EZCORP INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to inform the reader about matters affecting the financial condition and results of operations of EZCORP, Inc. and its subsidiaries (collectively, “we,” “us”, “our”, “EZCORP” or the “Company”). The following discussion should be read together with our condensed consolidated financial statements and related notes included elsewhere within this report. This discussion contains forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements. See “ Part I, Item 1A — Risk Factors ” of our Annual Report on Form 10-K for the year ended September 30, 2024, as supplemented by the information set forth in “Part I, Item 3 — Quantitative and Qualitative Disclosures about Market Risk” and “Part II, Item 1A — Risk Factors” of this Report, for a discussion of certain risks, uncertainties and assumptions associated with these statements. Business Development On September 11, 2024, the Company announced entry into an acquisition agreement with Presta Dinero, S.A. de C.V. for the purchase of 53 pawn stores in Mexico. While at the time we expected to complete the transaction by October 31, 2024, the transaction has not yet closed and the parties remain in discussion. Business Overview EZCORP is a Delaware corporation headquartered in Austin, Texas. We are a leading provider of pawn services in the United States and Latin America. Pawn loans are nonrecourse loans collateralized by personal property. We also sell merchandise, primarily collateral forfeited from unpaid loans and pre-owned merchandise purchased from customers. We exist to serve our customers’ short-term cash needs, helping them to live and enjoy their lives. We are focused on three strategic pillars: Strengthen the Core Relentless focus on superior execution and operational excellence in our pawn business Cost Efficiency and Simplification Shape a culture of cost efficiency through ongoing focus on simplification and optimization Innovate and Grow Broaden customer engagement to service more customers more frequently in more locations Pawn Activities At our pawn stores, we advance cash against the value of collateralized tangible personal property. We earn pawn service charges (“PSC”) for those cash advances, and the PSC rate varies by state and transaction size. At the time of the transaction, we take possession of the pawned collateral, which consists of tangible personal property, generally jewelry, consumer electronics, tools, sporting goods and musical instruments. If the customer chooses to redeem their pawn, they will repay the amount advanced plus any accrued PSC. If the customer chooses not to redeem their pawn, the pawned collateral becomes our inventory, which we sell in our retail merchandise sales activities or, in some cases, scrap for its inherent gold or precious stone content. Consequently, the success of our pawn business is largely dependent on our ability to accurately assess the probability of pawn redemption and the estimated resale or scrap value of the collateralized personal property. Our ability to offer quality pre-owned goods at prices significantly lower than original retail prices attracts value-conscious customers. The gross profit on sales of inventory depends primarily on our assessment of the estimated resale or scrap value at the time the property is either accepted as pawn collateral or purchased and our ability to sell that merchandise in a timely manner. As a significant portion of our inventory and sales involve gold and jewelry, our results can be influenced by the market price of gold and diamonds. 20 Table of Contents Growth and Expansion Our strategy is to expand the number of locations we operate through opening new (“de novo”) locations and through acquisitions and investments in both Latin America, the United States and potential new markets. Our ability to open de novo stores, acquire new stores and make other related investments is dependent on several variables, such as projected achievement of internal investment hurdles, the availability of acceptable sites or acquisition candidates, the alignment of acquirer/seller price expectations, the regulatory environment, local zoning ordinances, access to capital and the availability of qualified personnel. Seasonality and Quarterly Results In the United States, PSC is historically highest in our fourth fiscal quarter (July through September) due to a higher average loan balance during the summer lending season. PSC is historically lowest in our third fiscal quarter (April through June) following the tax refund season and merchandise sales are highest in our first and second fiscal quarters (October through March) due to the holiday season, jewelry sales surrounding Valentine’s Day and the availability of tax refunds. In Latin America, most of our customers receive additional compensation from their employers in December, and many receive