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FCFS > SEC Filings for FCFS > Form 10-Q on 25-Oct-2013All Recent SEC Filings

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Form 10-Q for FIRST CASH FINANCIAL SERVICES INC


25-Oct-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of financial condition, results of operations, liquidity and capital resources of First Cash Financial Services, Inc. and its wholly-owned subsidiaries (the "Company") should be read in conjunction with the Company's condensed consolidated financial statements and accompanying notes included under Part I, Item 1 of this quarterly report on Form 10-Q, as well as with Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's annual report on Form 10-K for the year ended December 31, 2012. References in this quarterly report on Form 10-Q to "year-to-date" refer to the nine-month period from January 1, 2013, to September 30, 2013.

GENERAL

The Company is a leading operator of retail-based pawn and consumer finance stores in the United States and Mexico. The Company's primary business is the operation of pawn stores, which engage in retail sales, purchasing of secondhand goods and consumer finance activities. The Company's pawn stores generate significant retail sales from the merchandise acquired through collateral forfeitures and over-the-counter purchases from customers. The Company's pawn stores are also a convenient source for small consumer loans to help customers meet their short-term cash needs. Personal property such as jewelry, consumer electronics, tools, sporting goods and musical instruments are pledged as collateral for the loans. In addition, some of the Company's pawn stores offer consumer loans or credit services products. The Company's strategy is to focus on growing its retail-based pawn operations in the United States and Mexico through new store openings and acquisition opportunities as they arise.

Pawn operations accounted for approximately 93% of the Company's revenue from continuing operations during the nine months ended September 30, 2013. The Company's pawn revenue is derived primarily from merchandise sales of forfeited pawn collateral and used goods purchased directly from the general public. The Company accrues pawn loan fee revenue on a constant-yield basis over the life of the pawn loan for all pawns that the Company deems collection to be probable based on historical pawn redemption statistics. If a pawn loan is not repaid prior to the expiration of the loan term, including any automatic extension period, if applicable, the property is forfeited to the Company and transferred to inventory at a value equal to the principal amount of the loan, exclusive of accrued interest.

During the nine months ended September 30, 2013, the Company acquired 30 pawn stores, including 19 stores located in Texas in a single transaction. For more information on the Company's acquisitions during the nine months ended September 30, 2013, see Note 3 (Acquisitions) to the unaudited condensed consolidated financial statements included in this quarterly report.

The Company also operates a small number of stand-alone consumer finance stores in Texas and Mexico. These stores provide consumer financial services products including credit services, consumer loans and check cashing. The product mix in these stores varies by market. The Company considers the consumer loan and credit services products generated through these locations to be non-core/non-growth revenue streams.

Consumer loan and credit services revenue, which was approximately 7% of consolidated year-to-date revenue from continuing operations, was derived primarily from credit services fees. The Company recognizes service fee income on consumer loans and credit services transactions on a constant-yield basis over the life of the loan or credit extension, which is generally 180 days or less. The net defaults on consumer loans and credit services transactions and changes in the valuation reserve are charged to the consumer loan credit loss provision. The credit loss provision associated with the Company's credit services organization ("CSO") program and consumer loans are based primarily upon historical credit loss experience, with consideration given to recent credit loss trends, delinquency rates, economic conditions and management's expectations of future credit losses. For an additional discussion of the credit loss provision and related allowances and accruals, see "Results of Continuing Operations."

The Company's business is subject to seasonal variations, and operating results for the current quarter and year-to-date periods are not necessarily indicative of the results of operations for the full year. Typically, the Company experiences seasonal growth of service fees in the third and fourth quarter of each year due to loan balance growth that occurs after the heavy repayment period of pawn loans in late December in Mexico, which is associated with statutory Christmas bonuses received by customers, and in the first quarter in the United States, which is associated with tax refund proceeds received by customers. Retail sales are seasonally higher in the fourth quarter associated with holiday shopping.


