Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Dan Feehan - President, CEO

Tom Bessant - EVP, CFO

Analysts

David Burtzlaff - Stephens Incorporated

John Hecht - JMP Securities

Liz Pierce - ROTH Capital Partners

Bill Armstrong - CL King & Associates

[Charles Ruff - Inside Investments]

Henry Coffey - Stern, Agee

John Rowan - Sidoti & Company

Cash America International, Inc (CSH) Q3 2010 Earnings Conference Call October 21, 2010 8:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to Cash America International Incorporated third quarter earnings release conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions).

As a reminder, this conference is being recorded Thursday, October 21, 2010. It is now my pleasure to introduce Dan Feehan, President and Chief Executive Officer. You may proceed, sir.

Dan Feehan

Thank you and good morning, ladies and gentlemen. Welcome to our call for the third quarter of 2010. As normal, Tom Bessant, our Chief Financial Officer is joining me this morning and he'll lead off with a review of our financial performance for Q3. I'll then rejoin the call and provide my perspective on the quarter and then we'll open it up for questions.

Before beginning our comments, please bear with me while I read our Safe Harbor disclosure. While on this call, comments made by Tom or me may contain forward-looking statements about the business, financial condition, and prospects of Cash America International, Inc. and its subsidiaries.

The actual results of the company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties, including, without limitation, the risks and uncertainties contained in the company's filings with the Securities and Exchange Commission.

These risks and uncertainties are beyond the ability of the company to control nor can the company predict, in many cases, all the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements.

When used in this call, terms such as believes, estimates, plans, expects, and anticipates, and similar expressions or variations as they relate to the company or its management are intended to identify forward-looking statements. The company disclaims any intention or obligation to update or revise any forward-looking statements.

I also want to mention, before we proceed, that a reconciliation of any non-GAAP information provided on this call to the most directly comparable GAAP information is included in the financial statements issued with the earnings release today and is also available on the Investor Relations section of our Web site at www.cashamerica.com. Non-GAAP financial information is not meant as a substitute for GAAP results, but is included solely for the informational and comparative purposes.

Now I'll turn it over to Tom.

Tom Bessant

Thanks, Dan. Good morning, everyone. As you've seen in our press release from this morning, Cash America reported a 24% increase in net income and a 16% increase in total revenue for the third quarter ended September 30, 2010.

Consistent with our pre-release from last week, earnings per share were $0.90 which is $0.02 above our guidance of between $0.82 and $0.88 per share provided to you during our July conference call.

As described in the press release, the company benefited from continued strong momentum out of our consumer loan businesses being driven by higher loans written in the United States and our European markets which is driving top line revenue growth. Loss rates in the consumer loan portfolio are down year-over-year providing additional efficiency and greater earnings power on the increase in revenue on the consumer loan piece.

Total loan portfolio in the United States continues to perform well while loan growth is not quite as high as typically is the case. The improved performance has increased loan yield and revenue to produce higher [font] service charges which are combining with increased gross profit margins on retail and scrap disposition to push overall contributions from pawn lending in the United States up nicely during the quarter which also contributed to our better-than-expected results for the period.

With that high level overview understood, we move into more of the metrics of the businesses and I'll start with the pawn lending activities which is really a tail of two distinct markets as our US business continues to perform well and is up nicely while the Mexico-based pawn operations are not where we were hoping they'd be at the end of the third quarter of 2010.

For purposes of these discussion, when I'm referring to the retail lending services segment, keep in mind it's all of our storefront operations consisting of our US pawn business, our consumer loan storefront platform, which in most cases has pawn activities within it, as well as our Mexico-based pawn operation.

Overall, US pawn metrics remain healthy as loans written increased 6% and US pawn loan balances were up a respectable 5% year-over-year at the end of the third quarter and better sequentially than the second quarter level which was up 3% year-over-year.

As I mentioned a moment ago, these higher balances are being complemented by increased loan yields on the portfolio which increased 430 basis points to 131.6% compared to 127.3% in the prior year increasing pawn service charges year-over-year 8% in the US business.

Unfortunately, the struggles in Mexico with pawn balances have continued and the quarter ending balance of loans in Mexico fell 9% to $20.4 million which caused the consolidated pawn loan balances to finish Q3 210 up 3% to $196.3 million.

Disposition activities continue to be a bright spot for the overall retail lending services business. Retail sales, excluding scrap gold and diamonds, were up almost 8% on a 120-basis point increase in gross profit margins leading to an 11% increase in gross profit from retail sales, excluding scrap gold and diamond activity during the quarter.

The higher prevailing price of gold led to an increase in gross profit margin from commercial disposition activities, which includes the liquidation of refined gold, platinum and diamonds to 32.4% in the current period compared to 28.5% last year.

Despite the continuing trend of lower gold volume being liquidated due to lower levels of forfeitures of jewelry items during the quarter, gross profit from commercial disposition activities rose 10% during the quarter due to the higher gross profit margin.

Consolidated retail disposition activities increased 2% overall but gross profit dollars were up 10% as gross profit margins increased during the quarter to 36.9% compared to 34.2% last year. This combination of increased gross profit dollars and higher comp service charges contributed to the success of the retail services segment.

Inventory available for disposition finished the third quarter up 3% in the United States which compares favorably to the down 3% where we finished the end of the second quarter. We've been looking for an increase in inventory levels to support disposition activities in the fourth quarter but it's been difficult to build inventory while pawn loan redemption activities has been higher year-over-year.

Nevertheless, we are encouraged by the current levels of inventory. The inventory aging schedule attached to the press release shows merchandise less than one year old is at its highest percentage of overall inventory than I can remember at 95% of total inventory indicating that our inventory mix is fresh and favorable coming into the fourth quarter.

These factors all came together to produce and increase in US operating income from retail services of 11% to $35.6 million on an 8% increase in total revenue for the third quarter of 2010 compared to prior year.

Mexico pawn operations struggled in the third quarter. As we talked about in Q2, much of this is due to the higher number of new unit openings during the period and a weak loan balance growth which remains lethargic.

