What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-11-15 compared with 2022-11-16 · 89 added, 83 removed, 274 unchanged (39% of the section changed)

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Non-GAAP Financial Information

To supplement our condensed consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide certain other non-GAAP financial information on a constant currency basis ("constant currency") and “same store” basis.

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide certain other non-GAAP financial information on a constant currency basis (“constant currency”) and “same store” basis.

We use constant currency results to evaluate our Latin America Pawn operations, which are denominated primarily in Mexican pesos, Guatemalan quetzales and other Latin American currencies.

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Constant currency results, where presented, also exclude the foreign currency gain or loss.

The end-of-period and approximate average

exchange rates for each applicable currency as compared to U.S.

dollars as of and for the twelve months ended September 30, 2022 and 2021 were as follows:

The end-of-period and approximate average exchange rates for each applicable currency as compared to U.S.

dollars as of and for the fiscal years ended September 30, 2023 and 2022 were as follows:

September 30, Twelve Months Ended

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Honduran lempira 24.5 24.1 24.3 24.1

Peruvian sol 3.9 4.1 3.8 3.7

Australian dollar 1.6 1.6 1.5 1.4

Operating Results

Fiscal 2023 vs.

These tables, as well as the discussion that follows, should be read in conjunction with the accompanying condensed consolidated financial statements and related notes.

These tables, as well as the discussion that follows, should be read in conjunction with the accompanying consolidated financial statements and related notes.

Summary Financial Data

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General and administrative 67,529 64,342 5%

Impairment of goodwill, intangible and other assets 4,343 — *

Depreciation and Amortization 32,131 32,140 —%

(Gain) loss on sale or disposal of assets and other (674) 83 *

Other charges — 229 *

Loss (gain) on sale or disposal of assets and other 208 (674) (131)%

Other income (5,097) — *

Total operating expenses 517,688 453,225 14%

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Interest income (7,470) (817) *

Equity in net income of unconsolidated affiliates (1,779) (3,803) (53)%

Other income (167) (790) (79)%

Equity in net loss (income) of unconsolidated affiliates 28,459 (1,779) *

Other expense (income) 3,072 (167) *

Total non-operating expenses 40,517 7,209 462%

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* Represents a percentage computation that is not mathematically meaningful.

PLO increased $34.1 million (19%) to $210.0 million.

This is the highest period-end PLO balance we have ever recorded.

The increase was due to strong loan demand reflecting continued recovery above pre-COVID levels.

Total revenues increased $156.7 million ( 21%), and gross profit increased 18%.

PSC increased $60.7 million ( 23%) as a result of higher PLO.

Merchandise sales increased $90.1 million (20%), and merchandise sales

gross profit increased $17.9 million (10%), due to a return to more normalized inventory levels and our improved core retail strategy of selling general merchandise inventory in the first 90 days.

Gross margin on merchandise sales declined 400 bps to 38%, reflecting a return to more normalized margins, but remained in our targeted range.

Operating expenses increased $34.9 million (8%) primarily due to (a) a $26.6 million increase in store expenses as a result of increased labor in-line with store activity and rent associated with lease renewals and (b) a $7.8 million increase in general and administrative expenses due to asset write-downs associated with IT infrastructure migration and corporate office sublease, a litigation accrual and increased labor and software licensing costs.

Total non-operating expenses decreased $7.9 million (52%).

Interest expense decreased $12.2 million, driven by the Accounting Standards Update 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40) , (“ASU 2020-06”) accounting policy change, which no longer requires debt discount be included on our balance sheet effective October 1, 2021.

The policy change eliminates the non-cash interest amortization of the debt discount.

Organization and Summary of Significant Accounting Policies included in “Part II, Item 8 — Financial Statements and Supplemental Data” for further discussion of this recently adopted accounting policy.

The interest expense decrease was partially offset by a decrease in equity income for our unconsolidated affiliates primarily due to Cash Converters’ net results, which included an impairment, primarily of its ROU lease assets, that was attributed to COVID-19.