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OPERATIONS AND LOCATIONS

The Company has operations in the United States and Mexico. For the three months ended September 30, 2013, approximately 52% of total revenue was generated from Mexico and 48% from the United States. Year-to-date, 54% of revenue was generated from Mexico and 46% from the United States.

As of September 30, 2013, the Company had 888 store locations in 12 U.S. states and 26 states in Mexico, which represents a net store-count increase of 10% over the trailing twelve months. A total of 28 new store locations were added during the third quarter of 2013 and 83 have been added year-to-date.

The following table details store openings for the three months ended September 30, 2013:

                                                 Pawn Locations                 Consumer
                                             Large              Small             Loan            Total
                                           Format (1)        Format (2)      Locations (3)      Locations
Domestic:
Total locations, beginning of period          208                   27              64                299
New locations opened                            2                    -               -                  2
Locations closed or consolidated                -                    -              (1 )               (1 )
Total locations, end of period                210                   27              63                300

International:
Total locations, beginning of period          516                   18              34                568
New locations opened                           18                    -               -                 18
Locations acquired                              8                    -               -                  8
Locations closed or consolidated (4)            -                   (1 )            (5 )               (6 )
Total locations, end of period                542                   17              29                588

Total:
Total locations, beginning of period          724                   45              98                867
New locations opened                           20                    -               -                 20
Locations acquired                              8                    -               -                  8
Locations closed or consolidated                -                   (1 )            (6 )               (7 )
Total locations, end of period                752                   44              92                888

(1) The large format locations include retail showrooms and accept a broad array of pawn collateral including electronics, appliances, tools, jewelry and other consumer hard goods. At September 30, 2013, 115 of the U.S. large format pawn stores also offered consumer loans or credit services products.

(2) The small format locations typically have limited retail operations and primarily accept jewelry and small electronic items as pawn collateral. At September 30, 2013, all but one of the small format pawn stores also offered consumer loans or credit services products.

(3) The Company's U.S. free-standing, small format consumer loan locations offer a credit services product and are all located in Texas. The Mexico locations offer small, short-term consumer loans. In addition to stores shown on this chart, the Company is also an equal partner in Cash & Go, Ltd., a joint venture, which owns and operates 37 check cashing and financial services kiosks located inside convenience stores in the state of Texas. The Company's credit services operations also include an internet distribution channel for customers residing in the state of Texas.

(4) The operations of the consumer loan locations were consolidated with adjacent or nearby large format pawn locations.


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The following table details store openings for the nine months ended September 30, 2013:

                                                 Pawn Locations                 Consumer
                                             Large              Small             Loan            Total
                                           Format (1)        Format (2)      Locations (3)      Locations
Domestic:
Total locations, beginning of period          184                   27              65                276
New locations opened                            4                    -               -                  4
Locations acquired                             22                    -               -                 22
Locations closed or consolidated                -                    -              (2 )               (2 )
Total locations, end of period                210                   27              63                300

International:
Total locations, beginning of period          485                   19              34                538
New locations opened                           49                    -               -                 49
Locations acquired                              8                    -               -                  8
Locations closed or consolidated (4)            -                   (2 )            (5 )               (7 )
Total locations, end of period                542                   17              29                588

Total:
Total locations, beginning of period          669                   46              99                814
New locations opened                           53                    -               -                 53
Locations acquired                             30                    -               -                 30
Locations closed or consolidated                -                   (2 )            (7 )               (9 )
Total locations, end of period                752                   44              92                888

(1) The large format locations include retail showrooms and accept a broad array of pawn collateral including electronics, appliances, tools, jewelry and other consumer hard goods. At September 30, 2013, 115 of the U.S. large format pawn stores also offered consumer loans or credit services products.

(2) The small format locations typically have limited retail operations and primarily accept jewelry and small electronic items as pawn collateral. At September 30, 2013, all but one of the small format pawn stores also offered consumer loans or credit services products.