Operating income was negative versus a profit in the prior year but Mexico remains a small component of the overall pawn business today amounting to less than 4% of total revenue in the retail services segment during the third quarter. However, we remain optimistic about the future of this business and its potential to be a significant contributor to consolidate results.

On a year-to-date basis, retail lending services remain 70% of overall operating income at $103 million out of $146 million in consolidated operating income for the first nine months of the year. Retail lending services' operating income is up 16% on a 5% increase on total revenue for the first three quarters of 2010 even though we have seen no incremental gains from our Mexico-based operation.

Now moving on to the e-commerce segment, this business continues to benefit from a significant increase in loans written to customers seeking access to convenient credit. The growth in US markets is being complemented by continued success in our foreign distribution channels for the online consumer business.

Loans written in the e-commerce segment were up 60% to $588 million while loss as a percentage of fees fell year-over-year to 33.7% compared to 35.8% in the prior year. This efficiency on the base of higher loans at the end of the second quarter led to a 58% increase in e-commerce revenues in the third quarter which combined with lower loss rates to generate a 65% increase in net cash advance fees which reached $59.4 million, up $23.4 million year-over-year contributing to a near doubling of e-commerce operating income to $14.9 million in Q3 2010 compared to $7.7 million last year.

The emergence of the UK market has been driving continued growth in the foreign component of our e-commerce segment and, in combination with US businesses, offset the loss of certain markets during 2010.

Revenue in the foreign component of the e-commerce segment rose to $27.9 million, up 138% from $11.7 million in the prior year and operating income nearly tripled to $2.8 million compared to $1 million in the prior year.

These metrics provide optimism for continued significant growth in contributions from the foreign component of the e-commerce segment which, in the third quarter, comprised about 30% total revenue in the e-commerce segment on a total revenue number which was up 60% year-over-year to $105.9 million.

Since our pre-release which discussed the near-term uncertainty about our prior base micro line of credit, let me touch on that business size relative to e-commerce segment. The heaviest driver of earnings growth in the e-commerce segment remains the internet lending platform in the US with the added leverage of our foreign activities. Combined US and foreign internet revenue and operating income was up 50% and 55% respectively excluding the end loss in Q3 of 2010 compared to the prior year.

Overall, a very solid third quarter and first nine months of 2010, so let's look at the expectations for the remainder of the current fiscal year.

As we approach the final quarter of 2010 I'm encouraged by the increase in inventory levels and the traction that we are beginning to get on the pawn loan growth following the extraordinary paydowns experienced in Q1 of 2010 on the US pawn loan side.

Overall, pawn metrics remain healthy and the recent increase in gold prices will continue to contribute to positive results in the fourth quarter. In addition, we completed the acquisition of the Maxit pawn store chain of 39 stores in early October.

While this will be a positive addition for our 2011 year it will not provide any accretive earnings in the fourth quarter due to the significant amount of one-time expenses related to transaction costs which were part of the expense under current accounting practices.

Our estimates include an earnings burden of approximately $2 million pre-tax in the fourth quarter or $0.04 per share after taxes. We don't expect the Mexico pawn operations to contribute in the fourth quarter, which is a difficult comparison to the prior year when pawn operations produced a positive operating income in Mexico.

We eliminated revenue and profits after October 12, 2010 for the card-based macro line of credit service, so this contribution is out of Q4 2010 and out of our 2011 figures. Consumer lending activity at our e-commerce segment will ride the momentum of the increased loans written in the third quarter which is combined with growth in our foreign operations to offset the lost markets we had discussed in earlier calls.

We expect loss rates to be in approximately the same range as the prior year. The net fee activity should be up nicely and contribute to improve results.

Depreciatingly [is] to publish our initial fourth quarter expectations for earnings per share between $1.09 and $1.19 per share which brings the fiscal year 2010 12-month earnings per share to be about $3.65 to $3.75. I realize the range for the quarter is a little larger than we typically provide, however the uncertainty regarding the final completion costs for the acquisition of Maxit and the winding down of the [M-lock] loan provides some element of uncertainty for us in the quarter.

My expectation is that most of you are more focused on the view for 2011 and, as you've seen in our press release, we're initiating 2011 guidance today with a $4.11 to $4.22 per share range as we continue to expect the momentum of the consumer loan business to provide strong growth in the early part of the year while most of the substantial growth year-over-year in retail lending services will occur in the latter half of 2011 with the benefit of our acquisition in Maxit and the recovery of our Mexico-based pawn operation.

With that I'll turn the call over to Dan.

Dan Feehan

Thank you, Tom. I'll begin with a few brief comments regarding our operating results for the quarter and then comment on a few non-operating items, including the Maxit acquisition, our launch of Gold Promise and the status of our micro line of credit services and an update on the regulatory environment.

Regarding our operating performance for the quarter I'm obviously pleased that our earnings have exceeded the top end of our guidance and the consensus estimates for the quarter. My analysis of the operational detail is pretty much a carbon copy of my analysis for the second quarter.

First key highlight I'll point out over the past few quarters that has continued into Q3 is what I refer to as behavioral state of our storefront customers, who I believe continue to remain anxious about the economy and unemployment levels.

As I've mentioned for several quarters we believe our traditional customers are being cautious with their borrowing and spending habits. Our same-store pawn loan growth has remained steady around 3% or so with redemption rates higher than historical averages. As Tom indicates, that result's an ongoing increase as pawn loan yields and loan growth and inventory.

Our storefront consumer loan demand is also slow, particularly in the industrial Midwest where we attribute persistently high unemployment rates as a key driver in preventing many people from qualifying for a consumer loan.

Fortunately, some of the slack in consumer loan growth in the Midwest has been offset by a growth in pawn loans in the converted consumer loan shops. Some of our customers are self selecting pawn loans over the consumer loan alternative.