Income tax expense increased $10.1 million primarily due to an increase in income before income taxes of $51.7 million.

Pawn loans outstanding (“PLO”) increased $35.8 million (17%) to $245.8 million due to improved operational performance and continued strong pawn demand.

Total revenues increased $162.8 million (18%) and gross profit increased 15%, reflecting improved pawn service charge (“PSC”) revenue, merchandise sales and merchandise sales gross profit.

PSC increased $62.9 million (20%) as a result of higher average PLO and yields.

Merchandise sales increased $82.6 million (15%), driven primarily by our continued focus on customer engagement, pricing merchandise to maintain strong inventory turnover and an increase in stores.

Merchandise sales gross margin remains within our targeted range at 36%.

Operating expenses increased $64.5 million (14%) primarily due to (a) a $61.2 million increase in store expenses as a result of increased labor in-line with store activity, higher store count and, to a lesser extent, expenses related to our loyalty program and (b) a $3.2 million increase in general and administrative expenses primarily due to an increase in costs related to incentive compensation, insurance and our Workday implementation, partially offset by the litigation accrual charge of $2.0 million recorded in the prior period.

Total non-operating expenses increased $33.3 million (462%), primarily due to the net loss on our share of losses in Cash Converters’ net results related to their non-cash goodwill impairment charge and interest expense.

Interest expense increased $6.5 million, primarily driven by the net loss recorded on the partial extinguishments of the 2024 convertible notes and 2025 convertible notes, and higher average total debt outstanding at overall higher average effective interest rates due to the issuance of the 2029 convertible notes in December 2022.

Debt of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data” for further discussion.

Income tax expense decreased $4.4 million primarily due to the decrease in income before income taxes of $16.1 million, offset by an increase in tax expense for the non-deductible loss realized on the refinancing of the convertible notes in the current year.

Income tax expense includes other items that do not necessarily correspond to pre-tax earnings and create volatility in our effective tax rate.

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Gross profit 456,338 405,766 12%

Segment contribution:

Segment operating expenses:

Store expenses 299,319 266,114 12%

Depreciation and amortization 10,382 10,552 (2)%

Loss on sale or disposal of assets and other 115 51 125%

Segment operating contribution 146,522 129,049 14%

Other segment expenses 49 27 81%

Other segment income (2) (2) —%

Segment contribution $ 146,524 $ 129,051 14%

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Monthly average yield on pawn loans outstanding 14 % 13 % 100 bps

Pawn loan redemption rate 84 % 86 % (200) bps

Pawn collateral - general merchandise 34 % 36 % (6)%

Pawn collateral - jewelry 66 % 64 % 3%

(a) Balance is calculated based on the average of the monthly ending balance averages during the applicable period.

PLO continued to increase, ending the year at $163.5 million, up 20% in total and on a same store basis, due to increased loan demand reflecting a recovery above pre-COVID levels.

Total revenues increased 19% and gross profit increased 16%, reflecting higher average PLO for the year driving higher PSC.

PSC increased 22% primarily as a result of higher average PLO.

Merchandise sales increased 15% due to our return to more normalized inventory levels and our improved core retail strategy of selling general merchandise inventory in the first 90 days.

Offsetting the sales increase, merchandise sales gross margin decreased 300 bps to 41%, reflecting a return to more normalized margins, but remained in our targeted range.

Store expenses increased 5% primarily due to increased labor in-line with store activity and rent associated with lease renewals.

PLO continued to increase, ending the year at $190.6 million, up 17% in total and 13% on a same store basis due to improved customer service and increased pawn demand.

Total revenues increased 16% and gross profit increased 12%, primarily due to increased PSC.

PSC increased 19% as a result of higher average PLO and yields.

Merchandise sales increased 10%, primarily driven by our continued focus on customer engagement and pricing merchandise to maintain strong inventory turnover.

Offsetting the sales increase, merchandise sales gross margin decreased 300 bps to 38%, reflecting a return to normalized margins.

