FCFS

Business Context and Reporting Period

Company: First Cash Financial Services, Inc. (First Cash Holdings, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: The Company operates pawnshops and short-term consumer loan stores in the U.S. and Mexico. As of March 31, 2009, it operated 525 locations (94 in Mexico, 431 in the U.S.). Pawn operations generated 81% of revenue from continuing operations, while short-term loans generated 19%. The Company recently acquired 16 pawnshops in Mexico (Presta Max) in December 2008.

Key Financial Metrics

Note: Total Debt calculated as Current portion of notes payable ($4,580) + Notes payable net of current ($8,232) + Revolving credit facility ($45,000).

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 7% year-over-year to $82.7 million. This was driven by a 22% increase in foreign revenue (Mexico) and a 17% increase in pawn retail merchandise sales. Domestic short-term loan fees declined 10% due to increased competition and slowing demand.
• Profitability: Net income increased 68% to $11.2 million, primarily due to a significant turnaround in discontinued operations. Income from continuing operations decreased slightly by 3% to $9.6 million.
• Discontinued Operations: The Auto Master automotive unit generated $2.3 million in after-tax income (vs. a loss of $3.2 million in Q1 2008) due to favorable cash collections on receivables. Conversely, the Company recorded a $0.66 million charge related to the closure of underperforming short-term loan stores in Michigan and Texas.
• Debt Reduction: The Company utilized operating cash flows to reduce its revolving credit facility balance by $23.5 million, bringing the outstanding balance to $45 million (50% utilization of the $90 million facility).
• Currency Impact: The Mexican peso weakened from 10.8 to 14.4 against the U.S. dollar. While this reduced translated revenue, it also lowered translated expenses, resulting in a minimal net impact on earnings.

Guidance, Outlook, and Risks

• Expansion Plans: Management anticipates opening approximately 55 to 60 new stores in 2009, primarily pawn stores in Mexico. No new U.S. short-term loan stores are planned for the remainder of the year.
• Discontinued Operations Outlook: The Company expects a total charge of $0.04 to $0.05 per share in 2009 related to the closure of Michigan and Texas short-term loan stores. Future collections from Auto Master receivables are expected to be positive but at a declining rate.
• Liquidity: The Company maintains a $90 million credit facility maturing in April 2010. It currently has $45 million available and is in compliance with all covenants.
• Risks:
  • Regulatory: Ongoing legislative efforts in the U.S. and Mexico to restrict or prohibit pawn and short-term loan activities.
  • Public Health: The H1N1 influenza outbreak in Mexico and the U.S. could restrict store hours or reduce customer traffic.
  • Market: Exposure to fluctuations in gold prices and foreign currency exchange rates.

Investor Verification Checklist

• Discontinued Operations Sustainability: Verify the sustainability of the $2.3 million gain from Auto Master receivables, as future collections are expected to decline.
• Store Closure Charges: Monitor the execution of the $0.04–$0.05 per share charge related to Michigan and Texas store closures in upcoming quarters.
• Credit Facility Renewal: Assess the terms and availability of the $90 million credit facility renewal due in April 2010.
• Regulatory Environment: Track pending legislation in key operating states (Texas, Michigan) and Mexico regarding payday lending and pawn regulations.
• Gold Price Sensitivity: Evaluate the impact of gold price volatility on the 48% of inventory comprised of gold jewelry and scrap jewelry margins.