FirstCash, Inc. — Form 10-Q Summary
Business context and reporting period
Filed July 29, 2019, for the quarter and six months ended June 30, 2019. FirstCash operated 2,646 stores across the U.S. and Latin America, including 1,054 U.S. locations and 1,592 Latin American locations. Pawn operations generated approximately 98% of year-to-date revenue. The company’s principal activities are pawn lending, retail merchandise sales, wholesale scrap jewelry sales, and a declining U.S. consumer-lending business.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $446.0 million | $420.0 million | $913.6 million | $869.8 million |
| Net revenue | $244.3 million | $228.4 million | $500.1 million | $467.5 million |
| Income before taxes | $45.3 million | $42.3 million | $104.1 million | $98.1 million |
| Net income | $33.0 million | $30.2 million | $75.7 million | $71.8 million |
| Diluted EPS | $0.76 | $0.67 | $1.74 | $1.57 |
| Operating cash flow | Not separately provided | Not separately provided | $106.0 million | $120.0 million |
Year-to-date revenue increased 5%, net income increased 5%, and diluted EPS increased 11%, helped by Latin American expansion, higher pawn fees, improved U.S. retail margins, and a lower diluted share count. Q2 net income increased 10% and diluted EPS increased 13%.
Calculated Q2 net margin was approximately 7.4%, compared with 7.2% in the prior-year quarter; year-to-date net margin was approximately 8.3%, compared with 8.3%. The company reported segment pre-tax operating margins of 18% for U.S. operations and 22% for Latin America in Q2, versus 18% and 23%, respectively, in the prior-year quarter.
Revenue and operating developments
- Q2 retail merchandise sales increased 9% to $278.8 million; pawn loan fees increased 11% to $136.9 million.
- Q2 wholesale scrap jewelry sales declined 9% to $25.0 million, while consumer loan and credit-services fees declined 61% to $5.4 million.
- U.S. Q2 revenue declined 3% to $280.2 million, but U.S. segment pre-tax operating income declined only 4% to $50.9 million. U.S. retail gross margin improved to 38% from 37%.
- Latin America Q2 revenue increased 27% to $165.8 million, and segment pre-tax operating income increased 23% to $36.2 million. Constant-currency revenue increased 26%.
- During the first six months, the company opened 59 Latin American pawn stores and acquired 158 Mexican and 20 U.S. pawn stores. It ended the period with 2,646 locations.
Cash flow, liquidity, debt and capital allocation
- Six-month operating cash flow was $106.0 million, down from $120.0 million, primarily because the prior-year period included a $21.4 million income-tax refund.
- Investing cash outflow was $73.5 million, including $38.2 million for acquisitions, $22.9 million for furniture, fixtures, equipment and improvements, and $31.9 million for discretionary store real-estate purchases.
- Cash and cash equivalents were $67.0 million at June 30, 2019. Working capital was $573.2 million, and management stated that available liquidity and operating cash flow should fund anticipated needs for at least the next twelve months.
- Total debt was approximately $636.2 million carrying value, consisting of $340.0 million under the revolving facility and $296.2 million of senior notes. Including outstanding principal, total debt was $640.0 million.
- The $425.0 million revolving facility matures in 2023; $81.3 million remained available after $340.0 million of borrowings and $3.7 million of letters of credit. The weighted-average facility rate was 4.88%.
- The $300.0 million senior unsecured notes bear interest at 5.375% and mature in 2024. The company was in compliance with debt covenants, and its reported Net Debt Ratio was 1.9-to-1.
- The company repurchased 671,000 shares for $59.4 million during the first six months and paid $21.7 million in dividends. A $0.25-per-share third-quarter dividend was declared in July 2019.
Material changes, outlook and unusual items
- The company adopted ASC 842 lease accounting prospectively on January 1, 2019. This added a $293.4 million operating lease right-of-use asset and $268.9 million of lease liabilities at June 30, 2019, with no material income-statement or cash-flow effect. Comparisons of liquidity and leverage metrics are affected.
- Ohio’s Fairness in Lending Act led the company to discontinue unsecured consumer lending and credit services at all 119 Ohio locations on April 26, 2019. It closed 52 Ohio locations, while 67 continue as full-service pawnshops. The company also eliminated these products at 78 non-Ohio pawn locations and expects further contraction of consumer lending.
- Ohio wind-down and related exit costs were approximately $2.0 million after tax, or $2.5 million before tax. Q2 adjusted net income was $35.3 million, or $0.82 adjusted diluted EPS, versus reported net income of $33.0 million and diluted EPS of $0.76.
- Management expects to add approximately 80 to 85 full-service pawn locations in Latin America during 2019, including targeted openings in Mexico, Guatemala and Colombia. Excluding discretionary real-estate purchases, 2019 furniture, fixtures, equipment and improvement expenditures are expected to total approximately $35.0 million.
- Management identified regulatory changes, foreign-currency movements, interest rates, gold prices, seasonality, integration of acquisitions and competition in consumer lending as key risks. The company had commitments to deliver 42,000 gold ounces from July 2019 through May 2020 at a weighted-average price of $1,329 per ounce.
- Results are seasonal: pawn service fees generally increase in the third and fourth quarters, while retail sales are typically strongest in the fourth quarter.
Investor verification priorities
- Verify the sustainability of Latin American growth, including same-store performance, acquisition integration, operating costs and currency effects.
- Assess the effect of the Ohio exit and broader consumer-lending contraction on revenue, credit losses, store economics and future restructuring costs.
- Reconcile reported debt, lease liabilities, covenant calculations and the 1.9-to-1 Net Debt Ratio, recognizing that lease adoption affects comparability.
- Monitor cash conversion and capital allocation as acquisitions, store expansion, discretionary real-estate purchases, dividends and share repurchases compete for liquidity.
- Evaluate exposure to gold prices, foreign exchange, interest rates, regulatory changes and the company’s gold-delivery commitments.
- Review non-GAAP adjusted earnings and constant-currency results alongside GAAP measures, particularly the exclusions for acquisition costs, lease-related foreign-exchange gains and Ohio wind-down costs.