Dollar Financial Corp.’s (DLLR) second-quarter operating earnings (excluding one-time gains) came in at 53 cents per share, a cent ahead of the Zacks Consensus Estimate of 52 cents but dramatically higher than the year-ago quarter’s estimate of 19 cents per share. Results do not take into consideration the three-for-two stock split that is effective from February 4, 2011.
The operating results exclude non-recurring gains, the non-cash interest expense resulting from the adoption of ASC 470-20, and the non-cash amortization associated with the legacy cross-currency interest rate swap agreements, which are adjusted for pro forma effective income tax rates. Including these charges, GAAP net income was 79 cents per share in the reported quarter compared to the 29 cents in the prior-year quarter.
Results for the quarter benefited primarily from increased revenues as a result of improvements in consumer lending, pawn and money transfer services. However, higher operating expenses were the downside. Dollar Financial’s global business units continued to deliver strong earnings growth and a low-risk balance sheet during the reported quarter.
Total revenues for the quarter increased 13.6% year over year to $182.5 million, almost in line with the Zacks Consensus Estimate of $182.0 million. Consumer lending revenues increased 20.1% year over year to $99.3 million.
Additionally, money transfer fees grew 11.3% year over year to $7.3 million, pawn service fees and sales surged 55.3% to $$7.3 million and other revenue increased 37.2% to $19.9 million. However, this top line growth was partially offset by check cashing revenues that declined 4.4% year over year to $36.8 million and purchased gold sales that dipped 14.4% to $11.3 million from the year-ago quarter.
Operating expenses increased 12.5% year over year to $112.6 million, primarily attributable to salaries and benefits that increased 13.5% year over year to $42.8 million. Alongside, provision for loan losses surged 29.9% year over year to $16.5 million.
The loan loss provision as a percentage of gross consumer-lending revenues modestly went up to 16.6% from 15.4% in the prior-year quarter, based on rising mix of internet-based loans.
Despite this, Dollar Financial’s operating margin jumped 15.3% year over year to 69.9% million, driven by strong organic revenue growth, supported by expanded advertising programs, low depreciation costs and contributions from recent acquisitions. The company also reported adjusted EBITDA of $52.9 million in the reported quarter, which increased 22.7% year over year and 20.9% on a constant currency basis.
Financial Update
On January 10, 2011, Dollar Financial authorized a three-for-two stock split of its common stock to infuse greater liquidity and boost share distribution. The stock split will be carried out through a stock dividend issued by the company. Accordingly, shareholders as on January 20 will receive one-half additional share for each share of common stock they hold on that date.
Further, Dollar Financial expects to distribute these additional shares on February 4. Additionally, the stock split will result in the increase in the number of shares of common stock outstanding to about 36.6 million shares from 24.9 million, as reported on September 30, 2010.
At the end of December 31, 2010, the debt structure of Dollar Financial consisted of $44.8 million of U.S. senior convertible notes due 2027 and $120.0 million of U.S. senior convertible notes due 2028.
In addition, Dollar Financial has $600.0 million of senior unsecured notes which are not due until December 2016. Thus, Dollar Financial has no immediate debt principal repayment obligations; the first potential put date being December 2012 for $44.8 million of U.S. senior convertible notes.
While revolving facilities in the U.S. and Canada remains intact, Dollar Financial availed £5.8 million out of its £7.0 million of total credit facilities in the U.K., as of December 31, 2010, to fund its working capital needs.
Dollar Financial’s strong operating cash flows will be helped by the absence of mandatory debt repayment obligations until December 2012. As of September 30, 2010, Dollar Financial’s total assets were $1.34 billion and total shareholders equity was $251.9 million.
Investments and Acquisitions Update
On December 31, 2010, Dollar Financial UK Ltd purchased a leading pawn lending Scandinavian company, Sefina Finance AB, for approximately $73 million in cash. While $58 million was paid immediately, the balance is expected to be paid in instalments in 2011.
Based in Stockholm, Sweden, Sefina has an operating history of more than 125 years. The company provides pawn loans that are primarily secured by gold jewellery, diamonds and watches, through its 16 store locations in Sweden and 12 stores in Finland. Hence, the acquisition appears to be a good fit in Dollar’s business portfolio.
Concurrently, on the same day the company also agreed to acquire Purpose U.K. Holdings Limited, the parent company of Month End Money (MEM), a leading provider of online short-term loans in the U.K. MEM operates under the brand name PaydayUK and is a market leader in providing loans through both internet and telephony-based technologies throughout the U.K.
Through the acquisition, Dollar Financial aims to position itself in the rapidly growing eCommerce arena. However, the acquisition awaits regulatory approval.
In addition, Dollar Financial opened 16 new stores in U.K., closed 5 stores and acquired 48 stores during the quarter, in order to increase customer reach and operating efficiencies to generate additional revenue in the future.
Outlook for Fiscal 2011
Dollar Financial raised its operating earnings guidance to $2.20–$2.32 from $2.05–$2.30 per share, excluding onetime charges or gains. Post the stock spilt, however, the operating earnings projection will equate to $1.45–$1.55 per share.
The guidance considers an expected effective income tax rate from operations of 37%. Further, Dollar Financial’s fiscal 2011 guidance includes the potential earnings contribution and costs from the Sefina acquisition and expansion into the eCommerce sphere.
The outlook for adjusted EBITDA has also been revised to the range of $215.0–$220.0 million from the prior range of $205.0–$215.0 million for fiscal 2011.
Our Take
Dollar Financial has been tapping on this growing opportunity through mergers and acquisitions in order to compete with arch rivals,CapitalSource Inc. (CSE) and Global Cash Access Holdings Inc. (GCA), in the payday lender industry. However, risks related to its tax strategies, increased debt obligation and its increased international dependence continue to float on the surface. Moreover, the stock split makes shares appear more affordable to small investors, which in turn would end up boosting the demand and drive prices. Nevertheless, solid liquidity, exposure to a somewhat recession-proof sector and cost containment measures will drive growth in future.
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