First Cash Financial Services, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015; filed July 22, 2015. The filing identifies the registrant as First Cash Financial Services, Inc. The interim financial statements are unaudited.
Business context
The company operates retail pawn stores and consumer-lending locations in the United States and Mexico. Pawn operations generated approximately 96% of continuing-operations revenue for the first six months of 2015. At June 30, 2015, the company operated 1,046 locations in 14 U.S. states and 29 Mexican states, a 13% increase from the prior-year period.
- Year to date, the company opened 24 pawn stores in Mexico, acquired 29 U.S. pawn stores, and closed or consolidated 12 locations.
- Management expects approximately 80 to 90 net store additions during fiscal 2015 and intends to close seven additional U.S. consumer-loan locations during the second half of 2015.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $167.6 million | $165.3 million | $343.6 million | $335.1 million |
| Net revenue | $94.0 million | $93.9 million | $192.8 million | $190.4 million |
| Income from continuing operations | $13.3 million | $16.0 million | $30.1 million | $39.0 million |
| Net income | $13.3 million | $16.0 million | $30.1 million | $38.7 million |
| Diluted earnings per share | $0.47 | $0.55 | $1.06 | $1.32 |
| Operating cash flow | Not separately provided | Not separately provided | $41.9 million | $48.5 million |
| EBITDA from continuing operations | $27.6 million | $31.4 million | $60.2 million | $66.0 million |
| EBITDA margin | 16% | 19% | 18% | 20% |
Q2 revenue increased 1% as reported, or 11% on a constant-currency basis. Six-month revenue increased 3% as reported, or 10% on a constant-currency basis. Retail merchandise sales increased 9% in Q2 and 10% year to date, while pawn-fee revenue was approximately flat in Q2 and increased 1% year to date on a reported basis.
Profitability declined materially. Q2 net income fell 17%, and six-month net income fell 22%. The company attributed the declines primarily to Mexican peso depreciation, lower wholesale scrap-jewelry activity, reduced consumer-lending revenue, higher interest expense, and the absence of a $3.7 million nonrecurring tax benefit recognized in the first half of 2014.
Margins, balance sheet, debt and liquidity
- Retail merchandise gross margin was 38% in both Q2 and the first six months of 2015, down from 39% in the comparable 2014 periods.
- Store-level operating margin was 23% in Q2 versus 25% in Q2 2014, and 24% for the first six months versus 26% in the prior-year period.
- At June 30, 2015, cash and cash equivalents were $77.4 million, working capital was $279.2 million, and total equity was $452.7 million.
- Pawn loans were $125.0 million, inventories were $88.1 million, and total assets were $749.6 million.
- Total debt consisted of $200.0 million of 6.75% senior unsecured notes due April 2021 and $56.0 million drawn on the U.S. revolving credit facility. The company also had a $10.0 million undrawn Mexico facility.
- Available borrowing capacity was $104.0 million under the U.S. facility and $10.0 million under the Mexico facility, or $114.0 million in total. Management stated that all applicable debt covenants were satisfied.
- Six-month investing cash outflows were $44.2 million, including $31.6 million for acquisitions and $8.6 million for property and equipment. Financing activities generated $15.1 million, including net revolving-facility borrowings of $33.6 million and $23.0 million of share repurchases.
- Management believes cash on hand, available credit, operating cash flow and working capital will fund operations and planned expansion for at least the next 12 months.
Material changes versus the prior comparable period
- Consumer-loan and credit-services fees declined 20% in Q2 and 21% year to date, reflecting competition, regulatory restrictions and the closure of seven Texas consumer-finance stores.
- Wholesale scrap-jewelry revenue declined 37% in Q2 and 34% year to date. Gold volumes sold declined, and the average selling price also decreased.
- Mexican peso depreciation reduced reported Mexican revenue and net assets; the peso declined approximately 18% on average in Q2 and 15% on average year to date against the U.S. dollar.
- Interest expense increased to $4.1 million in Q2 and $8.1 million year to date, primarily because of the 2014 senior-notes issuance and higher revolving debt.
- Goodwill increased to $300.4 million from $276.9 million at December 31, 2014, primarily reflecting the 2015 U.S. acquisitions.
- The company acquired 29 U.S. pawn stores for an aggregate purchase price of $31.8 million, including $25.4 million of preliminary goodwill.
- The company repurchased approximately 463,000 shares for $23.0 million, leaving 1.54 million shares authorized for future repurchase.
Guidance, outlook, risks and unusual items
- Management expects a 2015 effective tax rate of approximately 31% to 32% and slightly increased annualized capital expenditures in the remainder of the year.
- Management expects continued pawn-revenue growth from acquisitions, new-store openings and maturation of existing stores, but results are subject to seasonal fluctuations.
- The CFPB had proposed rules affecting payday, vehicle-title and other high-cost lending products. The proposals were not final at the filing date and could affect the company’s consumer-loan, credit-services and vehicle-title products; management did not expect them to affect pawn loans.
- Key risks include Mexican peso and other foreign-currency movements, gold prices, consumer demand and repayment behavior, pawn forfeiture rates, inventory values, competition, acquisition integration, debt availability and interest rates, regulatory changes, litigation, cybersecurity and operational disruptions.
- Comprehensive income included a $13.7 million pretax currency-translation loss for the first six months, partially offset by tax benefits, reducing accumulated other comprehensive loss to $35.0 million.
- The filing reported no material change in previously disclosed legal proceedings and no material change in market-risk exposure since December 31, 2014.
Facts investors should verify
- Whether the planned 80–90 store additions and 2015 acquisitions generate the expected revenue and store-level returns.
- The sustainability of reported growth after removing acquisition effects and Mexican currency translation.
- Trends in U.S. same-store pawn receivables, inventory aging and retail merchandise margins.
- Potential effects of CFPB, state, local and Mexican regulatory developments on consumer lending and pawn operations.
- Debt covenant headroom, floating-rate exposure and the company’s ability to fund acquisitions, capital expenditures and share repurchases.
- Exposure to further Mexican peso depreciation and changes in gold prices.