increased to $25.8 million from $12.0 million. Excluding AFF purchase-accounting effects, prior-year AFF segment income was $25.2 million, making the underlying comparison approximately flat.
- Credit and lease losses: Q2 provisions were $52.9 million for lease losses and $28.2 million for loan losses. At June 30, allowance for lease losses was $111.0 million and allowance for loan losses was $93.1 million.
- Balance sheet: Cash and equivalents were $104.6 million; pawn loans were $426.2 million; finance receivables, net, were $110.6 million; inventories were $267.1 million; and leased merchandise, net, was $143.1 million.
- Debt: Revolving facility borrowings were $376.0 million and senior unsecured notes were $1.04 billion, for total reported long-term debt of $1.41 billion. The Company reported a 2.7-to-1 consolidated total debt ratio and compliance with credit-facility covenants.
- Liquidity: Available liquidity consisted of $104.6 million of cash and $211.1 million of unused revolving-facility capacity. Working capital was $832.6 million and the current ratio was 3.7-to-1.
- Shareholder returns: Six-month dividends paid totaled $30.6 million and share repurchases totaled $101.8 million of cash outflow. The Company repurchased 1.153 million shares at an average cost of $91.48 per share.
Material changes versus the prior comparable period
- Growth was strongest in AFF’s transaction activity: Q2 gross transaction volume increased 24% to $256.0 million, while six-month volume increased 29% to $505.6 million.
- AFF leased merchandise before loss allowances increased 36% year over year, while the allowance for lease losses increased 61% to $111.0 million. The Q2 lease-loss provision rate rose to 34% of originations from 31% on an adjusted comparable basis.
- Finance receivables, net, declined 12% year over year to $110.6 million because the allowance for loan losses increased 26% to $93.1 million, despite higher originations.
- U.S. pawn loan receivables increased 7%, while U.S. same-store retail sales decreased 3% in Q2. U.S. pawn segment margin improved to 23% from 21%.
- Latin America revenue growth benefited from a stronger Mexican peso. Reported Q2 Latin America revenue increased 22%, but constant-currency growth was 9%; segment margin declined to 20% from 21%.
- Interest expense increased 30% in Q2 and 29% for the six-month period, primarily because of higher floating interest rates and higher average revolving debt balances.
- Operating cash flow declined 9% for the six months, while cash used for finance-receivable funding increased to $57.1 million from $23.5 million.
Guidance, outlook, risks and unusual items
- Management expected approximately 60 new Latin America de novo stores and four new U.S. stores during 2023. It also expected net deleveraging by year-end, although 2023 net interest expense was expected to increase because of higher floating rates.
- Management stated that operating cash flow and available revolving-facility capacity were expected to fund liquidity and capital needs over the next 12 months and longer term.
- In July 2023, the Board declared a $0.35 per share quarterly dividend and authorized a new $200.0 million stock-repurchase program. The prior program was completed in July 2023.
- The CFPB lawsuit against Company subsidiaries concerning alleged Military Lending Act violations remained stayed pending the U.S. Supreme Court’s review of the CFPB’s funding structure. No material liability was accrued, and the Company stated it could not estimate a probable loss or loss range.
- The Company had commitments to deliver 66,600 gold ounces from July 2023 through March 2025 at a weighted-average price of $2,013 per ounce. Management expected historical scrap-gold volumes to satisfy these commitments.
- Principal risks include regulatory developments, the CFPB litigation, consumer demand and credit performance, inflation and interest rates, labor costs, foreign currency movements, competition, acquisition execution, and covenant or liquidity constraints.
- Management reported effective disclosure controls as of June 30, 2023 and no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Reconcile reported earnings with adjusted results: adjusted diluted EPS was $1.22 in Q2 and $2.46 for the first six months, versus reported EPS of $0.99 and $2.01, respectively.
- Monitor AFF lease-loss allowances, delinquency rates, charge-offs and provisioning. Q2 lease delinquency was 20.7%, compared with 19.0% in the adjusted prior-year comparison.
- Assess leverage and interest-rate sensitivity: total long-term debt was $1.41 billion, revolving borrowings carried a weighted-average rate of 7.70%, and the reported debt ratio was 2.7-to-1.
- Evaluate whether pawn-loan growth and AFF originations can continue without disproportionate increases in loss provisions and funding requirements.
- Separate reported Latin America growth from currency effects and track Mexican peso, Guatemalan quetzal and Colombian peso movements.
- Follow the CFPB litigation, related regulatory developments and any potential impact on compliance costs, customer redress, penalties or operating practices.
- Confirm the sustainability of dividends, repurchases and planned store expansion against free cash flow, debt capacity and covenant restrictions.