Store expenses increased 12% (10% on a same store basis), primarily due to increased labor in-line with store activity, higher store count and, to a lesser extent, expenses related to our loyalty program.

Segment contribution increased $17.5 million due to the changes described above.

During fiscal 2022, we acquired three stores in the U.S.

During fiscal 2023, segment net store count in our U.S.

pawn segment increased by 14 due to the acquisition of 12 stores, the opening of 3 de novo stores and the consolidation of 1 store.

Latin America Pawn

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Gross profit 153,445 122,270 25% 141,641 16%

Segment contribution:

Segment operating expenses:

Store expenses 119,255 91,303 31% 109,552 20%

Depreciation and amortization 9,191 7,913 16% 8,412 6%

Other charges — 229 * — *

Other income (5,097) — 100% (4,481) 100%

Segment operating contribution 30,096 23,054 31% 28,158 22%

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Monthly average yield on pawn loans outstanding 17 % 16 % 100 bps 17 % 100 bps

Pawn loan redemption rate (c) 79 % 80 % (100) bps 79 % (100) bps

Pawn collateral - general merchandise 68 % 72 % (6)% 67 % (7)%

Pawn collateral - jewelry 32 % 28 % 14% 33 % 18%

* Represents a percentage computation that is not mathematically meaningful.

(a) Fiscal 2022 and 2021 constant currency amounts exclude net GAAP basis foreign currency transaction minimal loss and a gain of $0.1 million, respectively, resulting from movement in exchange rates.

(a) Fiscal 2023 and 2022 constant currency amounts exclude net GAAP basis foreign currency transaction loss of $0.4 million and a minimal loss, respectively, resulting from movement in exchange rates.

(b) Balance is calculated based on the average of the monthly ending balance averages during the applicable period.

(GAAP) 2022 Change

(Constant Currency)

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(a) Stores open at the end of the period included in the same store calculation were 651.

During fiscal 2022, we opened 28 de novo stores in Latin America.

PLO improved to $55.1 million, up 19% (7% on constant currency basis).

On a same store basis, PLO increased 15% (13% on a constant currency basis).

The increase was attributable to increased loan demand reflecting a recovery above pre-COVID levels.

Total revenues were up 30% and on a constant currency basis, while gross profit increased by 23% and on a constant currency basis, reflecting higher average PLO for the year driving higher PSC

PSC increased 26% on a GAAP and constant currency basis, as a result of higher average PLO during the year.

Merchandise sales increased 39% (40% on a constant currency basis) due to our return to more normalized inventory levels and our improved core retail strategy of selling general merchandise inventory in the first 90 days.

Offsetting the sales increase, merchandise sales gross margin decreased 500 bps to 30%, reflecting a return to more normalized margins.

Store expenses increased $13.8 million, up 18% (18% on a constant currency basis), primarily due to increased labor in-line with store activity and rent associated with lease renewals and annual inflation adjustments.

On a same store basis, PLO increased 16% (4% on a constant currency basis) as consumer demand increased.

Total revenues were up 26% (16% on a constant currency basis), while gross profit increased by 25% (16% on a constant currency basis), primarily due to increased PSC, higher merchandise sales and improved gross profit.

PSC increased 22% (13% on constant currency basis) as a result of higher average PLO and yields.

Merchandise sales increased 30% (19% on a constant currency basis) and 24% on a same store basis (14% on a constant currency basis).

Merchandise sales increase was driven primarily by our continued focus on customer engagement, pricing merchandise to maintain strong inventory turnover and increase in stores.

Merchandise sales gross margin increased 100 bps to 31%, within our target range.

Store expenses increased $28.0 million, up 31% (20% on a constant currency basis), primarily due to increases in minimum wage and headcount, higher store count and, to a lesser extent, expenses related to our loyalty program and rent.

Same-store expenses increased 26% (15% on a constant currency basis).

Segment contribution was up 39% to $24.1 million (40% increase to $24.2 million on a constant currency basis) primarily due to the changes described above.

