EZCORP, Inc. is a Delaware corporation headquartered in Austin, Texas. We lend or provide credit services to individuals who do not have cash resources or access to credit to meet their short-term cash needs. We operate pawn stores in the United States under the “EZPAWN” and “Value Pawn” brands, and in Mexico under the “EMPEÑO FÁCIL” and “EMPEÑE SU ORO” brands. We also operate short-term consumer loan stores in the United States principally under the “EZMONEY” brand and in Canada under the “CASHMAX” brand. We also own approximately 30% of the outstanding stock of Albemarle and Bond Holdings PLC, one of the United Kingdom’s largest pawnbroking businesses with 115 stores, and Cash Converters International Limited, which franchises and operates approximately 500 locations worldwide.
At our pawn stores, we offer pawn loans, which are non-recourse loans collateralized by tangible personal property, and sell merchandise to customers looking for good value. The merchandise we sell consists primarily of pre-owned collateral forfeited from our pawn lending activities or purchased from customers. At our short-term consumer loan stores and at some of our pawn stores, we offer a variety of loan products, including single-payment, non-collateralized payday loans with maturity dates typically ranging from 7 to 30 days; non-collateralized installment loans that may be repaid over extended periods of up to five months, and 30-day loans secured by automobile titles. Short-term non-collateralized loans are sometimes referred to as signature loans. Our short-term consumer loan stores in Texas do not offer loan products themselves, but rather offer credit services to help customers obtain loans from independent third-party lenders. Some of our Texas pawn stores also offer credit services in addition to pawn loans.
Pawn Activities
Our pawnshops make pawn loans, which are typically small, non-recourse loans collateralized by tangible personal property. At September 30, 2009, we had approximately 958,000 loans outstanding, representing an aggregate principal balance of $101.7 million. We earn pawn service charge revenue on our pawn lending. In fiscal 2009, pawn service charges accounted for approximately 22% of our total revenues and 36% of our net revenues.
While allowable service charges vary by state and loan size, a majority of our U.S. pawn loans earn 20% per month. The pawn loan amount varies depending on the valuation of the item pawned, but our average U.S. pawn loan amount typically ranges between $80 and $120. The total U.S. loan term, consisting of the primary term and a grace period, is 60 days in most locations, but ranges up to 120 days in some states. In Mexico, pawn service charges range from 13% to 20% per month, but a majority of our pawn loans earn 18%, net of applicable taxes. The total Mexico pawn loan term is 40 days, consisting of the primary term and a grace period. In fiscal 2007, 2008 and 2009, approximately 77%, 79% and 79% of our pawn loans were redeemed in full or were renewed or extended through the payment of accrued pawn service charges.
Collateral for our pawn loans consists of tangible personal property, generally jewelry, consumer electronics, tools, sporting goods and musical instruments. Approximately 65% of our pawn loan collateral is jewelry, and the vast majority of that is gold jewelry. We do not evaluate the creditworthiness of a pawn customer, but rely on the estimated resale value of the collateral and the perceived probability of the loan’s redemption. We generally lend from 25% to 65% of the pledged property’s estimated resale value depending on an evaluation of these factors. The sources of information we use to determine the resale value of collateral include our computerized valuation software, gold values, internet retail and auction sites, catalogues, newspaper advertisements and previous sales of similar merchandise.
The collateral is held through the duration of the loan, which the customer may renew or extend by paying accrued pawn service charges. Through our lending guidelines, we maintain an annual redemption rate (the percentage of loans made that are repaid, renewed or extended) between 76% and 79%. If a customer does not repay, renew or extend a loan, the collateral is forfeited to us and becomes inventory available for sale. We do not record loan losses or charge-offs of pawn loans because the principal amount of an unpaid loan becomes the inventory carrying cost of the forfeited collateral. We provide an inventory valuation allowance to ensure that this forfeited collateral is valued at the lower of cost or market.
The redemption rate of pawn loans and the gross profit realized on the sale of forfeited collateral are dependent on the loan value of customer merchandise. Jewelry, which makes up approximately 65% of the value of collateral, can be appraised based on weight, gold content, style and value of gemstones. Other items pawned typically consist of consumer electronics, tools, sporting goods, and musical instruments. These are evaluated based on recent sales experience and the selling price of similar new merchandise, adjusted for age, wear, and obsolescence.
At the time a pawn transaction is made, a pawn loan agreement (typically called a pawn ticket) is given to the customer. The pawn ticket shows the name and address of the pawnshop and the customer, the customer’s identification information, the date of the loan, a detailed description of the pledged goods, the amount financed, the pawn service charge, the maturity date of the loan, the total amount that must be paid to redeem the loan and the annual percentage rate.
Pawn loan forfeitures constitute the primary source of inventory for our retail sales activities, although we also purchase and resell pre-owned merchandise from customers and some new merchandise from third-party vendors. The gross profit on sales of inventory depends primarily on our assessment of the loan or purchase value at the time the property is either accepted as loan collateral or purchased. Improper value assessment in the lending or purchasing process can result in lower margins or reduced marketability of the merchandise. During fiscal 2007, 2008 and 2009, we realized gross margins on sales of 39%, 40% and 37%.
Jewelry sales represent approximately half of our total sales, with the remaining sales consisting primarily of consumer electronics, tools, sporting goods and musical instruments. We believe our ability to offer quality used merchandise at prices significantly lower than original retail prices attracts value-conscious customers.