There is one aspect of Q3 performance that is a little bit counter to the behavioral trends I've referenced for several quarters. Our over-the-counter retail sales in our US business were up a surprising 7.5% in the third quarter. That's the strongest quarterly year-over-year increase we've experienced in the last couple of years.

We also, as Tom indicated, experienced the added benefit of higher gross profit margins. Hopefully this renewed spur in retail activity will carry over into the holiday selling season of Q4.

Another carryover highlight from the second quarter is the declining volume of commercial sales driven primarily by lower volumes of gold available for melt. Higher redemption rates in our pawn portfolio are providing less available ounces to scrap and our store managers have been focused on maintaining a sufficient jewelry inventory in the show cases to feed retail demand.

As you can see in our reported numbers, our retail margins are running about 25% higher than our scrap margins, even with the spot gold above $1300 an ounce. So we will always favor the longer-term retail sales as opposed to short-term commercial sales in periods of lean inventory. But even with a lower commercial sales volume we were able to post a 9% increase in gross profit dollars from commercial sales during the third quarter compared to last year.

The third point that I'll discuss and I've referenced in the second quarter is the continued lack of asset and profitability growth in Mexico, as Tom has reported. We've been pursuing a strategy that I have discussed in our last quarter's call of slowing new unit growth and converting existing units into an expanded format handling a broader range of collateral than just gold.

Along with this shift in strategy we have deployed more US-based personnel into Mexico to assist with training and development. We still have a lot of work to do there but I'm confident we can get it back on track with both unit and profitability growth. However, I would not expect for you to see tangible progress in our reported numbers until mid next year.

The last recurring trend bridging from the first half of 2010 into the third quarter is the remarkably strong ongoing demand for consumer loans in our e-commerce segment, both domestic and foreign.

As I pointed out in previous calls the phenomenon stands in stark contrast to the slower growth we are experiencing in our retail storefronts. I won't waste any of our time reporting the hypothesis that I have advanced in the last two quarterly calls other than to confirm that I still believe we are seeing crossover traffic of people who are being squeezed out of the mainstream consumer credit markets, particularly the bank market.

Another metric that was a little counter to our expectations in the quarter was the year-over-year improvement in the consolidated loss rate as Tom had reported. Loss rate as a percentage of fee decreased from $38.4 million in the third quarter of last year to $37.9 million in the third quarter this year.

While this 50-basis point drop may not sound like a lot, we had expected the loss rate to be up 100 basis points or more given the year-over-year shift in the mix between our retail services and e-commerce segments.

The e-commerce segment, which traditionally carries higher loss rates, accounted for about 78% of consolidated consumer loan fees in the third quarter of this year versus 68% in the third quarter last year. Such a shift would normally drive consolidated loss rates higher. However, lower default rates and better collections led to a decrease in loss rates for both segments and for our consolidated results. I find this very encouraging.

Now moving on to our non-operational issues let me first address the recently disclosed disruption of our micro line of credit services business. You may recall from our SEC filings and discussions on previous quarterly earnings calls that we provide loan processing services [for] and participate in receivables associated with a bank issue micro line of credit made available by the bank on certain store value debit cards the bank issues.

The bank we have been utilizing with respect to these services over the (technical difficulty) Group, Inc (technical difficulty) product known as [iAdvance]. On October 12th, which was Tuesday of last week, Meta Financial Group issued an 8-K disclosing at the office of Direct Supervision that issued a supervisory directive to Meta Bank requiring, among other things, that the bank discontinue all [advanced] line of credit origination activity by Wednesday morning October 13.

In that directive that cited an examination finding that the bank had allegedly engaged in unfair deceptive acts or practices in violation of section five of the Federal Trade Commission Act and the OTS Advertising Regulation.

Consequently, we are no longer processing services to Meta Bank nor will any new receivables for Meta Bank be available for future participation. I should point out that Cash America has not been provided any information regarding what specific acts or practices of the bank the OTS may have considered unfair or deceptive ad we do not believe any of our actions as a processor or as a participant in receivables contributed to the directive issued by the OTS.

This disruption with Meta Bank is an obvious setback for our micro line of credit services. Even thought his product offering provides only a small amount of our overall consolidated revenue, less than 3% on a year-to-date basis at September 30, it is a product we believe is easily scalable and one that represents another attractive option for our consumers.

We have no intention of abandoning our micro line of credit services and we've been working on developing other opportunities beyond Meta Bank to broaden the distribution of the product. Those opportunities include potential servicing agreements with other financial institutions both domestic and foreign as well as applications that would be independent of any other financial institution.

Neither our guidance beyond October 13 and the fourth quarter nor our guidance for 2011 include any the earnings for the micro line of credit offering as we do not have a definitive alternative to Meta Bank at this time. However, I remain optimistic about our prospects to resume offering the product sometime in 2011.

Let me comment on a couple of our other positive non-operating developments here in the quarter. The first is our previously disclosed acquisition of Maxit Financial. This chain of pawn shops in Washington and Arizona is a great addition to our retail services segment that will serve to increase the mix of pawn-related earnings for the consolidated enterprise. We believe Maxit is one of the best run private chains in the country with attractive stores and well-trained personnel. As Tom indicated, these stores will be accretive to earnings in 2011.

Second, you may have seen our release also last week regarding the launch of a new business initiative we are calling Gold Promise. Gold Promise will be our attempt to redefine the mail-in gold buying business with the help of a comprehensive marketing campaign featuring Mr. T as our spokesperson.

While one might argue we're a little late to this game, our recent research indicates that a significant number of people in the US, about 43%, still have jewelry sitting at home that the seldom, if ever, wear. Research also tells us that approximately half of these people would be willing to sell those items if they could find a trustworthy and reliable way to do so.

What's also interesting is that the current customer satisfaction scores for competitive offerings in this space are shockingly low. Less than 50% of the people we surveyed who have used existing services were satisfied with their experience and less than 40% felt like they received a fair value.

Consequently we concluded that a New York Stock Exchange listed company with 25 years of experience in buying and selling gold coupled with our reputation for great customer service may be enough o get people motivated to sell their unwanted jewelry. Obviously the elevated price of gold should also help.

