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FCFS > SEC Filings for FCFS > Form 10-Q on 24-Apr-2014All Recent SEC Filings

Show all filings for FIRST CASH FINANCIAL SERVICES INC

Form 10-Q for FIRST CASH FINANCIAL SERVICES INC


24-Apr-2014

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, 2013.

GENERAL

The Company is a leading operator of retail-based pawn stores in the United States and Mexico. The Company's primary business is the operation of pawn stores, which engage in retail sales, the purchase of secondhand goods as well as offer consumer finance services products. 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 consumer electronics, jewelry, power 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 94% of the Company's consolidated revenue from continuing operations during the three months ended March 31, 2014, compared to 93% during the three months ended March 31, 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 pawn loans that the Company deems collection to be probable based on historical 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.

The Company 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. Certain of the Company's pawn stores also offer credit services and/or consumer loans as an ancillary product. Consumer loan and credit services revenue accounted for approximately 6% of consolidated revenue from continuing operations during the three months ended March 31, 2014, compared to 7% during the three months ended March 31, 2013, and 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."

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.


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The Company's business is subject to seasonal variations, and operating results for the current quarter 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 the fourth quarter in Mexico, which is associated with statutory year-end Christmas bonuses paid by employers, 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.

OPERATIONS AND LOCATIONS

The Company has operations in the United States and Mexico. For the three months ended March 31, 2014, approximately 49% of total revenue was generated from Mexico and 51% from the United States.

As of March 31, 2014, the Company had 915 store locations in 12 U.S. states and 26 states in Mexico, which represents a net store-count increase of 9% over the trailing twelve months. The Company had net store growth of nine locations, with a total of 12 new store locations added during the first quarter of 2014.

The following table details store openings for the three months ended March 31, 2014:

                                               Pawn Locations              Consumer
                                           Large            Small            Loan            Total
                                        Format (1)       Format (2)      Locations (3)     Locations
Domestic:
Total locations, beginning of period          227               25                 57            309
New locations opened                            2                1                  -              3
Locations acquired                              1                -                  -              1
Store format conversions                        1               (1 )                -              -
Locations closed or consolidated               (2 )             (1 )                -             (3 )
Total locations, end of period                229               24                 57            310

International:
Total locations, beginning of period          552               17                 28            597
New locations opened                            8                -                  -              8
Total locations, end of period                560               17                 28            605

Total:
Total locations, beginning of period          779               42                 85            906
New locations opened                           10                1                  -             11
Locations acquired                              1                -                  -              1
Store format conversions                        1               (1 )                -              -
Locations closed or consolidated               (2 )             (1 )                -             (3 )
Total locations, end of period                789               41                 85            915

(1) The large format locations include retail showrooms and accept a broad array of pawn collateral including consumer electronics, appliances, power tools, jewelry and other general merchandise items. At March 31, 2014, 121 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 and also offer 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. The Company's credit services operations also include an internet distribution channel for customers residing in the state of Texas.


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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, assumptions and judgments 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, assumptions and judgments 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 the Company believes are the most critical to aid in fully understanding and evaluating its reported financial results have been reported in the Company's 2013 annual report on Form 10-K. There have been no changes to the Company's significant accounting policies for the three months ended March 31, 2014.

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 March 31, 2014, Compared To The Three Months Ended March 31, 2013

The following table details the components of the Company's revenue for the three months ended March 31, 2014, as compared to the three months ended March 31, 2013 (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 decreased 5%, from 12.7 to 1 during the first quarter of 2013 to 13.2 to 1 during the first quarter of 2014. The end-of-period value of the Mexican peso to the U.S. dollar decreased 6%, from 12.4 to 1 at March 31, 2013, to 13.1 to 1 at March 31, 2014. As a result of these currency exchange movements, revenue from Mexican operations translated into fewer U.S. dollars relative to the prior-year period, and net assets of Mexican operations as of March 31, 2014 translated into fewer U.S. dollars relative to the prior period end. While the weakening of the Mexican peso decreased the translated dollar-value of revenue, the cost of sales and operating expenses decreased 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. See -"Non-GAAP Financial Information-Constant Currency Results" below.

