First Cash Financial Services, Inc. — Q1 2013 Form 10-Q Summary
Business context and reporting period
The unaudited filing covers the three months ended March 31, 2013, compared with the three months ended March 31, 2012. The company operates pawn, consumer-loan and credit-services businesses in the United States and Mexico. Approximately 51% of revenue came from Mexico and 49% from the United States. Pawn operations generated approximately 92% of continuing-operations revenue. The company had 836 locations at quarter-end, up 15% year over year, including 22 locations added during the quarter.
Financial performance and key metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $160.8 million | $134.6 million | Up 19% |
| Net revenue | $92.1 million | $78.1 million | Up 18% |
| Income from continuing operations | $20.3 million | $17.5 million | Up 16% |
| Net income | $20.3 million | $17.5 million | Up 16% |
| Diluted EPS | $0.68 | $0.58 | Up $0.10 |
| Operating cash flow | $25.2 million | $29.1 million | Down 13% |
Revenue consisted primarily of merchandise sales of $105.0 million, pawn-loan fees of $43.2 million, and consumer-loan and credit-services fees of $12.5 million. Net income represented approximately 12.6% of revenue, compared with approximately 13.0% in the prior-year quarter. Income before taxes was $31.3 million, or approximately 19.5% of revenue, and the effective tax rate increased to 35.3% from 34.5%.
Merchandise gross margin declined to 37% from 38%. Retail merchandise margin was 41% in both periods, while scrap-jewelry margin fell to 20% from 28%, primarily because of higher gold acquisition costs. Store-level operating margin was 28%, compared with 29% in the prior-year quarter. Store operating expenses increased 20% to $43.5 million, while administrative expenses increased 7% to $13.1 million. Interest expense increased to $0.7 million from $0.1 million.
At March 31, 2013, cash and cash equivalents were $38.3 million. Pawn loans were $104.6 million, inventories were $64.8 million, and total assets were $505.7 million. Total liabilities were $110.8 million and stockholders' equity was $395.0 million. Working capital was $199.3 million and the current ratio was 6.9x.
Total debt comprised $52.0 million outstanding under the revolving credit facility and approximately $10.8 million of notes payable, excluding any accounting presentation differences. The $175.0 million unsecured facility matured in February 2015, bore interest at 2.25% at quarter-end, and had $123.0 million available. The company was in compliance with its financial covenants.
Cash used in investing activities was $3.0 million, including $4.7 million of capital expenditures and $1.5 million for acquisitions. Cash used in financing activities was $35.7 million, primarily reflecting $50.5 million of revolver repayments. The company also received $8.4 million from stock-option exercises and $7.2 million of related tax benefits. Ending cash declined by $11.9 million to $38.3 million.
Material changes versus the prior comparable period
- Constant-currency revenue increased 18%, while same-store revenue increased 1%; excluding wholesale scrap jewelry, same-store pawn revenue increased 7%.
- Pawn receivables increased 29% reported, or 26% on a constant-currency basis, to $104.6 million.
- Inventories increased 38% reported, or 35% on a constant-currency basis, to $64.8 million.
- Consumer-loan and credit-services revenue was essentially flat, and Texas payday-loan-related revenue declined 5%.
- Operating cash flow decreased despite higher net income, primarily because of changes in operating assets and liabilities.
- Interest expense rose substantially as borrowing levels increased during the comparable period, although the company repaid $50.5 million of revolver borrowings during Q1 2013.
- The company issued 532,000 shares upon option exercises and did not repurchase shares during the quarter. From April 1 through May 6, 2013, it repurchased 450,000 shares for $23.3 million.
- Mexico expansion drove most new-store activity: 21 pawn stores opened in Mexico and one U.S. store was acquired.
Guidance, outlook, risks, contingencies and unusual items
Management expected to open approximately 75 to 85 pawnshops during 2013, primarily in Mexico, excluding potential acquisitions. It expected quarterly capital expenditures at a similar rate or higher than the $4.7 million incurred in Q1. Management believed operating cash flow, cash balances and the unused credit facility would fund current operations and planned expansion.
The business is seasonal, with typically stronger service-fee growth in the third and fourth quarters and higher retail sales in the fourth quarter. Results for the quarter are not necessarily indicative of full-year performance.
- The Texas credit-services program guaranteed independent-lender extensions of credit. Maximum exposure under outstanding letters of credit was $12.8 million at March 31, 2013; the estimated fair-value liability was immaterial, while the related net estimated exposure included in accrued liabilities was $0.5 million.
- Forward sales commitments through June 2013 covered 18,000 ounces of silver at $27 per ounce and 3,000 ounces of gold at $1,714 per ounce. These commitments were not recorded on the balance sheet.
- Principal risks include tighter regulation of pawn, payday-loan and credit-services activities; consumer credit losses; changes in gold prices; foreign-exchange movements; competition; inventory and collateral valuation; acquisition integration; interest rates; access to credit; and the ability to execute store expansion.
- Foreign-currency translation generated $6.2 million of after-tax comprehensive income in Q1 2013. The Mexican peso strengthened against the U.S. dollar, increasing the translated value of Mexican revenue, expenses and net assets.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No material changes to previously reported legal proceedings were disclosed.
Most important facts for investors to verify
- Reconcile reported revenue growth with underlying same-store performance and the 15% increase in store count.
- Assess whether the lower scrap-jewelry margin and higher inventory balances could persist if gold prices or resale values weaken.
- Review the sustainability of cash generation given the $50.5 million debt repayment, planned 75-to-85-store expansion and expected capital expenditures.
- Monitor the $175.0 million unsecured facility, its February 2015 maturity, covenant compliance and refinancing risk.
- Evaluate regulatory developments affecting Texas credit services, consumer lending and pawn operations in the United States and Mexico.
- Track consumer-loan loss reserves, CSO guarantee exposure and delinquency trends.
- Verify the effect of subsequent share repurchases after March 31, 2013, including the $23.3 million repurchase reported through May 6.