additional compensation in June or July, applying downward pressure on loan balances and fueling some merchandise sales in those periods. In Mexico, we saw similar downward pressure in loan balances during the third quarter of fiscal 2023 due to a change in law related to company profit sharing payments to employees. We anticipated this change would impact pawn loan redemptions annually in May and June; however, in fiscal 2024, the demand for pawn loans in Mexico exceeded any downward pressure related to profit sharing payments. As a net effect of these and other factors and excluding discrete charges, our consolidated income before tax is generally highest in our first fiscal quarter (October through December) and lowest in our third fiscal quarter (April through June). Financial Highlights We remain focused on optimizing our balance of pawn loans outstanding (“PLO”) and the resulting higher PSC. The following chart presents sources of gross profit, including PSC, merchandise sales gross profit (“Merchandise sales GP”) and jewelry scrapping gross profit (“Jewelry Scrapping GP”) for the three months ended December 31, 2024 and 2023: 21 Table of Contents The following chart presents sources of gross profit by geographic disbursement for the three months ended December 31, 2024 and 2023: Results of Operations Non-GAAP Constant Currency and Same-Store 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. 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. We analyze results on a same-store basis (which is defined as stores open during the entirety of the comparable periods) to better understand existing store performance without the influence of increases or decreases resulting solely from changes in store count. We believe presentation of constant currency and same-store results is meaningful and useful in understanding the activities and business metrics of our Latin America Pawn operations and reflects an additional way of viewing aspects of our business that, when viewed with GAAP results, provides a better understanding and evaluation of factors and trends affecting our business. We provide non-GAAP financial information for informational purposes and to enhance understanding of our GAAP consolidated financial statements. We use this non-GAAP financial information to evaluate and compare operating results across accounting periods. Readers should consider the information in addition to, but not rather than or superior to, our financial statements prepared in accordance with GAAP. This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of those measures for comparative purposes. Constant currency results reported herein are calculated by translating consolidated balance sheet and consolidated statement of operations items denominated in local currency to U.S. dollars using the exchange rate from the prior-year comparable period, as opposed to the current period, in order to exclude the effects of foreign currency rate fluctuations. In addition, we have an equity method investment that is denominated in Australian dollars and is translated into U.S. dollars. We used the end-of-period rate for balance sheet items and the average closing daily exchange rate on a monthly basis during the appropriate period for statement of operations items. Our statement of operations constant currency results reflect the monthly exchange rate fluctuations and are not directly calculable from the rates below. 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 three months ended December 31, 2024 and 2023 were as follows: December 31, Three Months Ended December 31, 2024 2023 2024 2023 Mexican peso 20.8 17.0 20.1 17.5 Guatemalan quetzal 7.5 7.7 7.5 7.6 Honduran lempira 25.0 24.3 24.8 24.4 Australian dollar 1.6 1.5 1.5 1.5 22 Table of Contents Operating Results Segments We manage our business and report our financial results in three reportable segments: • U.S. Pawn — Represents all pawn activities in the United States; • Latin America Pawn — Represents all pawn activities in Mexico and other parts of Latin America; and • Other Investments — Represents our equity interest in Cash Converters and our investment in and notes receivable from Founders. Store Count by Segment Three Months Ended December 31, 2024 U.S. Pawn Latin America Pawn Consolidated As of September 30, 2024 542 737 1,279 New locations opened — 4 4 As of December 31, 2024 542 741 1,283 Three Months Ended December 31, 2023 U.S. Pawn Latin America Pawn Consolidated As of September 30, 2023 529 702 1,231 New locations opened — 5 5 Locations acquired 1 — 1 As of December 31, 2023 530 707 1,237 23 Table of Contents Three Months Ended December 31, 2024 vs. Three Months Ended December 31, 2023 These tables, as well as the discussion that follows, should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and related notes. U.S. Pawn The following table presents selected summary financial data for our U.S. Pawn segment: Three Months Ended December 31, Change (in thousands) 2024 2023 Gross profit: Pawn service charges $ 87,876 $ 79,073 11% Merchandise sales 128,800 125,513 3% Merchandise sales gross profit 47,244 46,804 1% Gross margin on merchandise sales 37 % 37 % —bps Jewelry scrapping sales 15,498 12,815 21% Jewelry scrapping sales gross profit 3,530 1,531 131% Gross margin on jewelry scrapping sales 23 % 12 % * Other revenues 27 37 (27)% Gross profit 138,677 127,445 9% Segment operating expenses: Store expenses 83,089 77,255 8% Depreciation and amortization 2,717 2,624 4% Loss on sale or disposal of assets and other — 26 (100)% Segment operating contribution $ 52,871 $ 47,540 11% Other segment income (11) — 100% Segment contribution $ 52,882 $ 47,540 11% Other data: Net earning assets (a) $ 368,668 $ 317,774 16% Inventory turnover 2.5 2.7 (7)% Average monthly ending pawn loan balance per store (b) 396 359 10% Monthly average yield on pawn loans outstanding 14 % 14 % —bps General merchandise as a % of PLO 32 % 33 % (100)bps Jewelry as a % of PLO 68 % 67 % 100bps * Represents a percentage computation that is not mathematically meaningful. (a) Balance includes pawn loans and inventory. (b) Balance is calculated based upon the average of the monthly ending balances during the applicable period. PLO ended the quarter at $220.2 million, up 15% on a total and same-store basis due to increase in average loan size, increased loan demand and improved operational performance. Total revenues increased 7% and gross profit increased 9%, reflecting higher PSC and merchandise sales. PSC increased 11% as a result of higher average PLO. Merchandise sales increased 3%, and gross margin was flat at 37%. Aged general merchandise, which is inventory over one year old, increased to 2.6%, or $1.2 million of total general merchandise inventory. Excluding our three Max Pawn luxury stores in Las Vegas, aged general merchandise was 1%. Net inventory increased 17%, in line with the growth in PLO. Inventory turnover decreased to 2.5x, from 2.7x . 24 Table of Contents Store expenses increased 8% (5% on a same-store basis), primarily due to labor costs (including higher health benefits) supporting more store activity, offset by a decrease in expenses related to our loyalty program. Segment contribution increased 11% to $52.9 million, due to the changes noted above. During the quarter, segment store count remained at 542. Latin America Pawn The following table presents selected summary financial data for the Latin America Pawn segment, including constant currency results, after translation to U.S. dollars from its functional currencies noted above under “Results of Operations — Non-GAAP Constant Currency and Same-Store Financial Information.” Three Months Ended December 31, (in thousands) 2024 (GAAP) 2023 (GAAP) Change (GAAP) 2024 (Constant Currency) Change (Constant Currency) Gross profit: Pawn service charges $ 29,176 $ 27,376 7% $ 31,979 17% Merchandise sales 57,543 53,890 7% 64,082 19% Merchandise sales gross profit 17,275 17,389 (1)% 19,251 11% Gross margin on merchandise sales 30 % 32 % (200)bps 30 % (200)bps Jewelry scrapping sales 1,234 1,267 (3)% 1,388 10% Jewelry scrapping sales gross profit 260 343 (24)% 298 (13)% Gross margin on jewelry scrapping sales 21 % 27 % (600)bps 21 % (600)bps Other revenues, net 16 16 —% 19 19% Gross profit 46,727 45,124 4% 51,547 14% Segment operating expenses: Store expenses 33,362 33,300 —% 37,031 11% Depreciation and amortization 2,046 2,339 (13)% 2,270 (3)% Loss (gain) on sale or disposal of assets and other 8 (196) (104)% 9 (105)% Segment operating contribution 11,311 9,681 17% 12,237 26% Other segment income (273) (468) (42)% (310) (34)% Segment contribution $ 11,584 $ 10,149 14% $ 12,547 24% Other data: Net earning assets (a) $ 105,637 $ 90,405 17% $ 122,159 35% Inventory turnover 3.1 3.8 (18)% 3.0 (21)% Average monthly ending pawn loan balance per store (b) $ 80 $ 78 3% $ 89 14% Monthly average yield on pawn loans outstanding 16 % 17 % (100)bps 16 % (100)bps General merchandise as a % of PLO 60 % 65 % (500)bps 62 % (300)bps Jewelry as a % of PLO 40 % 35 % 500bps 38 % 300bps (a) Balance includes pawn loans and inventory. (b) Balance is calculated based upon the average of the monthly ending balances during the applicable period. 25 Table of Contents 2024 Change (GAAP) 2024 Change (Constant Currency) Same-store data: PLO 2% 17% PSC 5% 15% Merchandise Sales 4% 16% Merchandise Sales Gross Profit (3)% 8% Store Expenses (2)% 9% PLO improved to $54.6 million, up 4% (19% on constant currency basis). On a same-store basis, PLO increased 2% (17% on a constant currency basis) due to improved operational performance and increased loan demand. Total revenues were up 7% (18% on constant currency basis), and gross profit increased 4% (14% on a constant currency basis), mainly due to increased PSC and higher merchandise sales. PSC increased to $29.2 million, up 7% (17% on a constant currency basis) as a result of higher average PLO. Merchandise sales increased 7% (19% on constant currency basis) and merchandise sales gross margin decreased to 30% from 32%. Aged general merchandise decreased to 1.4% from 1.6% of total general merchandise inventory. Net inventory increased 35% (57% on a constant currency basis) due to increase in PLO and decrease in inventory turnover to 3.1x, from 3.8x. Store expenses were flat (11% increase on a constant currency basis) and on a same-store basis decreased 2% (9% increase on a constant currency basis), primarily due to labor and rent. Segment contribution increased 14% to $11.6 million (24% on a constant currency basis), due to the changes noted above. During the quarter, segment store count increased by four de novo stores to 741. Other Investments The following table presents selected financial data for our Other Investments segment after translation to U.S. dollars from its functional currency of primarily Australian dollars: Three Months Ended December 31, Change (in thousands) 2024 2023 Gross profit: Consumer loan fees, interest and other $ — $ 4 (100)% Gross profit — 4 (100)% Segment operating expenses: Interest income (594) (573) 4% Equity in net income of unconsolidated affiliates (1,623) (1,153) 41% Segment operating contribution 2,217 1,730 28% Other segment loss — 1 (100)% Segment contribution $ 2,217 $ 1,729 28% Segment contribution was $2.2 million, an increase of $0.5 million primarily due to the increase in our share of equity in net income of Cash Converters. 26 Table of Contents Other Items The following table reconciles our consolidated segment contribution discussed above to net income attributable to EZCORP, Inc., including items that affect our consolidated financial results but are not allocated among segments: Three Months Ended December 31, Percentage Change (in thousands) 2024 2023 Segment contribution $ 66,683 $ 59,418 12% Corporate expenses (income): General and administrative 18,669 16,543 13% Depreciation and amortization 3,572 3,602 (1)% Gain on sale or disposal of assets and other — (2) (100)% Interest expense 3,147 3,440 (9)% Interest income (1,297) (1,646) (21)% Equity in net loss of unconsolidated affiliates 148 — 100% Other expense (income) 1,060 (224) * Income before income taxes 41,384 37,705 10% Income tax expense 10,368 9,235 12% Net income $ 31,016 $ 28,470 9% * Represents a percentage computation that is not mathematically meaningful. Segment contribution increased $7.3 million or 12% over the prior year quarter, primarily due to improved operating results of the U.S. Pawn and Latin America Pawn segments above. General and administrative expense increased $2.1 million or 13%, primarily due to labor (including incentive compensation) and, to a lesser extent, ongoing support costs related to Workday. Income tax expense increased $1.1 million primarily due to an increase in income before taxes of $3.7 million, partially offset by an increase in the benefit for stock compensation for tax purposes in excess of the book expense. The increase in the effective tax rate is due primarily to an increase in non-deductible items. Income tax expense includes other items that do not necessarily correspond to pre-tax earnings and create volatility in our effective tax rate. These items include the net effect of state taxes, non-deductible items and the foreign rate differential. See our Annual Report on Form 10-K for the year ended September 30, 2024, Note 9: Income Taxes of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data” for quantification of these items. Liquidity and Capital Resources Cash and Cash Equivalents Our cash and cash equivalents balance was $174.5 million at December 31, 2024 compared to $170.5 million at September 30, 2024. At December 31, 2024, our cash and equivalents were held in cash depository accounts with major banks or invested in high quality, short-term liquid investments. 27 Table of Contents Cash Flows The table and discussion below presents a summary of the selected sources and uses of our cash: Three Months Ended December 31, Percentage Change (in thousands) 2024 2023 Net cash provided by operating activities $ 25,991 $ 21,481 21% Net cash used in investing activities (14,040) (16,864) (17)% Net cash used in financing activities (7,102) (6,392) 11% Effect of exchange rate changes on cash, cash equivalents and restricted cash (764) (207) 269% Net increase (decrease) in cash, cash equivalents and restricted cash $ 4,085 $ (1,982) 306% The increase in cash flows provided by operating activities year-over-year was primarily due an increase in net income as well as changes in working capital primarily related to the timing of payments of prepaid expenses, accounts payable, inventory, customer layaway deposits and income taxes. The $2.8 million decrease in cash flows used in investing activities year-over-year was primarily due to a $17.3 million decrease in net cash flows used related to strategic investments, capital expenditures and other, a $3.6 million increase in cash inflows from the sale of forfeited collateral, partially offset by an $18.1 million increase in net pawn lending outflows. The $0.7 million increase in cash flows used in financing activities was primarily related to taxes paid related to net share settlement of equity awards. The net effect of these changes was a $4.1 million increase in cash on hand during the current year to date period, resulting in a $183.9 million ending cash and restricted cash balance. Sources and Uses of Cash On May 3, 2022, our Board authorized the repurchase of up to $50 million of our Class A Common Stock over three years. As of December 31, 2024, we have repurchased 3,096,011 shares of our Class A Common Stock under the program for $29.0 million. 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. Under the stock repurchase program, we may purchase Class A Non-Voting common stock from time to time at management’s discretion in accordance with applicable securities laws, including through open market transactions, block or privately negotiated transactions, or any combination thereof. In addition, we may purchase shares pursuant to a trading plan meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934. 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. See Note 8 of Notes to Condensed Consolidated Financial Statements included in “Part I, Item 1 — Financial Statements.” We anticipate that cash flows from operations and cash on hand will be adequate to fund ongoing operations, current debt 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 the next twelve months. 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. Depending on the level of acquisition activity and other factors, our ability to repay our longer-term debt obligations, including the convertible debt maturing in May 2025 and 2029, may require us to refinance these obligations through the issuance of new debt securities, equity securities, convertible securities or through new credit facilities. Contractual Obligations In “Part II, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended September 30, 2024, we reported that we had $673.5 million in total contractual obligations as of September 30, 2024. There have been no material changes to this total obligation since September 30, 2024. We are responsible for the maintenance, property taxes and insurance at most of our locations. In the fiscal year ended September 30, 2024, these collectively amounted to $17.7 million. 28 Table of Contents Recently Adopted Accounting Policies and Recently Issued Accounting Pronouncements See Note 1 of the Notes to Condensed Consolidated Financial Statements included in “Part I, Item 1 — Financial Statements” of this Quarterly Report for recently issued accounting pronouncements including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements. Cautionary Statement Regarding Risks and Uncertainties that May Affect Future Results This Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend that all forward-looking statements be subject to the safe harbors created by these laws. All statements, other than statements of historical facts, regarding our strategy, future operations, financial position, future revenues, projected costs, prospects, plans and objectives are forward-looking statements. These statements are often, but not always, made with words or phrases like “may,” “should,” “could,” “will,” “predict,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “projection” and similar expressions. Such statements are only predictions of the outcome and timing of future events based on our current expectations and currently available information and, accordingly, are subject to substantial risks, uncertainties and assumptions. Actual results could differ materially from those expressed in the forward-looking statements due to a number of risks and uncertainties, many of which are beyond our control. In addition, we cannot predict all of the risks and uncertainties that could cause our actual results to differ from those expressed in the forward-looking statements. Accordingly, you should not regard any forward-looking statements as a representation that the expected results will be achieved. Important risk factors that could cause results or events to differ from current expectations are identified and described in “ Part I, Item 1A — Risk Factors ” of our Annual Report on Form 10-K for the year ended September 30, 2024 and “Part II, Item 1A — Risk Factors” of this Report. We specifically disclaim any responsibility to publicly update any information contained in a forward-looking statement except as required by law. All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.