                                     Three Months Ended                                       Increase/(Decrease)
                                         March 31,                                             Constant Currency
                                    2014            2013          Increase/(Decrease)                Basis
Domestic revenue:
Retail merchandise sales        $    45,575     $   33,712     $     11,863         35  %              35  %
Pawn loan fees                       22,902         18,839            4,063         22  %              22  %
Consumer loan and credit
services fees                         9,112         10,888           (1,776 )      (16 )%             (16 )%
Wholesale scrap jewelry
revenue                               8,543         13,950           (5,407 )      (39 )%             (39 )%
                                     86,132         77,389            8,743         11  %              11  %
International revenue:
Retail merchandise sales             53,133         48,058            5,075         11  %              16  %
Pawn loan fees                       24,736         24,312              424          2  %               6  %
Consumer loan and credit
services fees                           672            879             (207 )      (24 )%             (20 )%
Wholesale scrap jewelry
revenue                               5,104          9,274           (4,170 )      (45 )%             (45 )%
                                     83,645         82,523            1,122          1  %               6  %
Total revenue:
Retail merchandise sales             98,708         81,770           16,938         21  %              24  %
Pawn loan fees                       47,638         43,151            4,487         10  %              13  %
Consumer loan and credit
services fees                         9,784         11,767           (1,983 )      (17 )%             (17 )%
Wholesale scrap jewelry
revenue (1)                          13,647         23,224           (9,577 )      (41 )%             (41 )%
                                $   169,777     $  159,912     $      9,865          6  %               8  %

(1) Wholesale scrap jewelry revenue during the three months ended March 31, 2014, consisted primarily of gold sales, of which approximately 8,900 ounces were sold at an average price of $1,304 per ounce, compared to approximately 12,400 ounces of gold sold at $1,650 per ounce in the prior-year period.

Domestic revenue accounted for approximately 51% of the total revenue for the current quarter, while international revenue (from Mexico) accounted for 49% of total revenue for the same period.

The following table details customer loans and inventories held by the Company and active CSO Program credit extensions from an independent third-party lender as of March 31, 2014, as compared to March 31, 2013 (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.


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                                                                                               Increase/(Decrease)
                                 Balance at March 31,                                           Constant Currency
                                  2014            2013            Increase/(Decrease)                 Basis
Domestic:
Pawn loans                   $     55,239     $   46,094     $     9,145             20  %              20  %
CSO credit extensions held
by independent third-party
(1)                                 9,248         10,341          (1,093 )          (11 )%             (11 )%
Other consumer loans                  633            838            (205 )          (24 )%             (24 )%
                                   65,120         57,273           7,847             14  %              14  %
International:
Pawn loans                         58,699         58,542             157              -  %               6  %
Other consumer loans                  606            780            (174 )          (22 )%             (18 )%
                                   59,305         59,322             (17 )            -  %               6  %
Total:
Pawn loans                        113,938        104,636           9,302              9  %              12  %
CSO credit extensions held
by independent third-party
(1)                                 9,248         10,341          (1,093 )          (11 )%             (11 )%
Other consumer loans                1,239          1,618            (379 )          (23 )%             (21 )%
                             $    124,425     $  116,595     $     7,830              7  %              10  %
Pawn inventories:
Domestic pawn inventories    $     35,289     $   28,044     $     7,245             26  %              26  %
International pawn
inventories                        36,990         36,727             263              1  %               7  %
                             $     72,279     $   64,771     $     7,508             12  %              15  %

(1) CSO Program amounts outstanding are composed of the principal portion of active CSO Program 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.

The following table details the composition of pawn collateral and the average outstanding pawn loan receivable as of March 31, 2014, as compared to March 31, 2013 (unaudited).

