Keeping up the momentum after you've already doubled and tripled in value is no easy task. What new initiatives can you devise that will let you drive forward further? How much more can you expand to keep customers interested and coming back for more? These are the some of the questions pawnshop operator EZCORP
Challenges to overcome
Sure, the stock price is one challenge, but it's not necessarily an issue Fools consider too deeply. Of course we want good value, but it's equally important that the business be good, too. One without the other would be like trying to pawn off gold plating for the real thing. EZCORP must overcome the following obstacles:
- After the big move that EZCORP has made into payday lending, it's now subject to all of the same restrictions, regulations, and criticisms that beset other lenders like Advance America
(NYSE:AEA), First Cash Financial (NASDAQ:FCFS), and Cash America (NYSE:CSH).
- EZCORP is still a local entity, based mainly in and around Texas, with only a few hundred stores in operation. By comparison, industry leader Advance America has more than 2,750 stores in 36 states.
- Even with payday lending acquiring more attention at EZCORP, pawnshop operations still make the bulk of the company's money, and those revenues in turn depend heavily on the price of gold. EZCORP has enjoyed the gold rush of the past few years, but can it continue for much longer?
Expand and conquer
Perhaps recognizing that the pawn business has its limitations, even for the country's second-largest chain, EZCORP is continuing to make moves into the payday lending side of things. That's where its biggest growth has been, and that's where it will be targeting its expansion in 2007.
That's smart, because it will be able to cater to the same type of customer who would use the pawn service, but without the costs associated with holding onto property until it is reclaimed. While merchandise sales from unclaimed property remain lucrative -- overall gross margins on merchandise and jewelry sales exceeded 39% -- generous returns can also come from making payday loans, with fewer employees. A pawnshop typically requires six employees; a payday loan center, just three.
For that reason, EZCORP plans to open 100 new EZ Money stores and no new EZ Pawn shops in 2007. It has not opened a new pawnshop since 2000, although it did acquire a handful last year.
The company has about 600 pawn and payday stores in operation; two-thirds of them are located in Texas, and the rest are scattered in 12 other states. The only state outside Texas with a sizeable presence is Colorado, where almost 70 stores are situated.
That presents some opportunities to grow, but as Dollar Financial
It opened its first Mexican EZ Money store this year and plans to open a slew of them in 2007. Since so many of its operations are in border towns, it realized that a large part of its clientele had Mexican roots and that expanding in that direction would allow it to tap into a market that wasn't already heavily serviced by the competition. Look for more EZ Dineros popping up next year.
Still the easy payday?
There don't appear to be any immediate hurdles to clear in EZCORP's goal to future growth. It's making cost-wise expansion decisions, going where the money is at least cost, and its valuations are not astronomical, considering that it has tripled in price. That triple must be why management decided on a 3-for-1 stock split that kicked in on Dec. 12. A non-event by itself, the split does make its shares more liquid and available for purchase.
EZCORP's trailing and forward P/E ratios are reasonable, though comparing its capitalization to company sales makes it seem a little pricey. Both, however, well exceed the historical averages for the company.
Foolish bottom line
Individuals don't always handle their finances as Foolishly as we would like. Sometimes they have short-term money needs that the big banking institutions have seen fit to ignore. Companies like EZCORP, whether through pawn shops or payday loans, have found a profitable niche to provide a much-needed service.
It's true that the industry faces critics who think the rates it charges are usurious, but they're no more so than if you converted that $26 late fee a bank or credit card charges you into a 671% APR. But that's a nonsensical way of looking at things, since payday loans are not intended to be long-term -- as their name suggests, they're meant to get you over the hump until your next payday.
A $15 fee on a $100 payday loan converts into a 391% APR, but that seems more financially prudent than a 1,300% APR for being charged a $50 non-payment fee for missing your utility bill.
EZCORP looks like it will continue to make it look easy making money.
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