(3) The Company's U.S. free-standing, small format consumer loan locations offer a credit services product and are all located in Texas. The Mexico locations offer small, short-term consumer loans. In addition to stores shown on this chart, the Company is also an equal partner in Cash & Go, Ltd., a joint venture, which owns and operates 37 check cashing and financial services kiosks located inside convenience stores in the state of Texas. The Company's credit services operations also include an internet distribution channel for customers in the state of Texas.

(4) The operations of the consumer loan locations were consolidated with adjacent or nearby large format pawn locations.


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CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, related revenue and expenses, and disclosure of gain and loss contingencies at the date of the financial statements. Such estimates and assumptions are subject to a number of risks and uncertainties, which may cause actual results to differ materially from the Company's estimates. The significant accounting policies that management believes are the most critical to aid in fully understanding and evaluating the reported financial results and the effects of recent accounting pronouncements have been reported in the Company's 2012 annual report on Form 10-K.

The Company has significant operations in Mexico, where the functional currency for the Company's Mexican subsidiaries is the Mexican peso. The assets and liabilities of these subsidiaries are translated into U.S. dollars at the exchange rate in effect at each balance sheet date, and the resulting adjustments are accumulated in other comprehensive income (loss) as a separate component of stockholders' equity. Revenue and expenses are translated at the average exchange rates occurring during the three-month and year-to-date periods.

The Company's management reviews and analyzes certain operating results in Mexico on a constant currency basis because the Company believes this better represents the Company's underlying business trends. Amounts presented on a constant currency basis will be denoted as such. See "Non-GAAP Financial Information" for additional discussion of constant currency operating results.

Stores included in the same-store revenue calculations are those stores that were opened prior to the beginning of the prior-year comparative period and remained open through the end of the measurement period. Also included are stores that were relocated during the year within a specified distance serving the same market, where there is not a significant change in store size and where there is not a significant overlap or gap in timing between the opening of the new store and the closing of the existing store. Unless otherwise stated, non-retail sales of scrap jewelry are included in same-store revenue calculations.

Operating expenses consist of all items directly related to the operation of the Company's stores, including salaries and related payroll costs, rent, utilities, equipment, advertising, property taxes, licenses, supplies and security. Administrative expenses consist of items relating to the operation of the corporate offices, including the compensation and benefit costs of corporate management, area supervisors and other operations management personnel, collections operations and personnel, accounting and administrative costs, information technology costs, liability and casualty insurance, outside legal and accounting fees and stockholder-related expenses.

Recent Accounting Pronouncements

There were no recent accounting pronouncements that had a material effect on the Company's financial position, results of operations or financial statement disclosures.


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RESULTS OF CONTINUING OPERATIONS

Three Months Ended September 30, 2013, Compared To The Three Months Ended September 30, 2012

The following table details the components of the Company's revenue for the three months ended September 30, 2013, as compared to the three months ended September 30, 2012 (unaudited, in thousands). Constant currency results exclude the effects of foreign currency translation and are calculated by translating current-year results at prior-year average exchange rates. The average value of the Mexican peso to the U.S. dollar increased 2%, from 13.2 to 1 in the third quarter of 2012 to 12.9 to 1 in the third quarter of 2013. The end-of-period value of the Mexican peso to the U.S. dollar decreased 2%, from 12.9 to 1 at September 30, 2012, to 13.1 to 1 at September 30, 2013. As a result of these currency exchange movements, revenue of Mexican operations translated into more U.S. dollars relative to the prior-year period, while net assets of Mexican operations translated into fewer U.S. dollars relative to the prior period. While the strengthening of the Mexican peso positively increased the translated dollar-value of revenue, the cost of sales and operating expenses increased as well. The scrap jewelry generated in Mexico is exported and sold in U.S. dollars, which does not contribute to the Company's peso-denominated earnings stream.