So we launched Gold Promise with a variety of media events in New York last week and our TV commercials with Mr. T begin airing this week. We would expect volumes to go slowly over the next six months and we're hopeful that we can ultimately be the dominant player in this space.

Finally, I can report that there is very little to report in the way of an update on the regulatory front. We do not have any additional information regarding the early formative stages of the Consumer Financial Protection Bureau other than what has been widely reported in the press. Additionally, I have no new information to report about activities in any of the space where we operate.

With that, we'll open the line for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from the line of David Burtzlaff - Stephens Incorporated.

David Burtzlaff - Stephens Incorporated

A few questions here; Dan, I guess, can you kind of address what you think is going on in Mexico? I mean, how does -- what should be a normal loan balance building period balances are actually down, what, 7% sequentially from the second quarter.

Dan Feehan

Yes, so as indicated in the previous call, David, we've got a number of issues in Mexico, some we believe related to some of the economic things that are happening in the country, particularly in the areas where we operate. As it relates to the gold only business part of our strategy, as I indicated in the previous call, was to get our stores converted to a full format business where we're accepting a broad range of collateral. I think that's an important initiative for us.

I think we also have operational issues in place that we are addressing in Mexico from a training and development perspective. So there -- it's a situation today that I think we, with deployment of additional US resources into Mexico, we can get corrected and turned around. It'll take us a little bit of time, as I indicated in the second quarter call, but, again, I want to be clear that I think we've got some operational issues that have to be dealt with and we're in the process of doing that.

David Burtzlaff - Stephens Incorporated

So those operational issues, I mean, that affects the borrowing or you think that's more the economic condition?

Dan Feehan

I think both. I think both. I mean, we expanded that business very quickly, added a lot of units in the first 18 months of owning that business. I think it taxed the organization and particularly with the shift in strategy to a full format basis our partners in Mexico have realized that we have greater expertise in the full format business and we have agreed to basically allow us to transition into full management control (inaudible) and that transition is in the works today where our folks will be in charge of the day-to-day operations of Prenda Facil here very quickly.

David Burtzlaff - Stephens Incorporated

Then on the US retail sales, I mean, obviously you said it's the best performance since 2007 when I go back and look at numbers. What are you seeing in the stores? I mean, is it more traffic coming in for buying because obviously, I mean, sales are up nicely but so are the margins, so it's not a -- it doesn't seem like it's a promotional strategy or anything.

Dan Feehan

Again, as I indicated in a comment, David, it is, I think, a little bit counter to some of the behavioral things I've been talking about for an extended period of time. So I think -- hopefully, I'm hopeful that it's sort of an early sign that people are getting a little more interested in buying, a little more interested, perhaps, in borrowing going forward.

I was, quite frankly, a little bit surprised that the numbers were as good as they were. Now, from the margin perspective -- I know you've followed this business long enough to understand that when you've got lean inventories and you've got traffic our store personnel are trained very well to make sure they protect their margins in a period where traffic's increasing and inventories are lean.

The counter to that that we've also seen this quarter that I also mentioned is that we've been bringing less actual ounces of gold to scrap because, again, I think our shore managers are feeling a little bit more encouraged about the retail traffic and are -- which they have the latitude to do in the way we run our business -- are trying to make sure that they've got sufficient jewelry in inventory particularly as we enter the fourth quarter selling season.

So I don't think we're far enough into this to declare that people are getting a lot less anxious and are going to step up the retail activity in our business but it's certainly encouraging given the trends we've seen over the last couple of years.

David Burtzlaff - Stephens Incorporated

Two more real quick ones; Tom, why are losses down so much on the retail services side on the payday business?

Tom Bessant

What I really think there, David, is that we just continue to see a maturity in that portfolio. We're seeing limited growth within those platforms, Dan mentioned as well. So what you're seeing is just the seasoning of that portfolio and when that occurs and you've got good underwriting you just have a natural easing of loss rates.

Also, we -- our customers are performing very well. So when you don't have a lot of new customers coming in to dilute that performance and your core customers are performing well you just get a lower loss rate level.

David Burtzlaff - Stephens Incorporated

Then finally, what is baked into your guidance for Maxit for next year?

Tom Bessant

I think back with our consistent discussions, probably in the $0.10 to $0.12 range for the full year subject to a lot of things. That's all sitting in 2011.

Operator

Your next question comes from the line of John Hecht - JMP Securities.

John Hecht - JMP Securities

Dan, you're seeing lower forfeiture rates. It sounds like your retail activities may be spiking a little bit or increasing a little bit. You expect some caution relative to just economic terms and the impact on your consumer. Are these type of trends changing your opinion in that regard?

Dan Feehan

Beginning to a little bit, John. I think, again, I'm encouraged by the retail activity this quarter. The pawn loan growth I'd like to see a little bit stronger, quite frankly, than we're currently experiencing. We've been pretty steady in that 3% to 4% range and I'd like to see a little stronger growth in that component of our business.

One of the things that I did mention in the second quarter that is relevant to Cash America but particularly as you look at our business compared to other companies is sort of the regional configuration of our store base. I'll remind folks that we have obviously a big store base in Texas which is doing well but we also have pretty significant presence in Nevada and Florida where those states are continuing, from an unemployment perspective and just from an economic recovery perspective, are continuing to lag behind the rest of the country.

So the good news is when those regions come back we'll have a lot of runway in front of us from a growth perspective. But I am beginning to be a little bit more encouraged the behavior may be improving but not dramatically at this point. I think when we get on this call perhaps in January, see how the fourth quarter rolls out, particularly from a retail demand perspective, I'll have a better visibility about what 2011 may look like for us.

John Hecht - JMP Securities

Then [growing up] from some of the last questions, you did note lower charge-off levels but you also increased your loan loss allowance during the quarter. Is that a function of just preparing for height in volume activity in the fourth quarter?