                                           Balance at March 31,
                                            2014           2013
Composition of pawn collateral:
Domestic pawn loans:
General merchandise                            42 %            35 %
Jewelry                                        58 %            65 %
                                              100 %           100 %
International pawn loans:
General merchandise                            88 %            85 %
Jewelry                                        12 %            15 %
                                              100 %           100 %
Total pawn loans:
General merchandise                            65 %            63 %
Jewelry                                        35 %            37 %
                                              100 %           100 %
Average outstanding pawn loan amount:
Domestic pawn loans                     $     173       $     186
International pawn loans                       69              76
Total pawn loans                               98             103


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Retail Merchandise Sales Operations

Total retail merchandise sales increased 21% (24% on a constant currency basis) to $98,708,000 during the first quarter of 2014 compared to $81,770,000 for the first quarter of 2013. The increased retail merchandise sales in the Company's pawn stores reflected store additions, maturation of existing stores and an increased mix of retail general merchandise inventories (primarily consumer electronics, appliances and power tools). During the first quarter of 2014, the gross profit margin on retail merchandise sales, which excludes scrap jewelry sales, was 39%, and the margin on wholesale scrap jewelry was 19%, compared to margins of 41% on retail merchandise sales and 20% on wholesale scrap jewelry for the first quarter of 2013. The decline in retail margins reflects the continued shift in the Company's consolidated retail product mix toward general merchandise inventory, which carry lower margins than retail jewelry items. Pawn inventories increased 12% (15% on a constant currency basis) from March 31, 2013, to March 31, 2014, reflecting the 9% increase in store additions and maturation of existing stores. At March 31, 2014, the Company's pawn inventories, at cost, were composed of: 33% jewelry (primarily gold jewelry held for retail sale), 41% electronics and appliances, 10% tools, and 16% other. At March 31, 2014, and 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. Pawn Lending Operations

Pawn loan fees increased 10% (13% on a constant currency basis) to $47,638,000 during the first quarter of 2014 compared to $43,151,000 for the first quarter of 2013. The increase in pawn loan fees was primarily the result of an increase in the average total outstanding pawn receivables. Consolidated pawn receivables, as of March 31, 2014, increased 9% (12% on a constant currency basis) compared to March 31, 2013, primarily from store additions and maturation of existing stores, offset, in part, by a 5% decline in the average loan amount outstanding. Pawn receivables, as of March 31, 2014, increased 6% in Mexico (constant currency basis) and 20% in the U.S., compared to March 31, 2013.

Pawn receivables collateralized with general merchandise items increased 11% in Mexico and 6% in the U.S. from March 31, 2013, to March 31, 2014, while pawn receivables collateralized with jewelry decreased 16% in Mexico and 10% in the U.S. due to lessened consumer demand and adjustments to the loan to value ratios reflecting the decline in gold prices. Consolidated same-store pawn receivables (constant currency basis) declined 4% in total, 7% in the U.S. and 1% in Mexico from March 31, 2013, to March 31, 2014, which was consistent with similar declines in average loan amounts outstanding in both the U.S. and Mexico.

Consumer Lending Operations

Service fees from consumer loans and credit services transactions (collectively, also known as payday loans) decreased 17% to $9,784,000 during the first quarter of 2014 compared to $11,767,000 for the first quarter of 2013. The majority of the payday loan revenues are generated in the Company's stand-alone stores in Texas, which experienced a revenue decline of 19% during the first quarter of 2014. The Company attributes the decrease, in part, to increased competition in the Texas markets coupled with store closings. Consumer/payday loan-related products comprised 6% of total revenue for the first quarter of 2014.

The Company's consumer loan and credit services credit loss provision was 18% of consumer loan and credit services fee revenue during the first quarter of both 2014 and 2013. The estimated fair value of liabilities under the CSO Program letters of credit, net of anticipated recoveries from customers, was $440,000, or 4.5% of the gross loan balance, at March 31, 2014, compared to $493,000, or 4.6% of the gross loan balance, at March 31, 2013, which is included as a component of the Company's accrued liabilities. The Company's loss reserve on consumer loans was $72,000, or 5.5% of the gross loan balance, at March 31, 2014, compared to $94,000, or 5.5% of the gross loan balance, at March 31, 2013.

