First Cash Financial Services, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011; filed October 24, 2011. The unaudited results cover U.S. and Mexican pawn, consumer loan, and credit services operations. Pawn operations generated approximately 89% of continuing-operations revenue in the first nine months. The company operated 667 locations at quarter-end, including 513 large-format pawn stores, 44 small-format pawn stores, and 110 consumer loan locations.
Financial Performance and Position
| Metric | Three months ended Sept. 30, 2011 | Three months ended Sept. 30, 2010 | Nine months ended Sept. 30, 2011 | Nine months ended Sept. 30, 2010 |
|---|---|---|---|---|
| Total revenue | $133.3 million | $106.1 million | $374.8 million | $295.8 million |
| Net revenue | $76.0 million | $62.7 million | $215.3 million | $173.6 million |
| Income from continuing operations | $18.3 million | $13.2 million | $49.4 million | $33.6 million |
| Net income | $18.4 million | $14.2 million | $56.3 million | $38.1 million |
| Diluted EPS | $0.59 | $0.46 | $1.78 | $1.23 |
| Cash flow from operating activities | Not separately provided | Not separately provided | $54.6 million | $49.8 million |
- Quarterly revenue increased 26%; year-to-date revenue increased 27%. Continuing-operations income increased 38% for the quarter and 47% year to date.
- Continuing-operations income margins were approximately 13.7% for the quarter and 13.2% year to date, compared with approximately 12.5% and 11.4%, respectively, in the prior comparable periods.
- Gross merchandise margins declined to 39% from 41% for the quarter and to 38% from 40% year to date. Retail merchandise margins were pressured by a larger mix of lower-margin hard goods in Mexico.
- Store-level operating margin improved to 30% from 29% for the quarter and to 30% from 28% year to date. Store operating expenses rose with expansion but declined as a percentage of revenue.
- Merchandise sales increased 33% for the quarter and 31% year to date. Pawn loan fees increased 20% and 26%, respectively. Consumer loan and credit services fees were flat for the quarter and increased 9% year to date.
- Cash and cash equivalents were $48.4 million at September 30, 2011, compared with $67.2 million at December 31, 2010 and $32.7 million at September 30, 2010. Working capital was $161.5 million and the current ratio was 5.15x.
- Pawn loans totaled $78.0 million, up 8% year over year on a reported basis, while inventories totaled $54.9 million, up 25%. Management reported 98% of inventory cost had been held for one year or less.
- Total debt was approximately $1.5 million, consisting of notes payable from a prior acquisition. The company had no borrowings under its $25.0 million unsecured credit facility, which could be increased to $50.0 million subject to lender approval.
- Investing cash outflows were $22.3 million, including $21.1 million of property and equipment purchases, $17.0 million of pawn-loan funding, and $4.0 million for a six-store acquisition, partially offset by $19.9 million from the sale of Illinois consumer loan stores.
- Financing cash outflows were $51.1 million, primarily reflecting $55.3 million used to repurchase approximately 1.36 million shares at an average price of $40.68 per share.
Material Changes Versus Prior Comparable Period
- The company added 69 locations year to date, including 63 new pawn stores and six acquired U.S. pawn stores. The store count increased 14% over the preceding twelve months.
- Same-store revenue increased 13% in the United States and 20% in Mexico during the quarter; year-to-date increases were 12% and 21%, respectively.
- Scrap jewelry sales increased 44% in the quarter and 28% year to date, driven primarily by higher gold prices. Year-to-date scrap gold volume declined 4%, while the average selling price increased 26%.
- The company sold all ten Illinois consumer loan stores in March 2011, recognizing a $6.0 million after-tax gain. Discontinued operations contributed $6.9 million in after-tax income year to date, compared with $4.5 million in the prior-year period.
- Foreign currency translation produced a $8.2 million net reduction in stockholders’ equity during the first nine months, and accumulated foreign currency translation loss reached $11.2 million at September 30, 2011.
- Consumer loan and credit services loss provision declined to 23% of related fee revenue year to date from 27%; the 2011 ratio benefited partly from a $576,000 gain from selling fully written-off bad-debt portfolios.
Guidance, Outlook, Risks, and Unusual Items
- Management expected operating cash flow and available cash and credit capacity to fund current operations and planned 2011 expansion. Capital expenditures were expected to continue at a similar quarterly rate for the remainder of 2011.
- In October 2011, the company signed an agreement to acquire five Indianapolis pawn stores for approximately $4.0 million, expected to close in late October or early November.
- The unsecured credit facility expires in April 2012 and contains financial covenants. Management reported compliance as of October 20, 2011 and believed the full available amount could be borrowed under the most restrictive covenants.
- The company had maximum exposure of $15.1 million under letters of credit supporting Texas credit services customers. The related estimated liability was $877,000 and was included in accrued liabilities.
- The company had forward commitments through January 2012 for 15,000 ounces of gold and through December 2011 for 20,000 ounces of silver. These commitments were treated as normal sales commitments and were not recorded on the balance sheet.
- U.S. Customs and Border Protection assessed approximately $613,000 of duties and accrued interest on certain 2008 and 2009 cross-border scrap-jewelry transactions. The company is appealing and cannot assess the likelihood of success or additional assessments.
- Regulatory risks include potential restrictions on pawn loans, consumer loans, credit services, fees, licensing, and cross-border merchandise transfers in the United States and Mexico. Texas credit services legislation becomes effective January 1, 2012; management did not expect a material impact, but future regulatory effects remain uncertain.
- Other principal risks include gold-price volatility, Mexican peso fluctuations, consumer credit losses, competition, store expansion and acquisition execution, inventory turnover, economic conditions, interest rates, tax examinations, and renewal of the credit facility.
Investor Verification Priorities
- Verify the sustainability of revenue and earnings growth after separating same-store growth, new-store contributions, currency effects, gold-price effects, and the Illinois disposition gain.
- Reconcile reported net income with continuing-operations income and discontinued-operations gains, particularly the $6.0 million after-tax Illinois sale gain.
- Monitor merchandise margins, inventory growth and turnover, pawn-loan growth, and the effect of shifting Mexican inventory toward hard goods.
- Assess consumer credit exposure, including the $15.1 million CSO letter-of-credit guarantee exposure and adequacy of the related reserves.
- Review liquidity after share repurchases, expansion spending, the planned Indianapolis acquisition, and the April 2012 credit-facility expiration.
- Follow the Customs and Border Protection assessment and appeal, as well as evolving U.S. and Mexican regulation of pawn and consumer-credit products.