2023-11-18 08:00:43 ET
Summary
- EZCORP's pawn loan business model is well suited for the current macro environment.
- The company recently saw record revenues and earnings on the back of strong demand for pawn loans.
- Despite strong business fundamentals, EZPW continues to trade at attractive valuations.
For the past year, I have written several positive articles on EZCORP Inc. ( EZPW ), as I believe EZCORP's pawn loan business model is well suited to the current challenging macro environment as the company provides alternative financing to struggling consumers.
So far, EZCORP has not disappointed, with the company recently delivering record annual revenues and earnings. For the fourth quarter, EZPW recorded a 14% YoY growth in Pawn Loans Outstanding ("PLO") and revenues reached $270.5 million, a 16% YoY increase. Net income rose 40% YoY to $10.3 million and Dil. EPS was $0.15, a 36% YoY increase (Figure 1).
For the full year, EZCORP reported a record $1.05 billion in revenues, the highest in the company's history. However, net income fell 23% YoY to $38.5 million. This was primarily due to a one-time non-cash impairment charge of EZCORP's investment in Cash Converters of Australia that we wrote about in our prior note.
On a constant currency basis, adjusted for the one-time charges, EZCORP's net income was actually $69.8 million, a 28% YoY surge (Figure 2).
Operationally, the highlight of the quarter was EZCORP's PLO balance, which grew 7.4% QoQ and 14% YoY to $240 million, the highest balance in the company's history (Figure 3). EZCORP's PLO balance grew 11% YoY on a same store basis, suggesting the company's services remain in high demand.
Merchandise sales remained strong, with the company recording $600 million in total sales for 2023, a 12.7% YoY growth. However, merchandise gross profit only grew 5% YoY, as gross margins declined by 100 bps. On the positive side, inventory remained robust at 2.7x while aged inventory improved 30bps QoQ to 1.3%.
The improvement aged inventory was encouraging, as one of the risks I highlighted in my previous article was from deteriorating customer balance sheets, as financial stretched consumers struggle under the pressures of soaring inflation.
Others' Pain Is EZCORP's Gain
One interesting tidbit on the company's latest conference call was when an analyst asked the CEO to comment on the health of the consumer, as a "big value retailer" (i.e. Walmart) reported on the same day as EZCORP and alluded to "a sharp falloff in sales during the last two weeks of October, and are basically more cautious on the consumer than they were 90 days ago with consumers holding out for lower prices."
I believe the CEO's reply concisely encapsulates my bullish thesis on the company: (author highlighted important sentences)
Yes, we are seeing new customers. It's region dependent. And as you know, we've got two sides of our business. We've got lending on one side and we've got retail on the other. I think on the demand side, lending continues to be very strong and I think that's reflective of the economy we're in , the macro environment .
And I think with sales. Sales is, for us, a critical part of the business. I think as the economy gets more challenging, I think it will also be challenging. But people are seeing value for money in secondhand goods. So I think there's a few forces at play here.
Do I think it's going to be a challenge in the future if the macroeconomic environment continues to deteriorate? Yes, I do. But in balancing that, we are still seeing strong demand for secondhand goods just because it represents value for money, and it also is an environmentally responsible way to shop.
Basically, when consumers struggle from a challenging macro environment, EZCORP benefit in two ways. First, financially stretched consumers are more likely to take out pawn loans as a form of alternative financing. Furthermore, when shopping for goods, EZCORP's secondhand goods may represent good value for money for struggling consumers.
A+ For 2020 Plan; What Is In Store For The Future?
The recent quarter also concluded EZCORP's ambitious 3-year plan that was initially put in place after fiscal 2020 (Figure 4). At the time, EZCORP was struggling after the COVID pandemic and financial performance was quite poor.
The 2020 3-year strategic plan called for EZCORP to refocus on its core pawn business while simplifying the cost structure. Initially, EZCORP focused on cost initiatives like closing its CASHMAX business in Canada and the closure of underperforming stores in the U.S. and Latin America. However, more recently, EZCORP has turned its focus on driving growth through an innovative EZ+ Rewards program to stimulate customer engagement and retention (Figure 5).
EZCORP's performance against the 2020 3-year plan has been nothing short of remarkable, as PLO increased from $131 million in 2020 to $240 million in the latest quarter (Figure 6).
This has led to a doubling of EBITDA and a near tripling of adj. net income, from $22 million in FY2020 to $70 million in the most recent fiscal year (Figure 7).
Looking forward, management recently launched a new 3-year plan with a focus on improving the company's culture and store management teams. The company will continue to focus on customer service and engagement while driving loan balances and inventory turnover. Basically, more of the same things the company has been doing right for the last 3 years.
Valuation Remains 'Cheap'
Despite the strong improvements in business fundamentals, EZPW's stock price has only risen by ~60% since 2020. In my opinion, EZPW's stock remains undervalued, trading at just 8.9x Fwd Non-GAAP P/E compared to 9.3x for financial peers (Figure 8)
Investors are reminded that unlike banks and other financial institutions that experience declining earnings due to higher loan losses when consumers struggle, EZPW actually benefits from a poor macro environment.
Buybacks As Part Of Capital Return
In a vote of confidence for the business, EZCORP has bought back close to 2 million shares in fiscal 2023 at a cost of $17.0 million, returning capital to shareholders (Figure 9).
Looking forward, the company hinted on the earnings call that it may continue to buy back shares "given where the stock is out at the moment", although buybacks will be balanced against capital required to fund growth in loan assets as well as to repay maturing convertible bonds.
Risks To EZCORP
Ironically, the biggest risk to EZCORP may be if the Federal Reserve can achieve a 'soft landing' or 'no landing' and inflation returns to the central bank's 2% target. This could prolong the current economic cycle and improve the financial condition of struggling consumers.
However, we should keep in mind that a slowing inflation growth rate does not mean that prices will return to prior levels, since low inflation simply means prices grow at a slower pace. Even if CPI YoY growth goes to zero , prices are still 18% higher than they were in December 2020 (Figure 1).
Conclusion
Overall, EZPW's latest quarter results continue to demonstrate the countercyclical nature of the pawn loan business, as EZCORP saw strong growth in revenues and earnings while other retailers like Walmart are starting see struggling customers reduce their consumption.
I continue to like EZPW's business and maintain my buy rating.
For further details see:
EZCorp: Record Revenues And Earnings, Reiterate Buy