The following discussion of financial condition, results of operations, liquidity and capital resources ofFirstCash Holdings, Inc. and its wholly-owned subsidiaries (together, the "Company") should be read in conjunction with the Company's consolidated financial statements and accompanying notes included under Part I, Item 1 of this quarterly report on Form 10-Q, as well as with the audited consolidated financial statements and accompanying notes and 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 endedDecember 31, 2021 . GENERAL The Company's primary line of business is the operation of retail pawn stores, also known as "pawnshops," which focus on serving cash and credit-constrained consumers. The Company is the leading operator of pawn stores in theU.S. andLatin America . Pawn stores help customers meet small short-term cash needs by providing non-recourse pawn loans and buying merchandise directly from customers. Personal property, such as jewelry, electronics, tools, appliances, sporting goods and musical instruments, is pledged and held as collateral for the pawn loans over the typical 30-day term of the loan. Pawn stores also generate retail sales primarily from the merchandise acquired through collateral forfeitures and over-the-counter purchases from customers. With the Company's acquisition of AFF onDecember 17, 2021 (the "AFF Acquisition"), the Company is also a leading provider of technology-driven, retail POS payment solutions focused on serving credit-constrained consumers. The Company's retail POS payment solutions business line consists solely of the operations of AFF, which focuses on LTO products and facilitating other retail financing payment options across a large network of traditional and e-commerce merchant partners in all 50 states in theU.S. , theDistrict of Columbia andPuerto Rico . AFF's retail partners provide consumer goods and services to their customers and use AFF's LTO and retail finance solutions to facilitate payments on such transactions. As one of the largest omni-channel providers of "no credit required" payment options, AFF's technology set provides consumers with seamless leasing and financing experiences in-store, online, in-cart and on mobile devices. The Company's two business lines are organized into three reportable segments. TheU.S. pawn segment consists of all pawn operations in theU.S. and theLatin America pawn segment consists of all pawn operations inMexico ,Guatemala ,Colombia andEl Salvador . The retail POS payment solutions segment consists of the operations of AFF in theU.S. andPuerto Rico . 24 --------------------------------------------------------------------------------
Table of Contents OPERATIONS AND LOCATIONS As ofJune 30, 2022 , the Company operated 2,834 pawn store locations comprised of 1,076 stores in 25 U.S. states and theDistrict of Columbia , 1,669 stores in 32 states inMexico , 60 stores inGuatemala , 15 stores inColombia and 14 stores inEl Salvador .
The following tables detail pawn store count activity:
Three Months Ended
U.S. Latin America Total Total locations, beginning of period 1,078 1,751 2,829 New locations opened (1) - 9 9 Locations acquired 1 - 1 Consolidation of existing pawn locations (2) (3) (2) (5) Total locations, end of period 1,076 1,758 2,834 Six Months Ended June 30, 2022 U.S. Latin America Total Total locations, beginning of period 1,081 1,744 2,825 New locations opened (1) - 19 19 Locations acquired 1 - 1 Consolidation of existing pawn locations (2) (6) (5) (11) Total locations, end of period 1,076 1,758 2,834 (1)In addition to new store openings, the Company strategically relocated two stores in theU.S. during the three months endedJune 30, 2022 . During the six months endedJune 30, 2022 , the Company relocated two stores in theU.S. and one store inLatin America . (2)Store consolidations were primarily acquired locations over the past five years which have been combined with overlapping stores and for which the Company expects to maintain a significant portion of the acquired customer base in the consolidated location.
