This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha
Half of the business is pawn
“The bricks-and-mortar business is a classic secured lending, commonly referred to as pawn loans. These loans average about $120 a piece, running over from 60 days to four months in length, secured by merchandise where customers come in 7 out of 10 times, redeem that merchandise and then put it back into the pawn cycle over many, many years.
On the 3 out of 10 times that those loans aren’t redeemed, we own the merchandise. We sell that merchandise. We make a gross profit. So, basically, we’re the only lender I know that has a positive recoveries-to-liquidations ratio, that’s why we underwrite every loan that we make as if we will loan the merchandise.”
Unsecured lending is other half
“At that time, we acquired a company called CashNetUSA, which was quite small, basically a breakeven business, and began offering unsecured loans over the Internet. The basis of that offering is a very complicated analytical model, high proprietary analytics that we think makes it a very defensible product longer term. Since that period of time, that company has gone from breakeven to, on a trailing 12-month basis, right at $200 million in EBITDA. High growth rate over the last four years as a CAGR operating in – or EBITDA, adjusted EBITDA rate of roughly 30%. On a level of, as I’ve said, roughly $1 billion, just under $1 billion in total revenue.”
Payday loans are only 30% of ecommerce business
“Whereas the single pay product was about 90% of revenue three or four years ago; today, it’s less than 30% of revenue from just the e-commerce business and comprises less than 24% or about 24% of the e-commerce assets which were roughly about $400 million in loans. So in addition to diversifying internationally, it’s diversified its product set, and I think it continues to give an industry leadership opportunity.”
The two businesses are very different, so we’re splitting them in a spinoff
“So the question becomes why did the board feel like it made sense to split these two businesses? Well, the key here is that you have a high-growth, Internet-based, leading market share business housed within what’s been a classic bricks-and-mortar pawn lending operation. One is a very routine cash cow performance with retail lending services.
In the past, historically, it grows at a slower rate. There’s awful a lot of cash but produces a nice level of growth versus a very innovative, high-growth product set on the e-commerce side, as I said, with impressive growth rates both on revenue and operating income over the last five years.
What we found is that an investor group which is now conflicted between the classic bricks-and-mortar environment with essentially an e-commerce opportunity. And the best solution, from our perspective, would be to allow the shareholders to decide which of those two businesses they want to hold.”
Haven’t seen any sign that this consumer is in better shape
“I don’t think this consumer is overall in better shape than it was in the past. I think the pay check-to-pay check activity continues to exist, access to capital continues to be limited. There aren’t competing products stepping into our space.
Serving this customer, whether it’s payroll taxes, entitlement reform, healthcare cost, all are more expensive, real wages aren’t rising. So the need for capital continues to exist and the defensibility of a significant pawnshop operation which reaches a variety of customers throughout the United States will continue to be a key for us to grow in the future.”
Higher gold prices do not dictate demand for pawn loans
” I tell people, gold prices don’t dictate demand. The need for money dictates demand. The ability to pay the light bill, the need to make – to finish out and make the final rent payment or the mortgage payment is what drives demand. So higher gold prices gives you more collateral value but it doesn’t drive your need.”
e-commerce customer is really more of a middle market customer with limited access to credit
“Moving slightly over to the e-commerce business, more of middle market group, we’re seeing a very strong growth in the U.S. business from a demand perspective. And we think that’s because of limitations that have been placed on our – some of our competitors, whether it’s the commercial bank’s ability to lend on an unsecured basis for their deposit advance product, whether it’s the CARD Act and the credit card reform activities. Again, more and more customers seeking unsecured loans, which is classic middle market America.
So this is a group that already deleveraged but now needs credit for whatever the short-term requirements and really to, and this is the most important thing, avoid a higher cost penalty, whether it’s a late fee on a credit card. Obviously, missing a mortgage or payment has many penalties. So, that customer seems to have found a solution in the Internet as a convenient access to capital and one that has driven significant growth in our U.S. business. So from a U.S. perspective, whether it’s the secured side or the unsecured side, we are seeing nice growth in both sides of that business”
Pawn customers were way ahead of the curve in buying used merchandise
“the pawn business is the ultimate discount retailer. At the end of the day, pre-owned merchandise, which has been made extremely popular due to the popularity of products – after eBay or Amazon, the acquisition of pre-owned goods kind of got demystified.
Now, the pawn customers understood that from the beginning. Because from a pawn customers’ perspective, they know that television works just fine when they pawn it and so they see no reason to pay retail prices for a television or piece of electronics, whether it’s a smartphone or a tablet, whatever, or a piece of jewelry or a lawn mower for that matter.”