Tom Bessant

John, it's a combination of things. When we have surging loans written, a lot of that is coming off of new customer volume. Our methodology is very consistent. So the way the provisioning and the allowance methodology works is balances rise, you treat those balances as new balances and you have to reserve against them.

The net charge-off number is more of a historical perspective, so, again, as you saw in the trend between Q2 and Q3 we had a heavy provision, charge-offs didn't come in quite as heavy. Hopefully that's the same trend coming into the fourth quarter.

John Hecht - JMP Securities

With respect to guidance next year, I understand that you may get a little bit, in terms of Latin American contribution, a little bit back-end loaded. But otherwise when you look at your businesses -- because you now have contributions from Canada, the UK, Australia, the electronic versus the retail -- other than the back-end weight from Mexico should we expect seasonal trends to be similar to prior years or is there anything that's fluctuating there?

Tom Bessant

Well, I think when I talk about the consumer loan business with our online platform on the foreign side, the UK has really matured nicely this year and continues to be posting growth. So that's going to give us some momentum that we didn't have per se in the first quarter last year. So part of that e-commerce growth year-over-year in the first quarter is going to be the success they've had in the foreign businesses.

Canada and Australia, as we've talked about, are continuing a very slow migration of growth not unlike the UK when we went into there many years back. So that element of the foreign growth is probably more back-end loaded but I think e-commerce has benefitted more so in the first quarter than we saw last year.

Operator

Your next question comes from the line of Liz Pierce - ROTH Capital Partners.

Liz Pierce - ROTH Capital Partners

I missed the first couple minutes of the call. Was there -- did you guys buy back shares in the quarter?

Tom Bessant

We did have some buybacks in the quarter, Liz, as is typically our practice. I think we bought about 190,000 shares in the quarter. We didn't talk about that in the part of the call that you missed but that's what we bought back.

Liz Pierce - ROTH Capital Partners

But there's just a big difference between Q1 and Q2, so I was trying to reconcile -- I mean, excuse me, Q2 and Q3.

Tom Bessant

Yes, I'll address the diluted share calculation. We did buy some shares back in the quarter but if you remember we did a convertible debt offering and the dilution related to that convertible debt offering which was done during 2009 share prices improved through the first quarter but as the share price comes down those diluted shares that you're picking up in that convert come back out. So we saw a little bit of a decrease in diluted share calculations in third quarter.

Liz Pierce - ROTH Capital Partners

So what's left on the buyback? You had, what, $1.5 million to begin with back in '07?

Tom Bessant

Yes, we're probably in the 60% to 65% completion range in that aggregate $1.5 million.

Liz Pierce - ROTH Capital Partners

Then in terms of the -- sorry, trying to flip through my notes -- the US pawn business, in terms of what you're seeing, remind me again on the advertising and the marketing. I thought that was very spot specific in terms of one or so markets. So you don't think that that necessarily had anything to do with it because if I remember it's vague as in if you're saying Nevada's still a little bit weak.

Dan Feehan

No, Nevada -- well, let me answer your question directly here with respect. We had been running retail marketing advertising and we do think it's been effective, quite frankly. The primary weakness that we're seeing in Nevada that you referenced is really more associated with our lending business.

Loan demand there has been very anemic in Nevada. A lot of people are -- I think the unemployment rate in Nevada is close to 16% or 17% today, so you've got a lot of people there that have been out of work and people that have left the state.

Now the retail ads that we ran in Nevada were very successful for us. Retail business there has been a little stronger than the national average and the retail ads that we run in other markets have also been paying dividends for us.

So we're encouraged about that. We're also shifting some of our advertising strategy, you'll see on the loan side as the business as well. Predominantly the dollars we've spent in the retail services segment this year have been dedicated to retail promotions and we're going to supplement that with some ads on the lending side of our business. So those dollars invested in marketing seem to be paying off for us today on the retail side and hopefully they'll pay off for us on the loan side.

Liz Pierce - ROTH Capital Partners

How many markets then, Dan, are you doing advertising in for retail?

Dan Feehan

Liz, we're currently in about -- let's see. We're in about six or seven markets today. We're adding two big markets here in Texas in the -- in fact, we've kicked them off here in early October.

So, again, we didn't want to jump in and spend a ton of money up front without having plenty of quantitative data supporting the success of these programs. But to date the data tells us that we're getting a fair return on that investment. Again, we've added to the spend here in Q4 and, again, hopefully it'll pay off for us.

Liz Pierce - ROTH Capital Partners

Again, I don't know if you said this in your opening comments about the number of stores that you've converted in Mexico.

Dan Feehan

Yes, so we've got today over 100 of the locations. We've got about 20 full -- when I say full format, large full format locations out of our approximately 200 store base in Mexico. We've also converted over about 75 or 80 additional locations. We'll continue to do those conversions here over the fourth quarter.

So the goal would be that all but a handful of our shops will be taking some form of additional collateral. Some of the shops aren't big enough to take large items but we'll be taking small electronics and other things in every location we can. We're also combining locations.

We're closing some and combining locations to build a larger footprint in particular markets in Central Mexico that will allow us full format strategy. So in the fourth quarter you'll probably see us report closing some units in Mexico that we're actually combining to make a larger footprint.

Liz Pierce - ROTH Capital Partners

How did those 20 large full format stores perform?

Dan Feehan

We're pretty happy with their performance right now, Liz. Clearly there is a demand in Mexico for the ability to pawn larger items and items in addition to jewelry. People, contrary to I guess what a lot of people may expect, people in Mexico have much like the people in the US in these income levels have items that they can bring in and borrow against.

So today those 20 stores are very encouraging for us. Again, we've got a lot of work to do in Mexico and it'll take us a little time to square that up but it's probably nothing more important on my agenda today.

Liz Pierce - ROTH Capital Partners

Do you have your -- I mean, have you guys brought down store managers to help in those 20 stores?