As of
CRITICAL ACCOUNTING ESTIMATES
The financial statements have been prepared in accordance with GAAP. The significant accounting policies and estimates 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 2021 Annual Report on Form 10-K. There have been no changes to the Company's significant accounting policies for the six months endedJune 30, 2022 . 25 -------------------------------------------------------------------------------- Table of Contents
RESULTS OF OPERATIONS (unaudited)
Continuing Impact of COVID-19
The COVID-19 pandemic and its contributory impacts on the economy continue to impact numerous aspects of the Company's business and the continuing long-term impact to its business remains unknown. The extent to which COVID-19 continues to impact the Company's operations, results of operations, liquidity and financial condition will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the unknown duration and severity of the COVID-19 pandemic, which may be impacted by variants of concern and the efficacy and adoption rate of the COVID-19 vaccines in the jurisdictions in which the Company operates. In addition, changes in economic conditions and consumer spending, rising inflation, increases in interest rates and the actions taken to limit the economic impact of COVID-19 have and may continue to have a material adverse impact on demand for pawn loans in future periods. Moreover, safety protocols, staffing constraints and supply chain delays continue to impact operations and traffic counts for many retailers, which include the Company's pawn stores and many of AFF's retail merchant partners.
Constant Currency Results
The Company's management reviews and analyzes operating results inLatin America on a constant currency basis because the Company believes this better represents the Company's underlying business trends. Constant currency results are non-GAAP financial measures, which exclude the effects of foreign currency translation and are calculated by translating current-year results at prior-year average exchange rates. The wholesale scrap jewelry sales inLatin America are priced and settled inU.S. dollars and are not affected by foreign currency translation, as are a small percentage of the operating and administrative expenses inLatin America , which are billed and paid inU.S. dollars. Amounts presented on a constant currency basis are denoted as such. See "Non-GAAP Financial Information" for additional discussion of constant currency operating results. Business operations inMexico ,Guatemala andColombia are transacted in Mexican pesos, Guatemalan quetzales and Colombian pesos. The Company also has operations inEl Salvador , where the reporting and functional currency is theU.S. dollar. The following table provides exchange rates for the Mexican peso, Guatemalan quetzal and Colombian peso for the current and prior-year periods:June 30 ,
Favorable /
2022 2021
(Unfavorable)
Mexican peso /U.S. dollar exchange rate: End-of-period 20.0 19.8 (1) % Three months ended 20.0 20.1 - % Six months ended 20.3 20.2 - % Guatemalan quetzal /U.S. dollar exchange rate: End-of-period 7.8 7.7 (1) % Three months ended 7.7 7.7 - % Six months ended 7.7 7.7 - % Colombian peso /U.S. dollar exchange rate: End-of-period 4,127 3,757 (10) % Three months ended 3,914 3,690 (6) % Six months ended 3,914 3,622 (8) % 26
-------------------------------------------------------------------------------- Table of Contents
Operating Results for the Three Months Ended
U.S. Pawn Segment The following table details earning assets, which consist of pawn loans and inventories, as well as other earning asset metrics of theU.S. pawn segment as ofJune 30, 2022 compared toJune 30, 2021 (dollars in thousands, except as otherwise noted): As of June 30, 2022 2021 IncreaseU.S. Pawn Segment Earning assets: Pawn loans $ 271,255 $ 203,838 33 % Inventories 185,921 144,083 29 % $ 457,176 $ 347,921 31 % Average outstanding pawn loan amount (in ones) $ 222 $ 209 6 % Composition of pawn collateral: General merchandise 35 % 35 % Jewelry 65 % 65 % 100 % 100 % Composition of inventories: General merchandise 45 % 49 % Jewelry 55 % 51 % 100 % 100 % Percentage of inventory aged greater than one year 1 % 1 % Inventory turns (trailing twelve months cost of merchandise sales divided by average inventories) 2.7 times 3.1 times 27
