FIRSTCASH HOLDINGS, INC. 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 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 . 25 --------------------------------------------------------------------------------
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OPERATIONS AND LOCATIONS
As of September 30, 2022 , the Company operated 2,839 pawn store locations
comprised of 1,076 stores in 25 U.S. states and the District of Columbia , 1,674
stores in 32 states in Mexico , 60 stores in Guatemala , 15 stores in Colombia and
14 stores in El Salvador .
The following tables detail pawn store count activity:
Three Months Ended
U.S. Latin America Total
Total locations, beginning of period 1,076 1,758 2,834
New locations opened - 9 9
Locations acquired 2 - 2
Consolidation of existing pawn locations
(1) (2) (4) (6)
Total locations, end of period 1,076 1,763 2,839
Nine Months Ended September 30, 2022
U.S. Latin America Total
Total locations, beginning of period 1,081 1,744 2,825
New locations opened (2) - 28 28
Locations acquired 3 - 3
Consolidation of existing pawn locations
(1) (8) (9) (17)
Total locations, end of period 1,076 1,763 2,839
(1)Store consolidations were primarily acquired locations over the past six
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.
(2)In addition to new store openings, the Company strategically relocated two
stores in the U.S. and one store in Latin America during the nine months ended
September 30, 2022 .
As of September 30, 2022 , AFF provided LTO and retail POS solutions for consumer
goods and services through a nationwide network of approximately 8,600 active
retail merchant partner locations.
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 nine months endedSeptember 30, 2022 . 26 -------------------------------------------------------------------------------- Table of Contents
RESULTS OF OPERATIONS (unaudited)
Continuing Impact of COVID-19
The COVID-19 pandemic and its contributory impacts on the economy have impacted numerous aspects of the Company's business. In particular, the COVID-19 pandemic and government responses thereto had an initial adverse impact on pawn loan demand, which impacted pawn receivables, inventories and revenues. This adverse impact in pawn loan demand was offset in large part by a positive impact in merchandise sales. Throughout 2021 and 2022, pawn loan demand has steadily recovered and pawn receivables, inventories and revenues are now ahead of pre-pandemic levels.
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: September 30, Favorable / 2022 2021 (Unfavorable) Mexican peso /U.S. dollar exchange rate: End-of-period 20.3 20.3 - % Three months ended 20.2 20.0 (1) % Nine months ended 20.3 20.1 (1) % Guatemalan quetzal /U.S. dollar exchange rate: End-of-period 7.9 7.7 (3) % Three months ended 7.8 7.7 (1) % Nine months ended 7.7 7.7 - % Colombian peso /U.S. dollar exchange rate: End-of-period 4,532 3,835 (18) % Three months ended 4,375 3,844 (14) % Nine months ended 4,068 3,696 (10) % 27
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Operating Results for the Three Months Ended
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 ofSeptember 30, 2022 compared toSeptember 30, 2021 (dollars in thousands, except as otherwise noted): As of September 30, 2022 2021 IncreaseU.S. Pawn Segment Earning assets: Pawn loans $ 279,645 $ 242,825 15 % Inventories 204,359 175,047 17 % $ 484,004 $ 417,872 16 % Average outstanding pawn loan amount (in ones) $ 232 $ 208 12 % Composition of pawn collateral: General merchandise 32 % 36 % Jewelry 68 % 64 % 100 % 100 % Composition of inventories: General merchandise 43 % 48 % Jewelry 57 % 52 % 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 2.9 times 28
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The following table presents segment pre-tax operating income and other
operating metrics of the U.S. pawn segment for the three months ended
September 30, 2022 compared to the three months ended September 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
September 30,
2022 2021 Increase
U.S. Pawn Segment
Revenue:
Retail merchandise sales $ 195,854 $ 167,257 17 %
Pawn loan fees 96,222 76,674 25 %
Wholesale scrap jewelry sales 12,956 4,168 211 %
Total revenue 305,032 248,099 23 %
Cost of revenue:
Cost of retail merchandise sold 114,899 93,326 23 %
Cost of wholesale scrap jewelry sold 11,338 3,778 200 %
Total cost of revenue 126,237 97,104 30 %
Net revenue 178,795 150,995 18 %
Segment expenses:
Operating expenses 102,508 93,247 10 %
Depreciation and amortization 5,806 5,662 3 %
Total segment expenses 108,314 98,909 10 %
Segment pre-tax operating income $ 70,481 $ 52,086 35 %
Operating metrics:
Retail merchandise sales margin 41 % 44 %
Net revenue margin 59 % 61 %
Segment pre-tax operating margin 23 % 21 %
Retail Merchandise Sales Operations
U.S. retail merchandise sales increased 17% to$195.9 million during the third quarter of 2022 compared to$167.3 million for the third quarter of 2021. Same-store retail sales increased 16% in the third quarter of 2022 compared to the third quarter of 2021. The increase in total and same-store retail sales was primarily due to increased inventory levels during the third quarter of 2022 compared to the third quarter of 2021 and greater demand for value-priced consumer goods. The gross profit margin on retail merchandise sales in theU.S. was 41% in the third quarter of 2022 and 44% in the third quarter of 2021. The decrease in the retail merchandise margins was primarily due to lower-than-normal inventory levels during the third quarter of 2021, which limited the need for normal discounting.U.S. inventories increased 17% from$175.0 million atSeptember 30, 2021 to$204.4 million atSeptember 30, 2022 . The increase was primarily due to lower-than-normal inventory balances atSeptember 30, 2021 due to the impacts of the COVID-19 pandemic. Inventories aged greater than one year in theU.S. were 1% at bothSeptember 30, 2022 and 2021. 29 --------------------------------------------------------------------------------
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Pawn Lending Operations
U.S. pawn loan receivables as of September 30, 2022 increased 15% in total and
on a same-store basis compared to September 30, 2021 . The increase in total and
same-store pawn receivables was primarily due to the continued recovery in pawn
loan demand to pre-pandemic levels combined with inflationary pressures driving
additional demand for consumer credit.