Other Investments

The following table presents selected summary financial data for our Other Investment segment after translation to U.S.

Segment contribution was up 32% to $31.7 million (24% on a constant currency basis).

This increase was primarily due to the reversal of contingent consideration liability in connection with a previously completed acquisition, which was recorded to “Other income,” and the changes in revenue and store expenses described above.

During fiscal 2023, net store count in our Latin America pawn segment increased by 42 due to the opening of 44 de novo stores and the consolidation of 2 stores.

Other Investments and Cash Converters

The following table presents selected summary financial data for our Other Investments and Cash Converters segments after translation to U.S.

dollars from its functional currency of primarily Australian dollars:

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Segment operating expenses:

Equity in net income of unconsolidated affiliates (1,779) (3,803) (53)%

Segment operating contribution 1,890 4,223 (55)%

Other segment loss (income) 52 (173) (130)%

Segment contribution $ 1,838 $ 4,396 (58)%

Segment contribution was $1.8 million, a decrease of $2.6 million, due to a decrease in equity income for our unconsolidated affiliates.

The decrease is primarily due to Cash Converters’ net results, which included an impairment, primarily of its ROU lease assets, that was attributed to COVID-19.

Interest income (1,500) — 100%

Equity in net loss (income) of unconsolidated affiliates 28,459 (1,779) *

Segment operating (loss) contribution (26,904) 1,890 *

Other segment loss 31 52 (40)%

Segment (loss) contribution $ (26,935) $ 1,838 *

* Represents a percentage computation that is not mathematically meaningful.

Segment loss was $26.9 million, a decrease of $28.8 million, primarily due to the net loss on our share of Cash Converters’ net results related to their non-cash goodwill impairment charge.

The following table reconciles our consolidated segment contribution discussed above to net income, including items that affect our consolidated financial results but are not allocated among segments:

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General and administrative 67,532 64,342 5%

Impairment of goodwill and intangibles 4,343 — *

Depreciation and amortization 12,558 13,675 (8)%

(Gain) Loss on sale or disposal of assets and other (688) 62 (1,210)%

Loss (gain) on sale or disposal of assets and other 382 (688) (156)%

Interest expense 16,456 9,972 65%

Interest income (4,829) — *

Other (income) expense (71) 223 (132)%

Other expense (income) 3,172 (71) *

Income before income taxes 51,633 67,713 24%

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Net income $ 38,463 $ 50,160 23%

Segment contribution increased $47.7 million (45%), primarily due to the improved operating results of the segments, as discussed above.

General and administrative expenses increased $7.8 million (14%), primarily due to a litigation accrual and increased salaries, including performance-based incentive compensation.

Interest expense decreased $12.2 million (55%) primarily driven by the ASU 2020-06 accounting policy change, which no longer requires debt discount be included on our balance sheet effective October 1, 2021.

The policy change eliminates the non-cash interest amortization of the debt discount.

Organization and Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data” for further discussion of this recently adopted accounting policy.

Income tax expense increased $10.1 million primarily due to an increase in income before income taxes of $51.7 million.

* Represents a percentage computation that is not mathematically meaningful.

Segment contribution decreased $3.7 million or 2%, primarily due to the net loss on our share of losses in Cash Converters’s net results related to their non-cash goodwill impairment charge, partially offset by the improved operating results of the segments above.

General and administrative expenses increased $3.2 million (5%), primarily due to the impact related to the reversal of incentive compensation for the departed CEO in the prior year and to a lesser extent, an overall increase in incentive-based compensation, and costs primarily related to our Workday implementation, partially offset by the litigation accrual charge of $2.0 million recorded in the prior period.

Interest expense increased $6.5 million (65%), primarily driven by the net loss recorded on the partial extinguishments of the 2024 convertible notes and 2025 convertible notes, and higher average total debt outstanding at overall higher average effective interest rates due to the issuance of the 2029 convertible notes during December 2022.

Debt of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data” for further discussion.

Interest income increased $4.8 million, due primarily to our treasury management with increased market interest rates.