-------------------------------------------------------------------------------- Table of Contents The following table presents segment pre-tax operating income and other operating metrics of theU.S. pawn segment for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 (dollars in thousands). Operating expenses include salary and benefit expense of pawn-store-level employees, occupancy costs, bank charges, security, insurance, utilities, supplies and other costs incurred by the pawn stores. Three Months Ended June 30, 2022 2021 Increase U.S. Pawn Segment Revenue: Retail merchandise sales $ 195,369 $ 173,254 13 % Pawn loan fees 87,743 66,942 31 % Wholesale scrap jewelry sales 15,673 6,846 129 % Total revenue 298,785 247,042 21 % Cost of revenue: Cost of retail merchandise sold 114,390 95,599 20 % Cost of wholesale scrap jewelry sold 13,282 5,387 147 % Total cost of revenue 127,672 100,986 26 % Net revenue 171,113 146,056 17 % Segment expenses: Operating expenses 101,242 93,574 8 % Depreciation and amortization 5,868 5,347 10 % Total segment expenses 107,110 98,921 8 % Segment pre-tax operating income $ 64,003 $ 47,135 36 % Operating metrics: Retail merchandise sales margin 41 % 45 % Net revenue margin 57 % 59 % Segment pre-tax operating margin 21 % 19 %
Retail Merchandise Sales Operations
U.S. retail merchandise sales increased 13% to$195.4 million during the second quarter of 2022 compared to$173.3 million for the second quarter of 2021. Same-store retail sales increased 10% in the second quarter of 2022 compared to the second quarter of 2021. The increase in total and same-store retail sales was primarily due to increased inventory levels during the second quarter of 2022 compared to the second quarter of 2021. The gross profit margin on retail merchandise sales in theU.S. was 41% in the second quarter of 2022 and 45% in the second quarter of 2021. The decrease in the retail merchandise margins was primarily due to lower inventory levels during the second quarter of 2021, which limited the need for normal discounting.U.S. inventories increased 29% from$144.1 million atJune 30, 2021 to$185.9 million atJune 30, 2022 . The increase was primarily due to lower-than-normal inventory balances atJune 30, 2021 due to the impacts of the COVID-19 pandemic. Inventories aged greater than one year in theU.S. were 1% at bothJune 30, 2022 and 2021. 28
--------------------------------------------------------------------------------
Table of Contents Pawn Lending OperationsU.S. pawn loan receivables as ofJune 30, 2022 increased 33% in total and on a same-store basis compared toJune 30, 2021 . The increase in total and same-store pawn receivables was primarily due to the continued recovery in pawn lending demand during the second quarter of 2022 to pre-pandemic levels.U.S. pawn loan fees increased 31% to$87.7 million during the second quarter of 2022 compared to$66.9 million for the second quarter of 2021. Same-store pawn fees in the second quarter of 2022 increased 29% compared to the second quarter of 2021. The increase in total and same-store pawn loan fees was primarily due to the continued recovery in pawn loan receivables, as described above.
Segment Expenses
U.S. operating expenses increased 8% to$101.2 million during the second quarter of 2022 compared to$93.6 million during the second quarter of 2021 while same-store operating expenses increased 6% compared with the prior-year period. The increase in total and same-store operating expenses was primarily due to inflationary increases in wages and other certain operating costs and increased store-level incentive compensation driven by increased revenues and segment profit during the second quarter of 2022.
Segment Pre-Tax Operating Income
TheU.S. segment pre-tax operating income for the second quarter of 2022 was$64.0 million , which generated a pre-tax segment operating margin of 21% compared to$47.1 million and 19% in the prior year, respectively. The increase in the segment pre-tax operating income and margin reflected a 17% increase in net revenue further leveraged by the 8% increase in operating expenses. 29 -------------------------------------------------------------------------------- Table of Contents
Latin America Operations Segment