U.S. pawn loan fees increased 25% to $96.2 million during the third quarter of
2022 compared to $76.7 million for the third quarter of 2021. Same-store pawn
fees in the third quarter of 2022 also increased 25% compared to the third
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 10% to $102.5 million during the third quarter
of 2022 compared to $93.2 million during the third quarter of 2021 while
same-store operating expenses increased 9% 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 store
operating profit during the third quarter of 2022.
Segment Pre-Tax Operating Income
TheU.S. segment pre-tax operating income for the third quarter of 2022 was$70.5 million , which generated a pre-tax segment operating margin of 23% compared to$52.1 million and 21% in the prior year, respectively. The increase in the segment pre-tax operating income and margin reflected an 18% increase in net revenue further leveraged by the 10% increase in segment expenses. 30 -------------------------------------------------------------------------------- Table of Contents
Latin America Operations Segment
Latin American results of operations for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 were impacted by a 1% unfavorable change in the average value of the Mexican peso compared to theU.S. dollar. The translated value of Latin American earning assets as ofSeptember 30, 2022 compared toSeptember 30, 2021 were not affected by the end-of-period Mexican peso compared to theU.S. dollar exchange rate as it was unchanged compared to the prior-year period. 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 ofSeptember 30, 2022 compared toSeptember 30, 2021 (dollars in thousands, except as otherwise noted): Constant Currency Basis As of September 30, As of September 30, 2022 Increase 2022 2021 Increase (Non-GAAP) (Non-GAAP) Latin America Pawn Segment Earning assets: Pawn loans $ 124,582$ 106,168 17 %$ 124,711 17 % Inventories 91,069 79,213 15 % 91,167 15 % $ 215,651$ 185,381 16 %$ 215,878 16 % Average outstanding pawn loan amount (in ones) $ 79$ 76 4 %$ 79 4 % Composition of pawn collateral: General merchandise 69 % 68 % Jewelry 31 % 32 % 100 % 100 % Composition of inventories: General merchandise 71 % 67 % Jewelry 29 % 33 % 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) 4.0 times 4.2 times
31
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The following table presents segment pre-tax operating income and other
operating metrics of the Latin America pawn segment for the three months ended
September 30, 2022 compared to the three months ended September 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 September 30,
September 30, Increase / 2022 Increase
2022 2021 (Decrease) (Non-GAAP) (Non-GAAP)
Latin America Pawn Segment
Revenue:
Retail merchandise sales $ 107,591 $ 101,469 6 % $ 108,808 7 %
Pawn loan fees 49,505 44,691 11 % 50,067 12 %
Wholesale scrap jewelry sales 5,626 5,415 4 % 5,626 4 %
Total revenue 162,722 151,575 7 % 164,501 9 %
Cost of revenue:
Cost of retail merchandise sold 68,642 64,731 6 % 69,415 7 %
Cost of wholesale scrap jewelry sold 4,923 4,750 4 % 4,977 5 %
Total cost of revenue 73,565 69,481 6 % 74,392 7 %
Net revenue 89,157 82,094 9 % 90,109 10 %
Segment expenses:
Operating expenses 47,979 45,372 6 % 48,527 7 %
Depreciation and amortization 4,566 4,591 (1) % 4,630 1 %
Total segment expenses 52,545 49,963 5 % 53,157 6 %
Segment pre-tax operating income $ 36,612 $ 32,131 14 % $ 36,952 15 %
Operating metrics:
Retail merchandise sales margin 36 % 36 % 36 %
Net revenue margin 55 % 54 % 55 %
Segment pre-tax operating margin 22 % 21 % 22 %
Retail Merchandise Sales Operations
Latin America retail merchandise sales increased 6% (7% on a constant currency basis) to$107.6 million during the third quarter of 2022 compared to$101.5 million for the third quarter of 2021. Same-store retail sales increased 5% (7% on a constant currency basis) during the third quarter of 2022 compared to the third quarter of 2021. The increase in total and same-store retail sales was primarily due to increased inventory levels during the third quarter of 2022 compared to the third quarter of 2021 and greater demand for value-priced consumer goods. The gross profit margin on retail merchandise sales was 36% during both the third quarter of 2022 and 2021.Latin America inventories increased 15% from$79.2 million atSeptember 30, 2021 to$91.1 million atSeptember 30, 2022 . The increase was primarily due to lower-than-normal inventory balances atSeptember 30, 2021 due to the impacts of the COVID-19 pandemic. Inventories aged greater than one year inLatin America were 1% at bothSeptember 30, 2022 and 2021. 32 --------------------------------------------------------------------------------
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Pawn Lending Operations
Latin America pawn loan receivables increased 17% as of September 30, 2022
compared to September 30, 2021 , and on a same-store basis pawn loan receivables
also increased 17%. The increase in total and same-store pawn receivables was
primarily due to the continued recovery in pawn loan demand during the third
quarter of 2022 to pre-pandemic levels.
Latin America pawn loan fees increased 11% (12% on a constant currency basis),
totaling $49.5 million during the third quarter of 2022 compared to $44.7
million for the third quarter of 2021. Same-store pawn fees increased 10% (12%
on a constant currency basis) in the third quarter of 2022 compared to the third
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 6% (7% on a constant currency basis) to $48.0
million during the third quarter of 2022 compared to $45.4 million during the
third 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% (6% on a constant currency basis)
compared to the prior-year period.
Segment Pre-Tax Operating Income
The segment pre-tax operating income for the third quarter of 2022 was$36.6 million , which generated a pre-tax segment operating margin of 22% compared to$32.1 million and 21% in the prior year, respectively. The increase in the segment pre-tax operating income and margin reflected a 9% increase in net revenue further leveraged by a 5% increase in segment expenses and a 1% unfavorable change in the average value of the Mexican peso. 33 -------------------------------------------------------------------------------- Table of Contents
Retail POS Payment Solutions Segment
The Company completed the AFF Acquisition onDecember 17, 2021 , and the results of operations of AFF have been consolidated since the acquisition date. As a result of purchase accounting, AFF's as reported earning assets, consisting of finance receivables and leased merchandise, contain significant fair value adjustments. The fair value adjustments will be amortized over the life of the finance receivables and lease contracts acquired at the time of acquisition. The following table provides a detail of finance receivables as reported and as adjusted to exclude the impacts of purchase accounting as ofSeptember 30, 2022 (in thousands): As of September 30, 2022 As Reported Adjusted (GAAP) Adjustments (Non-GAAP) Finance receivables, before allowance for loan losses (1)$ 190,358 $ (7,858) $ 182,500 Less allowance for loan losses (78,413) - (78,413) Finance receivables, net$ 111,945 $
(7,858)
(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 ofSeptember 30, 2022 (in thousands): As of September 30, 2022 As Reported Adjusted (GAAP) Adjustments (Non-GAAP) Leased merchandise, before allowance for lease losses (1)$ 210,703 $ 6,709 $ 217,412 Less allowance for lease losses (78,020) (7,610) (85,630) Leased merchandise, net (2)$ 132,683 $
(901)
(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. (2)Includes$0.6 million of intersegment transactions related toU.S. pawn stores offering AFF's LTO payment solution as a payment option in its stores that are eliminated upon consolidation. For further detail, see earning assets detail in Note 10 of Notes to Consolidated Financial Statements. 34
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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 ended September 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 $ 158,089 $ - $ 158,089
Interest and fees on finance receivables 48,846 7,111 55,957
Total revenue 206,935 7,111 214,046
Cost of revenue:
Depreciation of leased merchandise 86,703 (839) 85,864
Provision for lease losses 32,350 - 32,350
Provision for loan losses 31,956 - 31,956
Total cost of revenue 151,009 (839) 150,170
Net revenue 55,926 7,950 63,876
Segment expenses:
Operating expenses 35,060 - 35,060
Depreciation and amortization 775 - 775
Total segment expenses 35,835 - 35,835
Segment pre-tax operating income $ 20,091 $ 7,950 $ 28,041
35
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