Income tax expense decreased $4.4 million primarily due to a decrease in income before income taxes of $16.1 million, offset by an increase in tax expense for the non-deductible loss realized on the refinancing of the convertible notes in the current year.

Income tax expense includes other items that do not necessarily correspond to pre-tax earnings and create volatility in our effective tax rate.

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Cash flows used in investing activities (110,886) (113,283) (2)%

Cash flows used in financing activities (2,832) (16,253) (83)%

Cash flows provided by (used in) financing activities 23,692 (2,832) *

Effect of exchange rate changes on cash and cash equivalents and restricted cash (41) 325 (113)%

Net decrease in cash and cash equivalents and restricted cash $ (49,255) $ (48,929) 1%

Net increase (decrease) in cash and cash equivalents and restricted cash $ 14,599 $ (49,255) 130%

* Represents a percentage computation that is not mathematically meaningful.

The increase in cash flows from operating activities was primarily due to a $41.5 million increase in net income, partially offset by cash flows used to purchase inventory and other changes to working capital primarily related to the timing of collections in pawn service charges receivable and the timing of payments of accounts payable and prepaid expenses.

The $28.7 million increase in cash flows used in investing activities was primarily due to $16.5 million in outgoing cash used to fund other investments and $6.9 million investment in unconsolidated affiliate, offset by the prior-year increased acquisition activity, primarily attributable to CAE.

In the current year, there was an increase of $79.0 million in net pawn lending associated with PLO growth, partially offset by a $65.9 million increase in the sale of forfeited collateral in line with our growing merchandise sales.

Of the $16.5 million used to fund other investments, $15.0 million was invested in Founders, as discussed in Note 5:

Strategic Investments of Notes to Consolidated Financial Statements included in in “Part II, Item 8 — Notes to the Condensed Consolidated Financial Statements.”

The decrease in cash flows used in financing activities was primarily due to the prior-year payment of assumed debt of $14.9 million from the CAE acquisition, offset by a $2.0 million current year increase in cash used to repurchase and retire common stock.

The net effect of these changes was a $49.3 million decrease in cash on hand during the current year, resulting in a $214.4 million ending cash and restricted cash balance.

The $35.3 million increase in cash flows provided by operating activities was primarily due to an increase in net income (when considering adjustments for non-cash items affecting net income) as well as changes in working capital primarily related to the timing of payments of income taxes, inventory, prepaid expenses and accounts payable.

The $2.4 million decrease in cash flows used in investing activities was primarily due to an increase of $33.4 million in net pawn lending outflows and a $29.8 million net increase in cash flows used to fund acquisitions, strategic investments and capital expenditures, the largest of which is $15.0 million related to a note receivable from Founders, as discussed in Note 5:

Strategic Investments in Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data.” These were offset by a $61.9 million increase in cash inflows from the sale of forfeited collateral.

The $26.5 million increase in cash flows provided by financing activities was primarily related to the December 2022 financing of the 2029 Convertible Notes, in which we issued $230.0 million principal amount of 3.750% Convertible Senior Notes Due 2029 offset by the extinguishment of approximately $109.4 million aggregate principal amount of our 2024 Convertible Notes for approximately $117.5 million plus accrued interest and approximately $69.1 million aggregate principal amount of our 2025 Convertible Notes for approximately $62.9 million plus accrued interest.

In addition, we used approximately $5.0 million of the net proceeds from the 2029 Convertible Notes offering to repurchase 578,703 shares of our Class A common stock from purchasers of the notes in privately negotiated transactions.

Further, the Company repurchased and retired 1,389,102 shares of our Class A Common Stock for $12.0 million under the Common Stock Repurchase Program during the fiscal year ended September 30, 2023.

The net effect of these changes was a $14.6 million increase in cash on hand during the current year, resulting in a $229.0 million ending cash and restricted cash balance.

Sources and Uses of Cash

On May 3, 2022, the Company's Board of Directors (the "Board") authorized the repurchase of up to $50 million of our Class A Common Stock over 3 years.