Latin American results of operations for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 were not materially affected by the change in the average Mexican peso toU.S. dollar exchange rate as it was materially consistent with the prior-year period. The translated value of Latin American earning assets as ofJune 30, 2022 compared toJune 30, 2021 was impacted by a 1% unfavorable change in the end-of-period value of the Mexican peso compared to theU.S. dollar. The following table details earning assets, which consist of pawn loans and inventories as well as other earning asset metrics of theLatin America pawn segment as ofJune 30, 2022 compared toJune 30, 2021 (dollars in thousands, except as otherwise noted): Constant Currency Basis As of June 30, As of June 30, 2022 Increase 2022 2021 Increase (Non-GAAP) (Non-GAAP) Latin America Pawn Segment Earning assets: Pawn loans $ 114,453$ 108,328 6 %$ 115,482 7 % Inventories 74,607 72,872 2 % 75,278 3 % $ 189,060$ 181,200 4 %$ 190,760 5 % Average outstanding pawn loan amount (in ones) $ 80$ 80 - %$ 81 1 % Composition of pawn collateral: General merchandise 69 % 67 % Jewelry 31 % 33 % 100 % 100 % Composition of inventories: General merchandise 70 % 64 % Jewelry 30 % 36 % 100 % 100 % Percentage of inventory aged greater than one year 1 %
1 %
Inventory turns (trailing twelve months cost of merchandise sales divided by average inventories) 4.2 times 4.4 times 30
-------------------------------------------------------------------------------- Table of Contents The following table presents segment pre-tax operating income and other operating metrics of theLatin America pawn segment for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 (dollars in thousands). Operating expenses include salary and benefit expense of pawn-store-level employees, occupancy costs, bank charges, security, insurance, utilities, supplies and other costs incurred by the pawn stores. Constant Currency Basis Three Months Ended Three Months Ended June 30, June 30, 2022 Increase 2022 2021 Increase (Non-GAAP) (Non-GAAP) Latin America Pawn Segment Revenue: Retail merchandise sales$ 102,888 $ 92,313 11 %$ 102,841 11 % Pawn loan fees 46,324 42,967 8 % 46,304 8 % Wholesale scrap jewelry sales 8,175 7,256 13 % 8,175 13 % Total revenue 157,387 142,536 10 % 157,320 10 % Cost of revenue: Cost of retail merchandise sold 64,919 57,825 12 % 64,888 12 % Cost of wholesale scrap jewelry sold 6,613 6,545 1 % 6,609 1 % Total cost of revenue 71,532 64,370 11 % 71,497 11 % Net revenue 85,855 78,166 10 % 85,823 10 % Segment expenses: Operating expenses 48,053 45,554 5 % 48,048 5 % Depreciation and amortization 4,553 4,534 - % 4,559 1 % Total segment expenses 52,606 50,088 5 % 52,607 5 % Segment pre-tax operating income$ 33,249 $ 28,078 18 %$ 33,216 18 % Operating metrics: Retail merchandise sales margin 37 % 37 % 37 % Net revenue margin 55 % 55 % 55 % Segment pre-tax operating margin 21 % 20 % 21 % 31
-------------------------------------------------------------------------------- Table of Contents
Retail Merchandise Sales Operations
Latin America retail merchandise sales increased 11% (also 11% on a constant currency basis) to$102.9 million during the second quarter of 2022 compared to$92.3 million for the second quarter of 2021. Same-store retail sales increased 11% (also 11% on a constant currency basis) during the second quarter of 2022 compared to the second quarter of 2021. The increase in total and same-store retail sales was primarily due to increased inventory levels during the second quarter of 2022 compared to the second quarter of 2021 and strong demand for deep value goods. The gross profit margin on retail merchandise sales was 37% during both the second quarter of 2022 and 2021.Latin America inventories increased 2% (3% on a constant currency basis) from$72.9 million atJune 30, 2021 to$74.6 million atJune 30, 2022 . The increase was primarily due to lower-than-normal inventory balances atJune 30, 2021 due to the impacts of the COVID-19 pandemic. Inventories aged greater than one year inLatin America were 1% at bothJune 30, 2022 and 2021.
Pawn Lending Operations
Latin America pawn loan receivables increased 6% (7% on a constant currency basis) as ofJune 30, 2022 compared toJune 30, 2021 , and on a same-store basis pawn loan receivables increased 5% (6% on a constant currency basis). The increase in total and same-store pawn receivables was primarily due to the continued recovery in pawn lending demand during the second quarter of 2022 towards pre-pandemic levels. The Company attributes the slower growth in Latin American pawn receivables in part to continued, elevated currency remittances from theU.S. Latin America pawn loan fees increased 8% (also 8% on a constant currency basis), totaling$46.3 million during the second quarter of 2022 compared to$43.0 million for the second quarter of 2021. Same-store pawn fees increased 7% (also 7% on a constant currency basis) in the second quarter of 2022 compared to the second quarter of 2021. The increase in total and same-store constant currency pawn loan fees was primarily due to the continued recovery in pawn loan receivables as described above.