Dan Feehan

Yes, we have dedicated a number of our both market managers and store managers out of the US. Fortunately, given the markets that we operate in the US we have a lot of Spanish-speaking management personnel, some of whom, quite frankly, were born in Mexico and other Central American countries.

So we have brought in a fair number of people to help in the conversion and the training and development process. I think the biggest challenge is getting -- we've got great people in Prenda Facil, people that are hungry to be successful and they're hungry to learn. It's a matter of getting them properly trained at this point.

Liz Pierce - ROTH Capital Partners

Then one final question on the inventory; are you -- how do you feel about the non-jewelry inventory for Q4?

Dan Feehan

So I feel reasonably good about it, quite frankly. We had, as Tom indicated, overall we had overall inventory growing a bit in this quarter. We had been concerned about our inventory levels in the first half of the year.

So, again, I think it's too early to get overly optimistic on the retail side of the business but I do think we're seeing some additional traffic. We've had a little bit of inventory growth here that we were really hoping for. So at this point I've got to tell you that I feel pretty good about it.

Operator

Your next question comes from the line of Bill Armstrong - CL King & Associates.

Bill Armstrong - CL King & Associates

Just a follow-up on the Mexico market down there; so you've got it sounds like about 100 out of your 200 total stores are full format. How many of the remaining 100 are just too small for you to be able to put into that format and then what can we expect from those?

Dan Feehan

So, Bill, in this conversion process we've actually segregated into a small, medium and a full format variety and that's based upon the footprints that exist in Mexico and our existing stores today.

So of the -- say of the 100 that we have today that you referenced, as I indicated, about 20 of the very large ones, and of the balance of those I'm going to -- and I don't have the numbers exactly right here in front of me, Bill, but my best recollection is that we've probably got half of those remaining ones that we've converted say 35 or 40, 45 that are the smaller version of the conversion just because the floor footprint doesn't allow it.

Then the balance of those would be what we refer to as a medium format. Medium format would be something that would be able to take larger items than obviously the smaller ones. So instead of just small electronics they'll be able to take some tools, some large electronics, some musical instruments, things of that nature.

So it's a mixture of based on the footprint of the remaining ones that we have to yet convert. You're going to end up with a similar percentage of small, medium. There are a handful of those conversions left that we can make a large full format but anything we open in the future will be a large full format.

I'm sorry that that was a little disconnected but -- .

Bill Armstrong - CL King & Associates

Moving on to gross margin, you talked about the commercial side. On the retail side you're also up. Was that also driven by gold prices or were there other things maybe mixed or better margins on general merchandise, anything else going on that might have helped gross margin on the retail side?

Tom Bessant

Yes, on the retail side that doesn't include any scrap liquidation activity, so that's really just across the counter sales there, so that improvement in margin is really a function of merchandise in the stores and our store manager's ability to get the prices that they want even though those prices still may be negotiated somewhat, so I think as Dan alluded to earlier, a variety of things probably going into that.

The advertising certainly has been a positive. There's a little more consumer appetite for pre-owned which is still markedly less expensive than brand new merchandise, any number of factors there. But, yes, pretty significant 120-basis point increase in retail margins which went to 40.6 compared to 39.4 last year.

Bill Armstrong - CL King & Associates

Then last question on [M-lock]; how much did [M-lock] contribute to earnings per share for 2010?

Dan Feehan

So, Bill, we have obviously a long standing policy that we don't talk about specific earnings numbers around individual products or individual countries. You can look at our disclosures with respect to loan volumes and the [M-lock] product and net fees, et cetera. I think you can scratch around to get the degree of significant that that business is from a full P&L perspective. But, again, for a variety of reasons, some competitive, some other, we do not disclose specific earnings numbers related to specific products outside of just the segment information.

It is -- the upsetting thing for me, quite frankly, is that it's a business that we're growing pretty quickly. It's a great alternative to consumers. It's a lower fee-based product than anything else we do and I think, again, we're not giving up on that business. We've been working for an extended period of time -- long before this -- on other options and alternatives to deploy those services elsewhere. Again, as I said, I'm genuinely optimistic that we'll get that back up and running.

Operator

Your next question comes from the line of [Charles Ruff - Inside Investments].

[Charles Ruff - Inside Investments]

Did I understand correctly that you're not aware of why the micro loan product was termed -- the marketing for it was termed a deceptive practice?

Dan Feehan

That's correct. All that we know and have been told is what was released in the 8-K by Meta Financial Group, Inc. It's my understanding that the examinations of financial institutions by federal agencies are traditionally confidential information between the agency and the banks and, again, we're -- other than being informed, which we were informed at the same time that the 8-K was released, that they were told to shut down that particular product. That's basically all that we know. So we have no additional information.

[Charles Ruff - Inside Investments]

So you have a business relationship with Meta. Have you contacted them? Have you made an effort to get more information? This obviously affects you in a material way and obviously affects the reputation of Cash America.

Dan Feehan

We have made that contact and have been told that the information between the agency and the bank is confidential and they're not allowed to share it with us.

[Charles Ruff - Inside Investments]

The two-year more recent growth initiative, the micro loan and Mexico have both been disappointing. I'm wondering when you look to make an acquisition or launch a new growth initiative, do you compare that versus buying back your stock?

Dan Feehan

I don't know that I directly link the two that every time we think about an initiative we go through an exercise of bouncing it off of buying back our stock. Repurchasing our stock is something that we evaluate on an ongoing basis independent of other activities. I understand there's an allocation of resource issue. We have not been under-resourced from a capital perspective.

So I can't tell you that we have consciously made a decision saying that we're not going to repurchase stock and said we're going to go expand in Mexico or we're going to launch a new business initiative. So if you're question is do we feel like we should be abandoning expansion activities in lieu of purchasing stock, that's not the current strategy of the company.

[Charles Ruff - Inside Investments]

I guess I didn't word it right. I guess if I was making an acquisition I would want to allocate my dollars to the highest return and if buying back stock on a risk adjusted basis is a better return than making an acquisition then that's what I would do.