In December 2022, we issued $230.0 million aggregate principal amount of 2029 Convertible Notes.

In conjunction with the issuance of the 2029 Convertible Notes, we extinguished approximately $109.4 million aggregate principal amount of our 2024 Convertible Notes for approximately $117.5 million plus accrued interest and approximately $69.1 million aggregate principal amount of our 2025 Convertible Notes for approximately $62.9 million plus accrued interest.

Debt of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data.” The shares repurchased in conjunction with the transactions discussed above were authorized separately from, and not considered part of, the publicly announced share repurchase program referred to below.

In May 2022, our Board of Directors (the “Board”) authorized the repurchase of up to $50 million of our Class A Common Stock over 3 years.

Execution of the program will be responsive to fluctuating market conditions and valuations, liquidity needs and the expected return on investment compared to other opportunities.

The amount and timing of purchases will be dependent on a variety of factors, including stock price, trading volume, general market conditions, legal and regulatory requirements, general business conditions, the level of cash flows, and corporate considerations determined by management and the Board, such as liquidity and capital needs and the availability of attractive alternative investment opportunities.

The Board of Directors has reserved the right to modify, suspend or terminate the program at any time.

Through September 30, 2022, the Company has repurchased and retired 237,943 shares of our Class A Common Stock for $2.0 million, which amount was allocated between "Additional paid-in capital" and "Retained earnings" in our Consolidated Balance Sheets.

We anticipate that cash flows from operations and cash on hand will be adequate to fund any future stock repurchases, our contractual obligations, tax payments, planned de novo store growth, capital expenditures and working capital requirements through fiscal 2023.

The Board has reserved the right to modify, suspend or terminate the program at any time.

Through September 30, 2023, we have repurchased and retired 1,627,045 shares of our Class A Common Stock for $14.0 million, which amount was allocated between “Additional paid-in capital” and “Retained earnings” in our Consolidated Balance Sheets.

We anticipate that cash flows from operations and cash on hand will be adequate to fund ongoing operations, deb service requirements, tax payments, any future stock repurchases, strategic investments, our contractual obligations, planned de novo store growth, capital expenditures and working capital requirements through fiscal 2024.

We continue to explore acquisition opportunities, both large and small, and may choose to pursue additional debt, equity or equity-linked financings in the future should the need arise.

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(d) Total excludes contractual obligations already recorded on our consolidated balance sheets as current liabilities, except for the accrued portions of interest and lease obligations which are included in interest on long-term debt obligations and lease obligations captions above.

In addition to the lease obligations in the table above, we are responsible for the ma intenance, property taxes and insurance at most of our locations.

In addition to the lease obligations in the table above, we are responsible for the maintenance, property taxes and insurance at most of our locations.

During the fiscal year ended September 30, 2023, these collectively amounted to $16.3 million.

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Inventory and Cost of Goods Sold

We consider our estimates of obsolete or slow-moving inventory and shrinkage estimates in determining the appropriate overall valuation allowance for inventory.

We consider our estimates of obsolete or slow-moving inventory and shrinkage in determining the appropriate overall valuation allowance for inventory.

We monitor our sales margins for each type of inventory on an ongoing basis and compare to historical margins.

Significant variances in those margins may require a revision to future inventory reserve estimates.

We have historically revised our reserve estimates pertaining to jewelry inventory depending on the current price of gold and resulting trends in margins.

We have historically revised our reserve pertaining to jewelry inventory depending on the current price of gold and resulting trends in margins.

Future declines in gold prices may cause an increase in reserve rates pertaining to jewelry inventory.

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We consider the earnings of certain non-U.S.

subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for reinvestment of those subsidiary earnings.

subsidiaries to be indefinitely invested outside the U.S.

on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for reinvestment of those subsidiary earnings.

We have not recorded a deferred tax liability related to foreign withholding taxes of our undistributed earnings of foreign subsidiaries indefinitely invested outside the U.S.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis