EZCorp,
Q2 2019 - Results
May 13, 2019
1. CONTEXT
It’s time to look at EZCorp. Let me first read my previous analysis before proceeding with this one.
I don’t know if you remember but EZCorp is the second largest pawn shop operator in the US. It’s a turnaround story with a major shareholder known for all the wrong reasons and that is why Mr. Market punishes this stock with low multiples compared to its biggest rival. I like it.
2. RESULTS
And now I’m going to look at the results.
Second Quarter Results – 2019 – Press release
Second Quarter Results – 2019 – Presentation
3. POSITIVES
3.1. Pawn Loans Outstanding
I didn’t include this metric on my first analysis but I’m including it now. Basically, this is the cash the company has lended to its customers and it’s one of the most important metrics because the more cash they have lended, the more Pawn Service Charges they get. It works like a bank. I wonder if I could separate the two businesses (loan and retail) and analyse them in separate.
The total Pawn Loans Outstanding were up by 10%. Just for some granularity, the US PLO went up by 5% while the LATAM’s PLO went up by 24%.
3.2. Revenue was up
And that’s one of the reasons why the revenue figure went up by 6%. The most important part of the business, the “Pawn service charges” were up by 10%.
We must bare in mind that the revenue coming from this section is already gross profit (higher margin) while we still have to subtract the Cost of Goods Sold from the Merchandise sales (lower margin).
3.3. SSS were up
As a retailer, the Same Store Sales are very important. On the second quarter, Same Store loan growth was up by 5% in the USA and 4% in LATAM.
3.4. Cash Flows
For the first six months of the year, the net cash provided by operating activities went up by 11% and the CAPEX went down by about $5M. These two combined made it possible for the FCF to go up 40% to $37M.
3.5. Repayment of the convertibles
Fortunately the company is paying part of the outstanding convertible notes later this year.
3.6. New independent directors
And because they know that this company has had a history of bad corporate governance – a subject I am more and more interested about – they’ve now added six new independent directors. I count this as a good thing but until one verifies the “independence” of these directors, this is equal to almost nothing.
4. NEGATIVES
4.1. Operating expenses were up
Although the net revenue was up by 6%, the operating expenses went up by more than that, exactly 8,8% which in turn led to a decrease of the EBITDA and the operating income.
These higher expenses are related to several factors including the net increase of 74 new stores that are usually less efficient when the company buys them. The company says that these new stores are usually accretive after one quarter of ownership so we should be seeing the EBITDA picking up in the next quarters.
4.2. Yet another impairment charge
The company recorded a $6,5M non-cash impairment charge related to the carrying value of the company’s investment in Cash Converters International, based on its share price. So although the company has written of a lot of bad investments in recent years, it doesn’t seem to have stopped. I wish they would just clean their numbers once and for all.
Mental Note: I’ve read about a lawsuit that is depressing the Cash Converters stock price and I should take a look at it for my next update.
4.3. Interest expense was up
The net interest expense was up $3,9M…
…due to the new debt issued in May 2018.
Although I would prefer to see the company financing its growth through its own cash flows, the balance sheet ratios are still the same as when I first wrote about the them.
5. OVERVIEW & CONCLUSION
5.1. OVERVIEW
Overall I think these are good results. The management team is following on their plan of expanding the company’s footprint in LATAM at the expense of short term profitability.
Pawn Loans Outstanding have increased 10% and same-store loan growth increased 6% leading to a 10% increase in the Pawn Service Charges. These are for me the most important factors to bare in mind.
I also like it that they are closing down some of the Canadian stores, where they have a completely different business and that they are rolling their new software across the existing stores. I’ve read the other day that the same item can be pawned for completely different amounts in different stores within the same city so I’m very curious to see what this Evergreen software can do for the business.
The major shareholder, Philip Cohen, is still there and that’s one of the reasons Mr. Market doesn’t appreciate this stock. I think that eventually there will have to be some changes to the dual-class stock structure and that’s when Mr. Market will re-price this stock as he should. As of this writing, the share price is $9,41, which is some 10% less from my first write-up while the most important metrics are all up.
5.2. CONCLUSION
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