FirstCash, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2020; filed July 27, 2020. The company operated 2,745 pawn stores across the U.S. and Latin America and reported two segments: U.S. operations and Latin America operations. Pawn operations represented more than 99% of six-month revenue. Effective June 30, 2020, the company ceased all unsecured consumer lending and credit-services operations.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Change |
|---|
| Total revenue | $412.7 million | $446.0 million | Down 7% |
| Net revenue | $223.1 million | $244.3 million | Down 9% |
| Income before taxes | $37.2 million | $45.3 million | Down 18% |
| Net income | $25.9 million | $33.0 million | Down 22% |
| Diluted EPS | $0.62 | $0.76 | Down 18% |
| Net margin | 6.3% | 7.4% | Down approximately 110 bps |
| Metric | Six months 2020 | Six months 2019 | Change |
|---|
| Total revenue | $879.2 million | $913.6 million | Down 4% |
| Net revenue | $482.4 million | $500.1 million | Down 4% |
| Income before taxes | $82.9 million | $104.1 million | Down 20% |
| Net income | $58.8 million | $75.7 million | Down 22% |
| Diluted EPS | $1.41 | $1.74 | Down 19% |
| Net margin | 6.7% | 8.3% | Down approximately 160 bps |
- Revenue mix: Q2 retail merchandise sales increased 3% to $287.4 million, but pawn loan fees declined 26% to $102.0 million. Wholesale scrap jewelry sales declined 9%, while consumer-loan fees fell 89% to $0.6 million.
- Margins: U.S. retail gross margin improved to 42% from 38% in Q2, supported by strong demand and lower aged inventory. Latin America segment pre-tax margin declined to 17% from 22%; the U.S. segment margin remained approximately 18%.
- Cash flow: Six-month operating cash flow was $143.3 million, compared with $106.0 million in 2019. Investing activities provided $130.4 million, primarily because pawn and consumer loan balances declined by $178.3 million. Financing activities used $244.8 million, including $138.5 million of net debt repayments, $80.3 million of share repurchases and $22.5 million of dividends.
- Liquidity: June 30 cash and equivalents were $71.0 million. The company reported $322.9 million of available and unused revolving credit capacity, $261.0 million of customer loans and receivables, $180.0 million of inventories and $325.5 million of working capital.
- Debt: Debt carrying value was $496.9 million, consisting of $200.0 million outstanding under the revolving facility and $296.9 million of senior unsecured notes. Total outstanding principal was $500.0 million. The company reported a 1.5-to-1 net debt ratio and compliance with applicable credit-facility covenants.
- Balance sheet: Total assets were $2.18 billion and stockholders’ equity was $1.23 billion at June 30, 2020. Pawn loans declined to $230.4 million from $369.5 million at December 31, 2019, while cash increased from $46.5 million to $71.0 million.
Material changes versus the prior comparable period
- COVID-19 materially reduced pawn loan originations and balances as customers benefited from stimulus payments, enhanced unemployment benefits, forbearance programs and remittances. Consolidated pawn loans were down 39% from June 30, 2019.
- U.S. retail sales benefited from stores remaining open as essential businesses and from demand for electronics, tools, sporting goods and jewelry. U.S. same-store retail sales increased 24% in Q2.
- Latin American retail sales were affected by store closures and a prohibition on retail transactions in Mexico during the final three weeks of May. Reported Latin America revenue declined 27% in Q2, or 12% on a constant-currency basis.
- The Mexican peso weakened 23% against the U.S. dollar on an average-rate basis in Q2 and 13% for the six-month period, contributing to lower reported Latin American results and a $2.1 million six-month foreign-exchange loss versus a $0.7 million gain in 2019.
- The company recorded $5.7 million of six-month write-offs and impairments, including $3.8 million of merger-related lease intangibles and $1.9 million of other assets.
- The company acquired 40 pawn stores in Mexico for aggregate consideration of $6.7 million and opened 51 stores during the first six months.
- The company repurchased 981,000 shares for $80.3 million during the first quarter, then temporarily suspended its repurchase program in response to COVID-19 uncertainty. Treasury stock increased to $585.9 million at June 30.
Guidance, outlook, risks and unusual items
- Management originally expected to open approximately 90 or more de novo pawn stores in Latin America during 2020. The company was on pace after opening 51 stores in the first six months, but stated that COVID-19 made the ultimate number of openings and related capital expenditures impractical to estimate.
- The company expected to continue quarterly dividends, subject to board approval, liquidity, results, debt covenants and COVID-19 effects. A $0.27-per-share third-quarter dividend was declared in July 2020. Share repurchases were expected to remain suspended through the end of 2020.
- Principal risks include renewed store closures or loss of essential-business status, changes in consumer behavior, weaker retail demand or loan demand, prolonged economic deterioration, currency volatility, gold-price changes, regulatory developments, financing-market disruption and potential covenant pressure from lower earnings.
- As of June 30, the company had commitments to deliver 31,500 gold ounces from July 2020 through July 2021 at a weighted-average price of $1,611 per ounce. It subsequently committed to an additional 5,000 ounces at $1,795 per ounce. Management expected historical scrap volumes to support these commitments.
- Management stated that disclosure controls and procedures were effective as of June 30, 2020 and reported no material changes in internal control over financial reporting.
Investor verification points
- Verify the pace and profitability of pawn-loan growth or contraction as stimulus programs, unemployment benefits and consumer liquidity change.
- Assess whether reported retail strength, particularly in the U.S., is sustainable after stimulus effects and whether Latin American operations normalize after government restrictions are lifted.
- Reconcile liquidity and covenant headroom under scenarios involving renewed closures, lower EBITDA or further currency depreciation.
- Monitor the 2024 maturity dates for the revolving facility and senior unsecured notes, including refinancing requirements and interest-rate exposure.
- Evaluate the effects of the consumer-lending exit on future revenue, cash flow, store footprint and regulatory exposure.
- Track Mexican peso and Colombian peso movements, gold prices, scrap-gold commitments and the potential recurrence of impairment or foreign-exchange charges.
