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EZCorp: Steady As She Goes

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Pawn Shop Sign

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Recently, EZCORP Inc. (NASDAQ:EZPW) reported beardown Q1/F23 results, pinch nan institution continuing to show double digit YoY maturation owed to nan countercyclical quality of nan pawn business. In nan 4th quarter, EZCORP besides refinanced astir of its 2024/2025 maturing convertible bonds, giving nan institution a longer runway for growth.

I expect EZPW's business to proceed to prosper successful nan coming quarters arsenic ostentation remains stubbornly precocious and unit lower-income consumers nan hardest.

Brief Company Overview

EZCORP is simply a starring usability of pawn stores successful nan U.S. and Latin America, pinch adjacent to 1,200 unit stores.

Pawn loans are afloat collateralized by nan pawned merchandise and person very debased in installments risk. This is successful stark opposition to different forms of user lending.

Historically, pawn work usage is countercyclical, arsenic financially stretched consumers activity retired replacement in installments solutions for illustration pawn loans during reliable economical times.

Readers willing successful learning much astir nan business should publication my initiation article connected EZPW.

Q1/2023 Review

Recently, EZCORP reported coagulated Q1/F23 results, pinch nan institution signaling a 18% YoY summation successful adj. revenues to $261.6 cardinal and a 27% YoY emergence successful adj. EPS to $0.28. Both revenues and net were up of Wall Street expert estimates, arsenic nan underlying pawn business continues to execute good (Figure 1).

EZPW Q1/F23 financial summary

Figure 1 - EZPW Q1/F23 financial summary (EZPW Q1/23 net presentation)

Pawn loans outstanding ("PLO"), nan cardinal capacity metric for EZCORP, grew 18% YoY to $208.6 million, though it really declined nominally QoQ from $210 cardinal successful Q4/F22 owed to seasonality factors. According to nan company's reports, loans outstanding are typically highest successful nan summertime and lowest successful nan spring, truthful a diminution successful PLO QoQ was expected.

Lower Merchandise Margins Worth Monitoring

Although PLO and pawn work charges ("PSC") grew powerfully YoY, thing worthy monitoring successful Q1/F23 was nan diminution successful merchandise margins (retail mark-up of panwed merchandise), which fell from 40% successful Q1/F22 to 36% successful Q1/F23 (Figure 2). Lower merchandise margins could beryllium a awesome of deteriorating customer health.

EZPW merchandise separator fell YoY

Figure 2 - EZPW merchandise separator fell YoY (EZPW Q1/23 net presentation)

When customers are healthy, they are typically consenting to acquisition pawned merchandise astatine wider margins, and inventory turnover is fast. However, if customers are excessively healthy, it could besides propose little request for pawn loans. For EZPW, nan cardinal is balancing coagulated PLO maturation while maintaining decent merchandise margins.

According to management, aft a play of elevated gross margins, merchandise margins are now returning to its normal scope of 35-38%. In fact, EZPW's CFO mentioned connected nan Q1/F23 net telephone that customers are nether unit and EZCORP person seen accrued "negotiation astatine nan shop level". The institution believes margins will enactment astatine nan little extremity of nan humanities scope arsenic "pressure continues to mount" connected its customer base.

While it is sobering to perceive that EZPW's customers are struggling, it does propose continued momentum pinch nan company's halfway pawn business.

Convertible Financing De-Risks Balance Sheet

In December, EZPW's banal plunged aft announcing an connection to rumor $175 cardinal successful convertible notes (Figure 3). When organization investors bargain convertible bonds, they often 'short' nan communal equity of nan issuer successful nan magnitude of nan conversion ratio, allowing them to gain a precocious output pinch small marketplace risk.

EZPW banal plunged successful December aft convertible statement issue

Figure 3 - EZPW banal plunged successful December aft convertible statement rumor (Author created pinch value floor plan from stockcharts.com)

At nan clip of EZPW's convertible statement issuance, I commented that nan banal guidance "likely reflects nan convertible enslaved investors putting connected nan hedge, and should not beryllium viewed arsenic reflective of nan underlying business fundamentals." Instead, investors should position nan convertible overhang arsenic a buying opportunity.

With nan Q1/F23 report, we get much specifications connected nan convertible statement that was issued (Figure 4).

EZPW Convertible Note refinancing summary

Figure 4 - EZPW Convertible Note refinancing summary (EZPW Q1/23 net presentation)

In total, EZPW issued $230 cardinal successful 2029 Convertible Notes to refinance $179 cardinal successful 2024 and 2025 notes. Even though liking rates person risen importantly successful 2022, EZPW was capable to rumor nan 2029 Convertible Notes astatine a 3.75% liking complaint because of nan $11.232 conversion sweetener.

Altogether, EZPW added $52 cardinal successful convertible indebtedness superior successful speech for an further imaginable dilution of 5.2 cardinal shares and $3.8 cardinal successful further liking expense.

While adding imaginable dilution of 5.2 cardinal shares (on 55.8 cardinal shares outstanding) is not ideal, nan woody does de-risk EZPW's equilibrium expanse and gives nan institution much runway for growth. Furthermore, nan 2029 Convertible Note's conversion value is much than 20% higher than nan existent banal price, truthful shareholders should beryllium rooting for nan banal to rally specified that it becomes charismatic for nan bondholders to convert.

Conclusion

Overall, I would qualify EZPW's Q1/F23 net study arsenic inline to my expectations but up of Wall Street analysts. EZPW saw 18% maturation successful revenues and 27% maturation successful adj. EPS. As ostentation remains stubbornly precocious (recent CPI report showed header ostentation accrued 6.4% YoY successful January, connected apical of past year's 7.5% YoY maturation for a 2-year compounded summation of 14.4%!), lower-income consumers will proceed to struggle and require EZPW's pawn services.

This article was written by

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I spent 5 years arsenic a co-founder and hedge money CIO / manager. Before that, I was a hedge money analyst/portfolio head astatine a starring Canadian replacement plus manager. I constitute articles arsenic portion of my ain owed diligence connected nan stocks that I find interesting, for 1 logic aliases another.Follow maine connected twitter for my thoughts connected macro trends.

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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