                                     Three Months Ended                                       Increase/(Decrease)
                                       September 30,                                           Constant Currency
                                    2013            2012          Increase/(Decrease)                Basis
Domestic revenue:
Retail merchandise sales        $    36,134     $   25,801     $     10,333         40  %              40  %
Pawn loan fees                       21,241         16,747            4,494         27  %              27  %
Consumer loan and credit
services fees                        10,894         12,989           (2,095 )      (16 )%             (16 )%
Wholesale scrap jewelry
revenue                              15,344         13,822            1,522         11  %              11  %
                                     83,613         69,359           14,254         21  %              21  %
International revenue:
Retail merchandise sales             53,638         44,137            9,501         22  %              19  %
Pawn loan fees                       26,214         23,021            3,193         14  %              12  %
Consumer loan and credit
services fees                           832            932             (100 )      (11 )%             (13 )%
Wholesale scrap jewelry
revenue                               9,890         12,246           (2,356 )      (19 )%             (19 )%
                                     90,574         80,336           10,238         13  %              11  %
Total revenue:
Retail merchandise sales             89,772         69,938           19,834         28  %              27  %
Pawn loan fees                       47,455         39,768            7,687         19  %              18  %
Consumer loan and credit
services fees                        11,726         13,921           (2,195 )      (16 )%             (16 )%
Wholesale scrap jewelry
revenue                              25,234         26,068             (834 )       (3 )%              (3 )%
                                $   174,187     $  149,695     $     24,492         16  %              15  %

Domestic revenue accounted for approximately 48% of the total revenue for the current quarter, while international revenue (from Mexico) accounted for 52% of total revenue.

The following table details customer loans and inventories held by the Company and active CSO credit extensions from an independent third-party lender as of September 30, 2013, as compared to September 30, 2012 (unaudited, in thousands). Constant currency results exclude the effects of foreign currency translation and are calculated by translating current year balances at the prior year end-of-period exchange rate. For more information on the Company's CSO program, see Note 4 (Guarantees) to the Company's condensed consolidated financial statements included in this quarterly report on Form 10-Q.


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                                                                                                Increase/(Decrease)
                                Balance at September 30,                                         Constant Currency
                                  2013             2012            Increase/(Decrease)                 Basis
Domestic:
Pawn loans                   $      60,619     $   51,875     $      8,744            17  %              17  %
CSO credit extensions held
by independent third-party
(1)                                 12,926         14,048           (1,122 )          (8 )%              (8 )%
Other consumer loans                   697          1,194             (497 )         (42 )%             (42 )%
                                    74,242         67,117            7,125            11  %              11  %
International:
Pawn loans                          60,568         55,839            4,729             8  %              11  %
Other consumer loans                   678            833             (155 )         (19 )%             (17 )%
                                    61,246         56,672            4,574             8  %              11  %
Total:
Pawn loans                         121,187        107,714           13,473            13  %              14  %
CSO credit extensions held
by independent third-party
(1)                                 12,926         14,048           (1,122 )          (8 )%              (8 )%
Other consumer loans                 1,375          2,027             (652 )         (32 )%             (31 )%
                             $     135,488     $  123,789     $     11,699             9  %              11  %
Pawn inventories:
Domestic pawn inventories    $      37,514     $   29,649     $      7,865            27  %              27  %
International pawn
inventories                         45,055         36,043            9,012            25  %              28  %
                             $      82,569     $   65,692     $     16,877            26  %              27  %

(1) CSO amounts outstanding are composed of the principal portion of active CSO extensions of credit by an independent third-party lender, which are not included on the Company's balance sheet, net of the Company's estimated fair value of its liability under the letters of credit guaranteeing the extensions of credit.

Store Operations

The overall increase in quarter-over-quarter revenue of 15% (on a constant currency basis) reflected a 25% increase in combined retail sales and pawn fee revenue from new and existing pawn stores, offset by a decrease in wholesale scrap jewelry revenue and consumer loan fees. Third quarter revenue generated by the stores opened or acquired since July 1, 2012, increased by $4,731,000 in Mexico and $19,592,000 in the United States, compared to the same quarter last year. Excluding wholesale scrap jewelry sales, same-store revenue in pawn stores increased 10% in Mexico, decreased 3% in the U.S. and increased 5% overall, on a constant currency basis. Same-store wholesale scrap jewelry revenue decreased 19% in total, 16% in the U.S. and 24% in Mexico, reflecting lower gold prices and reduced volumes from customers selling gold to the Company.