For fiscal 2007, 2008 and 2009, retail activities and jewelry scrapping (sales of precious metals and gemstones to refiners and gemstone wholesalers) accounted for approximately 52%, 51% and 54% of our total revenues, or 33% of our net revenues in each year, after deducting the cost of goods sold. As a significant portion of our inventory and sales involve gold jewelry, our results can be heavily influenced by the market price of gold, which has increased over the past several years. This is particularly true for gold scrapping, which comprised 27% of total sales in fiscal 2007, 33% in fiscal 2008 and 37% in fiscal 2009.
Customers may purchase an extended return plan that allows them to return or exchange certain merchandise sold through our retail pawn operations within six months of purchase. We recognize the fees for this service as revenue ratably over the six month period. Customers may also purchase an item on layaway by paying a minimum layaway deposit of typically 20% of the item’s sale price. We hold the item for a 60 to 90-day period, during which the customer is required to pay the balance of the sales price. The initial deposit and subsequent payments are recorded as customer layaway deposits. Layaways are recorded as sales when paid in full. As of September 30, 2009, we held $4.2 million in customer layaway deposits. We record layaway and product protection fees as other revenue.
Our overall inventory is stated at the lower of cost or market. We provide an inventory valuation allowance for shrinkage and cost in excess of market value. We estimate this valuation allowance through study and analysis of sales trends, inventory turnover, inventory aging, margins achieved on recent sales and shrinkage. At September 30, 2009, total inventory on hand was $64.0 million after deducting the inventory valuation allowance of $5.7 million.
Short-Term Consumer Loan Activities
We also offer a variety of loan products and credit services to customers who do not have access to other sources of credit. Many customers find our loan products a more attractive alternative than borrowing from friends or family or incurring insufficient fund fees, overdraft protection fees, utility reconnect fees and other charges imposed when they have insufficient cash. Customers can exercise greater control of their personal finances without damaging the relationship they have with their merchants, service providers and family members.
The specific loan products offered varies by location, but generally include some or all of the following:
Payday loans — Payday loans are short-term loans (generally less than 30 days and averaging about 18 days) with due dates corresponding to the customer’s next payday. The principal amount of a payday loan can be up to $1,500, but average approximately $430. We typically charge a fee of 15% to 22% of the loan amount for a 7-to-23-day period.
Installment loans — Installment loans typically carry a term of about five months, with ten equal installment payments due on the customer’s paydays. Installment loan principal amounts range from $525 to $3,000, but average about $1,250. We typically charge a fee of 10% of the initial loan amount with each semi-monthly or bi-weekly installment payment.
Auto title loans — Auto title loans are 30-day loans collateralized by the titles to customers’ automobiles. The principal amount of an auto title loan can be up to $9,000, but averages about $700. Loan amounts are established based on customers’ income levels, an inspection of the automobile and title and reference to market values of used automobiles. For each auto title loan, we charge a fee of 12.5% to 25% of the loan amount.
In our Texas stores, we do not offer signature loan or auto title loan products themselves, but offer fee-based credit services to customers seeking loans. In these locations, we act as a credit services organization (or “CSO”) on behalf of customers in accordance with applicable state laws, and offer advice and assistance to customers in obtaining loans from unaffiliated lenders. Our services include arranging loans with independent third-party lenders, assisting in the preparation of loan applications and loan documents, and accepting loan payments for the lenders. We do not make, fund or participate in the loans made by the lenders, but we assist customers in obtaining credit and enhance their creditworthiness by issuing a letter of credit to guarantee the customer’s payment obligations to the independent third-party lender. For credit services in connection with arranging a payday loan (average loan amount of about $550), our fee is 20% of the loan amount. For credit services in connection with arranging an installment loan (average loan amount of about $2,100), our fee is 10% of the initial loan
amount with each semi-monthly or bi-weekly installment payment. For credit services in connection with arranging an auto title loan (average loan amount of about $680), the fee is 25% of the loan amount.
A loan is considered defaulted if it has not been repaid or renewed by the maturity date or, in the case of installment loans, when the customer has failed to make two consecutive installment payments. Although defaulted loans may be collected later, we charge the loan principal to bad debt upon default, leaving only active loans in the reported balance. Subsequent collections of principal are recorded as a reduction of bad debt at the time of collection. Accrued service charges related to defaulted loans are deducted from service charge revenue upon loan default, and increase service charge revenue upon subsequent collection. We provide for a valuation allowance on both the principal and service charges receivable based on recent default and collection experience. Our signature loan balance represents the principal amount of all active (non-defaulted) loans, net of this valuation allowance.
If a credit service customer defaults on a loan, we pay the lender the principal and accrued interest due under the loan and an insufficient funds fee or late fee and charge those amounts to bad debt expense. We then attempt to collect those amounts from the customer. Subsequent recoveries are recorded as a reduction of bad debt at the time of collection. We also record as bad debt expense an accrual of expected losses for principal, interest and insufficient fund fees and late fees we expect to pay the lenders on default of the lenders’ current loans. This estimate is based on recent default and collection experience and the amount of loans the lenders have outstanding.
The table below shows the dollar amount of our signature loan activity for fiscal 2007, 2008 and 2009. For purposes of this table, signature loan balances include the principal portion of payday loans and installment loans (net of valuation allowance) recorded on our balance sheet and the principal portion of such active brokered loans outstanding from unaffiliated lenders, which is not included on our balance sheet. In fiscal 2009, new loans were renewed 1.9 times on average, down from 2.1 times in fiscal 2008 and 2.3 times in fiscal 2007.