Segment Expenses
Operating expenses increased 5% (also 5% on a constant currency basis) to$48.1 million during the second quarter of 2022 compared to$45.6 million during the second quarter of 2021, reflecting continued store growth and modest inflationary pressure on labor and other operating expenses in the current quarter. Same-store operating expenses increased 5% (also 5% on a constant currency basis) compared to the prior-year period.
Segment Pre-Tax Operating Income
The segment pre-tax operating income for the second quarter of 2022 was$33.2 million , which generated a pre-tax segment operating margin of 21% compared to$28.1 million and 20% in the prior year, respectively. The increase in the segment pre-tax operating income and margin reflected a 10% increase in net revenue further leveraged by a 5% increase in operating expenses. 32 -------------------------------------------------------------------------------- Table of Contents
Retail POS Payment Solutions Segment
The Company completed the AFF Acquisition onDecember 17, 2021 , and the results of operations of AFF have been consolidated since the acquisition date. As a result of purchase accounting, AFF's as reported earning assets, consisting of finance receivables and leased merchandise, contain significant fair value adjustments. The fair value adjustments will be amortized over the life of the finance receivables and lease contracts acquired at the time of acquisition. The following table provides a detail of finance receivables as reported and as adjusted to exclude the impacts of purchase accounting as ofJune 30, 2022 (in thousands): As of June 30, 2022 As Reported Adjusted (GAAP) Adjustments (Non-GAAP) Finance receivables, before allowance for loan losses (1)$ 199,555 $ (14,970) $ 184,585 Less allowance for loan losses (73,936) - (73,936) Finance receivables, net$ 125,619 $
(14,970)
(1) As reported acquired finance receivables was recorded at fair value in conjunction with purchase accounting. Adjustment represents the difference between the original amortized cost basis and fair value of the remaining acquired finance receivables.
The following table provides a detail of leased merchandise as reported and as adjusted to exclude the impacts of purchase accounting as ofJune 30, 2022 (in thousands): As of June 30, 2022 As Reported Adjusted (GAAP) Adjustments (Non-GAAP) Leased merchandise, before allowance for lease losses (1)$ 188,025 $ 15,174 $ 203,199 Less allowance for lease losses (69,101) (16,913) (86,014) Leased merchandise, net$ 118,924 $ (1,739) $ 117,185 (1) As reported acquired leased merchandise was recorded at fair value (which includes estimates for charge-offs) in conjunction with purchase accounting. Adjustment represents the difference between the original depreciated cost and fair value of the remaining acquired leased merchandise. 33 -------------------------------------------------------------------------------- Table of Contents AFF's as reported results of operations contain significant purchase accounting impacts. The following table presents segment pre-tax operating income as reported and as adjusted to exclude the impacts of purchase accounting for the three months endedJune 30, 2022 (in thousands). Operating expenses include salary and benefit expense of certain operations focused departments, merchant partner incentives, bank and other payment processing charges, credit reporting costs, information technology costs, advertising costs and other operational costs incurred by AFF. Three
Months Ended
As Reported Adjusted (GAAP) Adjustments (Non-GAAP) Retail POS Payment Solutions Segment Revenue: Leased merchandise income$ 147,700 $ -$ 147,700 Interest and fees on finance receivables 43,744 11,514 55,258 Total revenue 191,444 11,514 202,958 Cost of revenue: Depreciation of leased merchandise 82,605 (1,598) 81,007 Provision for lease losses 38,035 - 38,035 Provision for loan losses 26,800 - 26,800 Total cost of revenue 147,440 (1,598) 145,842 Net revenue 44,004 13,112 57,116 Segment expenses: Operating expenses 31,260 - 31,260 Depreciation and amortization 699 - 699 Total segment expenses 31,959 - 31,959 Segment pre-tax operating income$ 12,045 $ 13,112 $ 25,157 34
-------------------------------------------------------------------------------- Table of Contents
© Edgar Online, source