The increase in pawn loan fees was primarily the result of an increase in the average outstanding pawn receivables. Consolidated pawn receivables increased 13% as of September 30, 2013 (14% on a constant currency basis), primarily from store additions and growth in same-store receivables, compared to September 30, 2012. During the third quarter of 2013, pawn receivables increased 8% in Mexico (11% on a constant currency basis), and 17% in the U.S., compared to the prior-year period. As of September 30, 2013, 65% of total pawn receivables were collateralized with hard goods (primarily consumer electronics, appliances and power tools) with the remaining 35% collateralized by jewelry. In Mexico, 88% of the Company's pawn receivables were collateralized with hard goods, and 12% were collateralized with jewelry, compared to 83% and 17%, respectively, at September 30, 2012. In the Company's U.S. stores, jewelry comprised 60% of pawn collateral as of September 30, 2013, compared to 64% at September 30, 2012. Pawn receivables collateralized with hard good items increased 16% in Mexico (on a constant currency basis) and 14% in the U.S., while growth in pawn receivables collateralized with jewelry in both the U.S. and Mexico was dampened somewhat by lessened demand and adjustments to the loan to value ratios reflecting the decline in gold prices. Consolidated same-store pawn receivables declined 2% (flat on a constant currency basis). While U.S. same-store pawn receivables declined 5%, same-store receivables increased 1% in Mexico (3% on a constant currency basis).


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The increase in store-based retail sales reflected new store contributions, maturation of existing stores and an increased mix of consumer hard good inventories, especially in Mexico. Revenue from wholesale scrap jewelry operations in the third quarter of 2013 decreased 3% compared to the same period last year. There were 17,300 ounces of gold sold during the third quarter of 2013, including 7,700 ounces of inventory from second quarter operations. Excluding the 7,700 ounces from the second quarter of 2013, the volume of scrap jewelry acquired decreased 31%. The average selling price for the 17,300 ounces of gold liquidated during the third quarter of 2013 was $1,343 per ounce, which generated a scrap gross profit margin of 11%, compared to the prior-period margin of 27%. Scrap jewelry profits accounted for 3% of net revenue (gross profit) for the third quarter of 2013, compared to 8% in the third quarter of the prior year. The average market price of gold for the third quarter of 2013 decreased 20% compared to the third quarter of 2012, while the ending price at September 30, 2013, decreased 25% compared to September 30, 2012. The Company's exposure to gold price risk is described in detail in the Company's 2012 annual report on Form 10-K, Item 1A.

During the third quarter of 2013, the gross profit margin on retail merchandise sales, which excludes scrap jewelry sales, was 40%, and the margin on wholesale scrap jewelry was 11%, compared to margins of 43% on retail merchandise sales and 27% on wholesale scrap jewelry for the third quarter of 2012. The decline in retail margins reflects the continued shift in the Company's consolidated retail product mix toward general merchandise inventory, which carries lower margins than retail jewelry items, especially in Mexico.

Pawn inventories increased by 27% on a constant currency basis from September 30, 2012, to September 30, 2013, reflecting the growth in pawn loans receivable, store maturation and acquisition activity. At September 30, 2013, the Company's pawn inventories, at cost, were composed of: 33% jewelry (primarily gold jewelry held for retail sale), 44% electronics and appliances, 9% tools, and 14% other. At September 30, 2013, 97% of total inventories, at cost, had been held for one year or less, while 3% had been held for more than one year.

Service fees from consumer loans and credit services transactions for the third quarter of 2013 decreased 16% compared to the third quarter of 2012. The majority of the payday loan revenues are generated in the Company's stand-alone stores in Texas, which experienced a revenue decline of 17% during the third quarter of 2013. The Company attributes the decrease, in part, to increased competition in the Texas markets from online and other store-front lenders, such as installment and title loan providers. Payday loan-related products comprised . . .

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