Dan Feehan

If you want to -- again, I hope I'm not sounding [intensive] because I don't intend to be. If you want to single out Mexico as an example of that in hindsight I would agree with your analysis. However, if you look at the history of Cash America over the last 25 years of making investments and acquisitions and new business initiatives, I think our track record has been that our return to shareholders through expansion activities has been greater than had we been hunkered down and did nothing but buying back stock.

So in hindsight, Mexico, at this point, appears to fall in that pew but I'm hopeful that a year from now you'll have a different feel about it.

[Charles Ruff - Inside Investments]

I hope so too. I wasn't trying to -- it's always easy in hindsight. I'm just trying to find out on a go-forward basis if you compare acquisitions versus buying back stock and it sounded like you said no. Is that right? You do not?

Dan Feehan

On a specific acquisition do we say we're going to go out and spend $50 million in acquisition or should we spend $50 million in buying back stock? I mean, buying back stock is part of a corporate finance strategy that we consider every time that we sit down and make decisions. So maybe I didn't answer your question correctly. So, yes, it's part of our ongoing corporate finance strategy and building shareholder value strategy.

We've been buying back stock opportunistically but at this point our primary goals are to expand our business. Our belief is we can create more long-term shareholder value by expanding our base of business both through acquisition and new initiatives.

Operator

Your next question comes from the line of Henry Coffey - Stern, Agee.

Henry Coffey - Stern, Agee

I was wondering if we could look at the [M-lock] product for a minute in a couple of questions. If we look backwards -- and I'm sure this may be unfair but we used the card services numbers from Q1. Is that a fair allocation of overhead or does the [M-lock] product have more moving parts in it?

Dan Feehan

Yes, the overhead allocated to the [M-lock] product in Q1 has actually increased in Q2 and Q3 based upon the scaling, a little bit of scaling up of its volume, et cetera, and its demand on some of our technology resources in Chicago. But I think looking at Q1 will give you a little bit of an idea of certainly the net fees associated with that product before allocation of any significant overhead.

Henry Coffey - Stern, Agee

So you're saying the overhead burden is actually a lot higher today than it would have been in the early stages of the product?

Dan Feehan

Yes, based upon the way that we allocate overhead, so a lot of the people that have been working on the [M-lock] product are folks, including myself, here in Forth Worth as well as a team in Chicago. We have direct personnel in Irvine, California that are doing the business development activity on a full-time basis but we have other resources both in Forth Worth and Chicago that have been working on that project.

As it scaled up and new business development activities have been put on the table that we've been working -- that I referenced are some of the things that we've been working on for some period of time, we have allocated additional overhead to that business.

Henry Coffey - Stern, Agee

Also, I mean, I don’t know what the customer count would be but you've got thousands and thousands of customers in a database now. You know who's good and you know who's bad. Are there any specific restrictions that would prohibit you from reaching out to those people or do you have to wait -- is there a given waiting period or how does that -- you obviously have a great database now. How do you get to utilize it going forward?

Dan Feehan

So the customers that we deal with in that particular product, Henry, as I think you understand, they are the bank's customers. So it's actually the bank's customers. It's the bank making the advances to those customers. We obviously process those transactions and participate in the receivables but they are not our customers.

Henry Coffey - Stern, Agee

So you would have -- .

Dan Feehan

So to answer your question we're not marketing directly to that customer base.

Henry Coffey - Stern, Agee

So you just have to reach out with a whole new product to address this sort of slice of demand. It seems to be a pretty unique customer base.

Dan Feehan

Yes, or I think -- yes. I mean, yes.

Henry Coffey - Stern, Agee

Well, yes I know this is a big loss but obviously a real large opportunity as well.

Dan Feehan

Well, most of those customers are also customers of a program manager, so whether it be [Net Spin] or [Account Now] or a handful of other program managers those program managers are trying to protect those customers as their customers and, quite frankly, will be looking for other opportunities with other financial institutions that continue to offer a credit option on their prepaid cards.

We've been in contact with the program managers as a result of this and obviously they're hopeful that our efforts to find other means of deploying this product on their cards will be successful.

Henry Coffey - Stern, Agee

I mean, there are many banks that offer a product just like this, so there is sort of a future here. It's just not yet quantified.

Dan Feehan

I think that's correct. It'd be difficult to quantify and really represent until we have something in place that I can definitively talk about.

Operator

Your next question comes from the line of John Rowan - Sidoti & Company.

John Rowan - Sidoti & Company

I missed the first few minutes of the call, so if I'm redundant just let me know. Is there any option to self-fund the micro line of credit in certain states?

Dan Feehan

The system would work. The processing platform would work in states that we have an online license to issue consumer loans. That becomes a little more complicated process. It's, quite frankly, not clearly as easy to administer from our perspective and market. In that situation we would be responsible for the marketing of that where we were not involved in the marketing with Meta Bank. But it is possible and something that we're looking at.

John Rowan - Sidoti & Company

But if you do keep any portion of this business, that's potential upside to your guidance because all of it's removed from guidance at this point.

Dan Feehan

Yes, it's all removed from guidance. In fact, there's a small amount of ongoing cost associated with the line of business in our numbers because, again, as I said, we don't intend to abandon this and we're going to continue to have some overhead associated with working all these opportunities to develop different channels, whether they be financial institutions or otherwise to offer this product to consumers.

So not only is there not any earnings in there, we have a little bit of cost in our go-forward numbers associate with this because I do think it's a fantastic product with a great future.

John Rowan - Sidoti & Company

One last question, when do you have to start looking at the goodwill from Prenda?

Tom Bessant

John, goodwill is [stuffed] at the segment level, so the -- what we'd be looking at there would be the retail lending services segment on the whole. But I don't think -- I mean, I think Prenda, despite the negative results in the current quarter, I mean, I think that business will be worth a tremendous amount of money and produce a lot of accretion to earnings.

It is, as I said on my comments, I mean, you're talking about 5% of revenue out of the retail services segment. I also say the [M-lock] kind of fits the same category, both of which are business lines that I think we've made solid investments in and both of which have a tremendous potential upside to it.