Wholesale Scrap Jewelry Operations

Revenue from wholesale scrap jewelry operations decreased 41% to $13,647,000 during the first quarter of 2014 compared to $23,224,000 for the first quarter of 2013. The volume of liquidated scrap jewelry decreased 28%, reflecting the continued decline in demand for gold buying services. The scrap gross profit margin was 19%, compared to the prior-period margin of 20%. Scrap jewelry profits accounted for 3% of net revenue (gross profit) for the first quarter of 2014, compared to 5% in the first quarter of 2013. The average market price of gold during the first quarter of 2014 decreased 21%, compared to the first quarter of 2013, while the ending price at March 31, 2014, decreased 19% compared to March 31, 2013. The Company's exposure to gold price risk is described in detail in the Company's 2013 annual report on Form 10-K.


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Combined Revenue Results

The overall increase in quarter-over-quarter revenue of 6% (8% on a constant currency basis) reflected a 17% increase (20% on a constant currency basis) in combined retail sales and pawn fee revenue from new and existing pawn stores, offset, in part, by a decrease in wholesale scrap jewelry revenue and consumer loan fees. Revenue generated by the stores opened or acquired since January 1, 2013, increased by $6,106,000 in Mexico and $20,071,000 in the United States in the first quarter of 2014 compared to the same quarter last year.

Excluding wholesale scrap jewelry sales, the Company's same-store core revenue in pawn stores increased 1% on a consolidated, constant currency basis from the first quarter of 2013 to the first quarter of 2014. Same-store core sales in Mexico increased 4% (constant currency), offset by a 4% decrease in the U.S. as compared to the prior-year period. Same-store wholesale scrap jewelry revenue decreased 50% in total, reflecting lower gold prices and reduced volumes from customers selling gold to the Company.

Store Operating Expenses

Store operating expenses increased by 13% to $48,492,000 during the first quarter of 2014, compared to $42,805,000 during the first quarter of 2013, primarily as a result of a 10% increase in the weighted-average store count, which included a number of larger, mature stores added through acquisitions, offset by a 5% decrease in the average value of the Mexican peso. Same-store operating expenses decreased 3% on a constant currency basis, compared to the prior-year period.

The net store profit contribution from continuing operations for the first quarter of 2014 was $44,421,000, which equates to a store-level operating margin of 26%, compared to $45,445,000 and 28% in the prior-year quarter, respectively. The decline in the store-level operating margin related primarily to the decrease in net revenue from jewelry scrapping.

Administrative Expenses, Interest, Taxes and Income

Administrative expenses increased 2% to $13,329,000 during the first quarter of 2014, compared to $13,092,000 during the first quarter of 2013. As a percentage of revenue, administrative expenses were 8% in both the first quarter of 2014 and 2013.

Interest expense increased to $1,436,000 in the first quarter of 2014, compared to $719,000 for the first quarter of 2013, reflecting an increase in the weighted average amounts outstanding on the Company's revolving credit facilities and the Notes (defined below).

For the first quarter of 2014 and 2013, the Company's effective federal income tax rates were 20.9% and 35.3%, respectively. The Company recorded an additional benefit of $3,669,000 in March 2014 as the result of a change in its estimated U.S. federal liability associated with the 2013 termination of its election to include foreign subsidiaries in its consolidated U.S. federal income tax return. Excluding the non-recurring net benefit, the consolidated tax rate for the first quarter of 2014 was 33.5%, compared to an effective rate of 35.3% in the prior-year quarter. The Company expects the effective rate going forward to be in a range of approximately 32% to 33% reflecting the blended statutory federal tax rates of 35% in the U.S. and 30% in Mexico.

Income from continuing operations increased 14% to $22,954,000 during the first quarter of 2014, compared to $20,180,000 during the first quarter of 2013. Net income was $22,682,000 during the first quarter of 2014, compared to $20,264,000 during the first quarter of 2013, which included the results of discontinued operations.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2014, the Company's primary sources of liquidity were $94,929,000 in cash and cash equivalents, $131,716,000 in customer loans, . . .

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