First Cash Financial Services, Inc. — Q1 2014 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2014, compared with the same period in 2013. The company operates retail-based pawn stores and consumer finance businesses in the United States and Mexico. Pawn operations generated approximately 94% of continuing-operations revenue. At quarter-end, the company operated 915 stores across 12 U.S. states and 26 Mexican states, up 9% from the prior-year period.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $169.8 million | $159.9 million | +6%; +8% constant currency |
| Net revenue | $96.5 million | $91.3 million | +6% |
| Income from continuing operations | $23.0 million | $20.2 million | +14% |
| Net income | $22.7 million | $20.3 million | +12% |
| Diluted EPS | $0.77 | $0.68 | +13% |
| Operating cash flow | $25.6 million | $25.2 million | +2% |
| Cash and equivalents at March 31 | $94.9 million | $38.3 million | +148% |
Revenue mix included retail merchandise sales of $98.7 million, pawn loan fees of $47.6 million, consumer loan and credit services fees of $9.8 million, and wholesale scrap jewelry revenue of $13.6 million. Net income margin was approximately 13.4% of revenue, compared with approximately 12.7% in the prior-year quarter. Store-level operating margin declined to 26% from 28%.
Retail merchandise gross margin declined to 39% from 41%, while wholesale scrap jewelry margin declined to 19% from 20%. Consumer loan and credit services loss provisions were $1.7 million, or 18% of related fee revenue, unchanged as a percentage of revenue.
Liquidity, debt and cash flow
- Working capital was $266.0 million and the current ratio was 7.56:1.
- Operating cash flow was $25.6 million; investing cash flow was a use of $4.8 million, including $4.9 million for acquisitions and $5.7 million of net loan receivables funding.
- On March 24, 2014, the company issued $200.0 million of 6.75% senior unsecured notes due April 1, 2021. Net proceeds were approximately $195.0 million.
- Proceeds repaid the revolving credit facility and acquisition-related notes. At March 31, 2014, no amount was outstanding under the $160.0 million 2014 Credit Facility, leaving the full facility available.
- Total debt at quarter-end was $200.0 million. The trailing-twelve-month leverage ratio was 1.4:1, compared with 0.4:1 a year earlier.
Material changes versus the prior comparable period
- Retail merchandise sales increased 21%, driven by store additions, maturation of existing stores and a higher mix of general merchandise.
- Pawn loan fees increased 10%; pawn loans outstanding increased 9%, or 12% on a constant-currency basis. Same-store pawn receivables declined 4% on a constant-currency basis.
- Consumer loan and credit services fees declined 17%, partly due to increased Texas competition and store closures.
- Wholesale scrap jewelry revenue declined 41%, reflecting a 28% decline in liquidated volume and a 21% decrease in the average gold price.
- Store operating expenses increased 13%, primarily because of a 10% increase in weighted-average store count. Administrative expenses increased 2%.
- Interest expense increased to $1.4 million from $0.7 million due to higher borrowing levels and the new senior notes.
- The effective tax rate was 20.9%, compared with 35.3% in the prior-year quarter. Results included a $3.7 million nonrecurring tax benefit related to the termination of the company’s prior election to include foreign subsidiaries in its U.S. federal tax return. Excluding that benefit, the company reported a 33.5% tax rate.
- The Mexican peso weakened approximately 5% on average against the U.S. dollar, reducing reported Mexican revenue and earnings in U.S. dollars. Comprehensive income also reflected currency translation losses.
Guidance, outlook, risks and unusual items
- Management expected an effective tax rate of approximately 32% to 33% going forward.
- The company planned approximately 75 to 85 new stores during 2014, primarily large-format pawn stores in Mexico, and expected capital expenditures to continue at a similar annualized rate.
- Management believed cash on hand, operating cash flow and available credit were sufficient to fund operations and planned expansion for at least the next 12 months.
- The 2014 Credit Facility requires compliance with financial covenants, including a leverage ratio no greater than 2.5 times Consolidated EBITDA. Management stated that the company was in compliance and could borrow the full available amount under the most restrictive covenant.
- Regulatory risk remains significant. The Consumer Financial Protection Bureau was developing potential payday-lending rules, and new local ordinances in Bryan and Garland, Texas, were expected to restrict credit services products later in 2014. The company could not estimate their financial impact.
- Key market exposures include gold prices, Mexican peso exchange rates, interest rates, consumer demand, pawn forfeiture rates, credit losses, competition, acquisition and store-opening execution, cybersecurity, litigation and changing U.S. and Mexican regulation.
- The filing reported no material changes in previously disclosed legal proceedings and no material changes in market-risk exposure since December 31, 2013.
Important facts for investors to verify
- Whether the $3.7 million tax benefit is excluded when evaluating sustainable earnings and the expected 32%–33% tax rate.
- The effect of lower gold prices, reduced scrap volumes and the shift toward lower-margin general merchandise on future gross margins.
- Trends in same-store pawn receivables, consumer loan revenue and credit losses, particularly in Texas.
- Compliance with the 2014 Credit Facility covenants and the company’s ability to service the $200 million of 6.75% senior notes.
- The actual impact of CFPB activity and Texas local ordinances on credit services operations.
- Whether management achieves the planned 75–85 store additions without weakening returns, liquidity or leverage.
- The filing’s reported 915-store count, cash balance, available revolver capacity and cash associated with indefinitely reinvested foreign earnings.