Business Context and Reporting Period
Company: First Cash Financial Services, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: The Company operates pawn shops and short-term loan/credit services stores in the U.S. and Mexico. As of March 31, 2010, it operated 559 locations (216 in the U.S., 343 in Mexico). Pawn operations generated 86% of revenue from continuing operations.
Key Financial Metrics
| Metric (in thousands) | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Revenue | $97,213 | $80,422 |
| Net Revenue | $57,553 | $49,622 |
| Net Income | $12,082 | $11,243 |
| Income from Continuing Ops | $11,044 | $9,207 |
| Diluted EPS | $0.39 | $0.38 |
| Operating Cash Flow | $24,882 | $21,780 |
| Cash and Equivalents | $47,323 | $20,775 |
| Total Debt (Notes Payable) | $8,281 | $12,812 |
| Working Capital | $116,586 | $84,762 |
Margins: Gross profit margin on pawn merchandise sales was 38% (down from 42% in Q1 2009). Store-level operating margin was 28% (down from 29%).
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 21% year-over-year, driven by a 21% increase in pawn retail sales and a 30% increase in pawn service fees. Foreign revenue (Mexico) grew 28%, aided by store maturation and currency translation effects.
- Profitability: Net income rose 7.5% to $12.1 million. Income from continuing operations increased 20% to $11.0 million.
- Balance Sheet: Cash and cash equivalents increased significantly by $20.5 million to $47.3 million. Total debt decreased as the Company paid down borrowings and had no outstanding balance on its revolving credit facility at quarter-end.
- Discontinued Operations: The Company recorded a net loss of $111,000 from West Coast and other short-term loan store closures, offset by a net income of $1.15 million from the discontinued Auto Master operation (collections of receivables).
Guidance, Outlook, and Risks
- Expansion: The Company opened 14 new stores in Q1 2010, all in Mexico. Management expects to fund continued expansion through operating cash flows.
- Credit Facility: The previous credit facility matured on April 15, 2010. On April 30, 2010, the Company entered a new unsecured credit agreement with $25 million available (expandable to $50 million) expiring in April 2012.
- Regulatory Risks:
- Maryland: New legislation adopted in April 2010 restricts credit services products, effective October 1, 2010. Management expects this to eliminate CSO revenue in Maryland but does not anticipate a material impact on consolidated results for fiscal 2010.
- Customs: U.S. Customs and Border Protection assessed duties of approximately $170,000 plus interest on cross-border jewelry transfers. The Company intends to appeal.
- General: Ongoing legislative efforts in the U.S. and Mexico to restrict pawn and short-term lending pose a risk to future operations.
- Market Risks: Exposure to fluctuations in gold prices, foreign currency exchange rates (Mexican Peso), and interest rates.
Investor Verification Checklist
- Discontinued Operations Sustainability: Verify the remaining balance of Auto Master receivables ($7.96 million gross) and the likelihood of future collection gains, as management expects these to decline in 2010.
- Regulatory Impact in Maryland: Monitor the implementation of the new Maryland legislation effective October 1, 2010, and its specific impact on the CSO program revenue.
- Customs Appeal Outcome: Track the status of the appeal regarding the $170,000 customs duty assessment and potential for additional assessments.
- Margin Compression: Analyze the trend in gross margins for pawn merchandise (38% vs 42% prior year) and scrap jewelry (33% vs 41% prior year) to assess pricing power and acquisition costs.
- Currency Sensitivity: Review the impact of the strengthening Mexican Peso on future translated revenue and expenses, noting the Company's use of constant currency metrics for internal analysis.