Business Context and Reporting Period
First Cash Financial Services, Inc. filed its Form 10-K for the fiscal year ended December 31, 2014, filed February 12, 2015. The filing provides full-year results and quarterly data, including fourth-quarter 2014 results. The company operated 1,005 locations at year-end: 331 in the United States and 674 in Mexico. Its core business is retail pawn lending and sales of previously owned merchandise; consumer loans and credit services are being reduced and represented approximately 5% of fiscal 2014 revenue.
Pawn operations generated approximately 95% of continuing-operations revenue. Revenue was derived 54% from Mexico and 46% from the United States. The company added 111 locations during 2014, including 39 new stores and 72 acquired stores.
Financial Performance and Key Metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $712.9 million | $660.8 million | +8% |
| Net revenue | $400.9 million | $369.6 million | +8% |
| Income from continuing operations | $85.4 million | $84.5 million | +1% |
| Net income | $85.2 million | $83.8 million | +2% |
| Diluted EPS from continuing operations | $2.94 | $2.86 | +3% |
| Diluted net EPS | $2.93 | $2.84 | +3% |
| EBITDA from continuing operations | $147.3 million | $138.7 million | +6% |
| Operating cash flow | $97.7 million | $106.7 million | -8% |
| Free cash flow | $71.3 million | $79.6 million | -11% |
Revenue mix was 60.0% retail merchandise sales, 28.0% pawn loan fees, 5.2% consumer loan and credit services fees, and 6.8% wholesale scrap jewelry revenue. Retail merchandise sales increased 17% to $428.2 million, while pawn loan fees increased 10% to $199.4 million. Consumer loan and credit services fees decreased 16% to $36.7 million, and wholesale scrap jewelry revenue decreased 29% to $48.6 million.
Net revenue margin was approximately 56.2%, compared with 55.9% in 2013. Retail merchandise gross margin declined to 38.9% from 39.7%, and store operating margin declined to 26.3% from 26.6%. EBITDA margin was approximately 21% in both years. Income from continuing operations represented 12.0% of revenue, compared with 12.8% in 2013.
Year-end assets were $714.7 million, including $68.0 million of cash, $118.5 million of pawn loans, $91.1 million of inventories, $113.8 million of property and equipment, and $276.9 million of goodwill. Working capital was $265.3 million and the current ratio was 7.23x.
Debt, Liquidity and Capital Allocation
- Total indebtedness at December 31, 2014 was $222.4 million, consisting of $200.0 million of 6.75% senior unsecured notes due April 2021 and $22.4 million outstanding under the revolving credit facility.
- The company had $137.6 million of unused revolving credit availability under the $160.0 million 2014 Credit Facility. The facility matures in February 2019 and had an interest rate of 2.69% at year-end.
- Leverage was 1.5x EBITDA, compared with 1.4x in 2013. The company reported compliance with its debt covenants and stated that it could borrow the full available amount under the most restrictive covenant.
- Cash flow used in investing activities was $85.4 million, including $58.9 million for acquisitions and $24.0 million for capital expenditures.
- The company repurchased 770,867 shares for $43.9 million during 2014. No cash dividends were paid. In January 2015, the board authorized a new repurchase program for up to 2.0 million shares.
- Management stated that cash on hand, operating cash flow, working capital and available credit should be sufficient for operations and planned expansion for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by store additions, acquired locations, maturation of existing pawn stores and higher retail general merchandise sales. On a constant-currency basis, revenue increased 10%.
- The Mexican peso weakened against the U.S. dollar, reducing reported Mexican revenue growth by approximately two percentage points and reducing comprehensive income. Foreign currency effects negatively impacted fiscal 2014 earnings by approximately $2.1 million.
- Retail merchandise sales and pawn fees increased, but lower scrap jewelry volumes and gold prices caused scrap revenue to fall 29%. Gold ounces sold declined to approximately 33,100 from 42,300.
- Pawn receivables increased 3% reported and 8% on a constant-currency basis. Pawn inventories increased 17% to $91.1 million, while inventory turnover remained 3.6x.
- Consumer lending continued to contract because of competition, store closures and regulatory restrictions, particularly in Texas. The loss provision declined to $9.3 million from $11.4 million.
- Interest expense increased substantially to $13.5 million from $3.5 million due primarily to the March 2014 issuance of the 6.75% senior notes.
- The effective tax rate declined to 27.0% from 29.7%, partly because of $5.8 million of non-recurring tax benefits related to the prior-year tax restructuring. Excluding those benefits, management reported a 32.0% consolidated tax rate for 2014.
- Cash and Go, Ltd., a 37-kiosk Texas check-cashing and financial-services joint venture, was discontinued. The company recorded a $272,000 after-tax loss from discontinued operations in 2014.
Fourth-Quarter Results
| Metric | Q4 2014 | Q4 2013 |
|---|---|---|
| Total revenue | $202.8 million | $185.2 million |
| Income from continuing operations | $26.9 million | $25.5 million |
| Net income | $26.9 million | $24.8 million |
| Diluted EPS | $0.94 | $0.84 |
The fourth quarter was the strongest revenue and continuing-operations earnings quarter of 2014, consistent with seasonal holiday retail demand and higher lending activity.
Guidance, Outlook, Risks and Unusual Items
- Management expected to add approximately 75 to 90 stores in 2015, with capital expenditures expected to be similar to the $24.0 million incurred in 2014.
- Management expected overall pawn revenue growth in 2015 from acquisitions, new-store openings and maturation of existing stores.
- The company expected a normalized effective tax rate of approximately 31% to 32% going forward.
- Seven U.S. consumer loan stores were expected to close in the first quarter of 2015, consistent with the strategy to reduce non-core consumer lending.
- Major risks include changing federal, state, local and Mexican regulation of pawn and consumer lending; potential CFPB rulemaking; access to banking and ACH services; credit losses and CSO guarantee obligations; Mexican peso depreciation; gold-price volatility; competition; acquisition integration; cyber and operational disruptions; litigation; and goodwill impairment.
- The company had $11.9 million of maximum exposure under outstanding CSO letters of credit and recorded a $493,000 liability for estimated losses. Active third-party CSO extensions totaled approximately $10.9 million and were not recorded as company loans.
- Goodwill represented approximately 39% of total assets. Management reported no goodwill impairment at December 31, 2014.
- Contractual commitments totaled $467.2 million, including $144.8 million of operating leases, $222.4 million of principal debt, $87.8 million of interest on senior notes, employment contracts and a consulting contract.
Important Facts for Investors to Verify
- Confirm the sustainability of earnings growth after excluding the $5.8 million of non-recurring tax benefits and considering materially higher interest expense.
- Evaluate whether acquisitions and new stores are producing acceptable returns, including the $29.9 million of goodwill added through 2014 acquisitions.
- Monitor same-store pawn revenue, pawn receivables, inventory aging and the decline in retail merchandise gross margin.
- Assess exposure to Mexican peso depreciation, gold prices and the concentration of revenue and assets in Mexico.
- Review the effect of Texas and potential CFPB regulation on the remaining consumer loan and credit services business.
- Assess liquidity after planned 2015 store expansion, acquisitions, capital expenditures, debt service and the new share-repurchase authorization.
- Verify the CSO Program’s actual loss experience, recovery rates and exposure under outstanding letters of credit.
- Note that the independent auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting.