FirstCash Holdings, Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

A leading operator of pawn stores in the US and Latin America, FCFS provides financial solutions to underbanked consumers through collateralized loans, as well as retail sales of pre-owned merchandise.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

FirstCash Holdings, Inc. (FCFS), formerly known as First Cash Financial Services, Inc., is a leading international operator of pawn stores.

Business Overview

FirstCash operates through two main segments: U.S. Pawn and Latin America Pawn.

  • U.S. Pawn: This segment primarily offers secured pawn loans, which use merchandise as collateral, and engages in retail sales of forfeited merchandise. The focus is on providing short-term financial solutions to a consumer segment that often faces challenges obtaining credit from traditional financial institutions.
  • Latin America Pawn: This segment operates pawn lending and retail sales across several countries in Latin America.

A significant portion of FirstCash’s revenue stems from the interest and fees earned on pawn loans.

Revenue Distribution: FirstCash’s revenue is generated through a combination of loan interest, fees and retail sales of merchandise, including jewelry. A substantial proportion of their revenue comes from interest and fees earned on pawn loans, along with retail sales of merchandise that was initially given as collateral but was forfeited.

  • Retail merchandise sales: A significant portion of FirstCash’s revenue comes from retail sales of pre-owned merchandise, which originally comes from customer pawn loans.
  • Fees and interest on finance receivables: Also generates income from fees on credit extension for their payment solutions.

FirstCash provides financial solutions to underbanked consumers through collateralized loans, with a focus on the US and Latin America markets.

Trends in the Industry: The pawn industry has historically been a stable market, serving a demographic that may not have easy access to traditional banking or loan services. The demand for short-term, small-dollar loans is influenced by economic conditions, financial needs of the underbanked, and their ability to offer collateral. FCFS operates in both the US and Latin America and, as a result, its revenue is subject to currency exchange rates.

  • Technological Disruption: New technologies such as fintech companies are offering digital lending products that may appeal to some customers, putting pressure on pawn shops to adapt.
  • Regulatory environment: The pawn industry faces various regulatory hurdles, and regulatory compliance is a core part of operating in this industry.
  • Economic Sensitivity: The pawn industry is inherently sensitive to economic cycles. In times of economic downturns, demand for small-dollar loans generally rises while, at the same time, people’s ability to pay back such loans may decline.

FirstCash is a fairly complex business, in that it operates across multiple countries with its earnings reported in multiple currencies.

Margins: FirstCash’s margins are a complex mix of interest income on loans, fees and sales of merchandise. The gross margin for its retail sales is typically very strong.

  • In recent filings, a positive trend of increasing gross margins in the US segment has been noted.
  • The company’s consolidated gross margin improved to 49.8 percent in the three months ended September 30, 2023 as compared to 45.2% during the same period in 2022.
  • The Latin America segment reported a gross margin of 66.6 percent in 2023 compared to 66.3% in 2022.
  • The company’s loan portfolio and operating results are also affected by factors such as local interest rates, economic conditions and the ability of consumers to repay loans.

The company has seen strong improvements in margin in the past few quarters.

Competitive Landscape: The pawn industry is fragmented. It includes local mom-and-pop shops to other larger players. Competition comes from payday lenders, buy-here-pay-here auto lenders and other forms of short-term lenders, all of whom can cause pressure to FirstCash’s market share and profit margins.

  • Scale advantage is critical: Larger companies such as FCFS benefit from economies of scale (in terms of sourcing and financing), which enables them to operate more efficiently and with a lower cost structure. This is critical, as smaller players often have lower profit margins.

FirstCash has several different sources of revenue. The company operates in multiple different countries. And a combination of all these facts and more is the reason for its understadability score. What Makes FCFS Different:

  • International Presence: It has operations in Mexico, Guatemala, Colombia, and El Salvador.
  • Integrated Retail and Pawn Model: The company both issues pawn loans and resells the underlying collateral if a borrower defaults.
  • Focus on Underbanked: FCFS has a targeted focus on serving the underbanked and those who need alternative forms of financial solutions.
  • Proprietary Technology: The company is also investing in fintech for mobile payment options in Latin America.

Despite a diversified nature of operations across both the US and Latin America, the company’s revenue model is actually fairly straightforward: give secured loans and sell the collateral if a borrower defaults.

Financial Analysis

Recent reports and filings reflect the company’s Q3 2023 financial performance.

  • Revenue: FirstCash reported consolidated revenue of $853.3 million, a 14.3% increase year over year. Notably, the U.S. segment revenues grew 16.1%, while the Latin America segment revenues increased 13%. This shows a strong underlying trend of growth across both segments.
  • Net Income: The company had net income of $64.6 million ($1.25 per diluted share) in 2023, an increase compared to the $57.3 million in net income ($1.13 per share) last year. The increase is due to higher revenue numbers and improved gross margins.
  • Earnings per Share: The net income translated to an adjusted diluted earnings per share of $1.25. Note that these are GAAP based earnings, for a better picture of the results, see diluted EPS excluding acquisition related expenses and severance costs.
  • Margins: The company’s consolidated gross margin improved to 49.8% as of Q3 2023 from 45.2% in the same quarter in 2022.
  • Growth: The company’s core pawn business is showing steady growth across the two segments, driven by both loan volumes and retail sales.
  • Guidance: The company has stated guidance that they expect 2023 earnings per share to be within $5.50 to $5.60.

The growth is a common theme in the report of FirstCash’s financials, especially in terms of revenues and gross margins.

Balance Sheet Health: 4 / 5

FirstCash’s balance sheet displays a number of positives.

  • Asset quality: The company’s assets (mostly loans and inventories) appear to be well-managed, but they are illiquid and can be heavily impacted by the overall economy.
  • Debt: The company uses debt to support its operations, which include debt of $1.4 billion as of September 30, 2023. As interest rates rise in the US, they can have an impact on the company’s bottom line. The company has been able to increase its borrowing under their credit facility, but this is also a risk. Debt-to-equity levels should continue to be carefully monitored, but is currently not a cause for alarm.
  • Cash Flow: Operating cash flow was $143.3 million during the first nine months of 2023, and free cash flow was $125.1 million, both numbers show a clear ability of the company to bring in cash from operations.

FirstCash has strong growth numbers with adequate financial management as of recent reports. However, investors need to track potential interest rate risk.

Understandability: 2 / 5

While the core business of pawn lending and retail sales is easy to comprehend, several factors make FCFS a slightly more complex business to understand.

  • International Operations: It operates in the U.S. and various Latin American markets, bringing in foreign currency risk.
  • Financial Reporting: FCFS’s consolidated financials can be difficult to analyze due to the presentation being affected by both US-GAAP and IFRS.
  • Currency risk: The company’s revenue and earnings are dependent on foreign exchange rates.
  • Risk: Both the operations and business model are dependent on macro-economic factors as well as regulations.

Recent Concerns and Controversies

One of the biggest concerns for any lender is potential loan losses, especially if the market turns sour. While FCFS is generally well-positioned to handle any bad turn in financial markets, any sign of a weakening consumer may force investors to second guess the sustainability of its business model.

  • The company’s share price decreased after its Q3 earnings were revealed. A potential contributing factor could be the fact that the company’s 2023 EPS guidance ($5.50-$5.60) did not include expected future revenue from acquisitions.
  • However, the CEO’s comments suggest that the management team remains optimistic in terms of continued revenue growth and margin improvements.

Overall, FirstCash seems to be well-positioned to thrive in its industry. However, one should keep in mind the risks associated with the business.

Summary

FCFS is a multinational pawn store operator with a combination of strong revenue generation and complex financial and risk factors.

Conclusion

FCFS seems to be doing well operationally and financially. However, due to several underlying risks that are not clearly visible, the business requires a deep dive to be understood properly. The management seems confident in the future of the business. So, as long as the company keeps track of its risk factors and grows the business, it would be a good investment. However, investors should do their due diligence before committing any capital.