Consistent with most other payday lenders' results, tiny QC Holdings (Nasdaq: QCCO) saw flat expenses atop higher revenues lead to wider profit margins. QC Holdings is a pure-play lender in a field that often involves a mix of payday loans, pawn shops, and most recently used-car dealerships.
Competing against industry giant Advance America (NYSE: AEA), the company still grew quarterly revenues 16%, to $48.7 million, on higher volumes of loans written, including the addition of 51 branches it acquired in South Carolina back in December. It originated approximately $291 million of payday loans during Q4, a 7% increase over the $271 million worth it originated last year.
At the same time, branch operating expenses remained flat year over year, despite the increased number of stores. That suggests an improved and more efficient operating structure. The longer stores stay open, the more profitable they become. It falls right in line with CEO Don Early's prediction last quarter that investors should expect higher revenues and consistent costs.
It was a hard lesson to learn for QC Holdings. The company initially expanded too far, too fast, and suffered mightily for it. Now, with experience under its belt, the company has found a consistent formula. It's expanding at a less torrid pace, only expecting to open 20 to 30 new branches in 2007. Nonetheless, it's seizing opportunities when they arise, such as its $16.2 million acquisition of South Carolina branches from privately held Express Check Advance. Along with 46 new branches it opened in the last quarter, those additions have already contributed $3 million in revenues.
QC is also closing down 35 branches that cost the company $2.4 million in losses in 2006, undoubtedly opened in the frenzy of new stores intended to increase its footprint early on. Those closures will subsequently cost QC Holdings $3.3 million in the first quarter. Growing pains are not uncommon, but here, they're also the result of intense competition from EZCORP (Nasdaq: EZPW) and First Cash Financial (Nasdaq: FCFS), who run ancillary businesses, too.
Also, like others in the industry, QC still has to contend with a changing legal and regulatory landscape. In addition to having to close down branches in states like North Carolina in 2005, fee structures have also changed in many states, limiting what can be charged. QC Holdings saw its average fees for loans decline from $54.01 to $52.92, but that was offset somewhat by higher loan principles.
The smallest player in the payday-lending field also carries the richest valuation. That's not unexpected as the company emerges into profitability, but it'll change as earnings grow. Already, its price-to-earnings ratio will decline from 50, based on trailing earnings, to 33, based on the new report.
As it seeks reasonable growth with a more profitable line of branches, focusing on doing one thing especially well, expect QC Holdings to continue improving its performance.
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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. The Motley Fool has a disclosure policy.
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