So I think Mexico is an important place to be. It's a great market for all the obvious reasons. We're not going to stop putting resources down there and I'm very optimistic about its future. It's a business we can operate well. We just need to make a few changes and those changes are in place and we're moving forward.

Operator

(Operator Instructions). Your next question comes from the line of Liz Pierce - ROTH Capital Partners.

Liz Pierce - ROTH Capital Partners

This may sound kind of silly but if you're pursuing other opportunities on [M-lock] and you don't know what the issues are how do you make sure it's not repeated?

Dan Feehan

I didn't hear it. Liz, I couldn't hear that question.

Liz Pierce - ROTH Capital Partners

I guess I was trying to figure out if you don't know what the issue are that caused -- .

Dan Feehan

Right.

Liz Pierce - ROTH Capital Partners

Can you hear me?

Dan Feehan

Yes, barely, but go ahead.

Liz Pierce - ROTH Capital Partners

Let me try to switch back to the headset.

Dan Feehan

Hello?

Liz Pierce - ROTH Capital Partners

Is that better?

Operator

Miss Pierce, we're unable to hear you at this time.

Liz Pierce - ROTH Capital Partners

Hello?

Dan Feehan

Got you.

Liz Pierce - ROTH Capital Partners

Sorry. It's basically on the [M-lock]. If you don't know what the problems were, what the issues were with the Office of Direct, how do you make sure if you're pursuing new relationships or new alternatives that the same issues won't resurface?

Dan Feehan

That's a great question. If the opportunities involve a US-based financial institution that US-based financial institution who's responsible for making the advances and responsible for marketing the program will have to independently determine whatever their regulatory agency is what is the proper way to market and advertise this business.

So you've got institutions that are obviously regulated by either the OCC or the FDIC, the Federal Reserve or the OTS and each institution is part of a program of adopting this would obviously, I think at this point, would be well advised to clear their marketing and advertising programs on the frontend.

So, again, we've been in contact with a number of folks and there are people that feel confident with their regulatory community that they can get an acceptable product designed. So this is a great question but the responsibility for marketing this program and advertising it is really, in the US, would be the financial institution's responsibility. Going outside of the US I think we've got a whole different set of equations there.

Liz Pierce - ROTH Capital Partners

In terms of the agreement you had with Meta Bank, the way the agreement was structured are you entitled to any kind of compensation for I guess the charges that you've been incurring to support this business or not?

Dan Feehan

No.

Operator

Your next question comes from the line of Henry Coffey - Stern, Agee.

Henry Coffey - Stern, Agee

I know this may be hard to answer or unfair, Dan, but when I read the Meta Bank 8-K the language was very, very similar to the language the FDIC seemed to be using and the OCC used back when they told the banks they couldn't participate in these marketing programs.

Do you think it was just a political move there and that all the other stuff was inflammatory or when you sort of are smelling around do you think that it was something specific with Meta Bank and there are other banks that are in better grace, have a better relationship with their regulators, maybe they're bigger banks so it's not as large a part of the relative mix that would be able to offer this product or a similar product? Or do you think this is just kind of a big, sweeping political gesture on behalf of the regulators like we've seen in the past?

Dan Feehan

Yes, what we don't know, Henry, is what other issues that -- and I'm not suggesting there are any. I'm just suggesting that we don't know what other issues Meta's regulator may have had with Meta. So we don't know how this particular action fits into an overall scheme with respect to that particular bank.

I think going forward we have been focused in terms of the people we're talking with and in contact with much larger financial institutions.

Henry Coffey - Stern, Agee

So you would think [Core Four] or SunTrust could actually probably provide this product still, then. I know those are two of Meta Bank's relationship people

Dan Feehan

Yes, I think that someone of that stature would be a totally different equation. I do think that you get into a larger bank. You've got a significantly different risk profile than exists with Meta Bank.

Henry Coffey - Stern, Agee

Again, we all appreciate the articulation on this issue. I know it was a tough loss but it looks like it's a pretty strong 2011 anyway.

Dan Feehan

Again, we're not giving up on that business. I think there are opportunities for us and it's a great product, it's a solid alternative to payday lending, quite frankly, lower-rated product, more convenient, a better term, so we're not giving up on that and we'll find a way to get it deployed.

Operator

Your next question comes from the line of John Hecht - JMP Securities.

John Hecht - JMP Securities

Yes, just real quick, you did have a good pickup in the yield on the pawn loans. Is that a function of a lower forfeiture rate primarily or is there something else going on there?

Tom Bessant

Yes, it's purely driven by portfolio performance, John. It's been trending that way throughout the year. At the end of the day, as I said, we're writing more loans but we're getting a lot more redemptions. So our pure cash yields are rising and it's just a function of performance although I'll take the opportunity to throw in this comment.

We will be, with bringing in the Maxit chain, roughly $20 million in pawn loan balances. That is a market that's lower yielding than the overall US market. It's more comparable to Nevada and Arizona. So our reported yields will come down. So as you guys are looking at your models the yields will come down while loan balance will jump up and earnings will be stronger.

That yield calculation will actually fall off and next year we'll have a downward comp associated with bringing in more of those loans. But in the current period it's pure performance and obviously Maxit was closed after the end of the quarter and so you don't see any of that in the current quarter.

John Hecht - JMP Securities

Maxit had about a $20 million loan balance when you closed it?

Tom Bessant

Yes, it's about $20 million loan balance and it has an effective yield of just under 100%. So when you look at our roughly 132% overall portfolio today you're going to put $20 million of additional loans on the books and it'll have a 100% yield, so you can do the weighted average calculation from there.

Operator

Mr. Feehan, we have no further questions at this time. You may proceed with your presentation or closing remarks.

Dan Feehan

We have no closing remarks. Appreciate everybody joining us today.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Cash America CEO Discusses Q3 2010 Results - Earnings Call Transcript
This Transcript
All Transcripts