Cash America 2008 Annual Report Download - page 63

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of pawn loans secured by jewelry, the liquidation of jewelry inventory, and the sale of gold items purchased
directly from customers.
Proceeds from disposition of merchandise, excluding refined gold, increased $10.2 million, or 3.7%,
in 2008, primarily due to the higher levels of retail sales activity that was supported by higher levels of
merchandise available for disposition entering into 2008. The consolidated merchandise turnover rate
increased to 2.9 times in 2008 from 2.7 times in 2007 as management emphasized disposition of
merchandise in 2008. Management expects that the profit margin on the disposition of merchandise will
likely trend slightly below current levels mainly due to the weak economic environment which could reduce
consumers’ appetite for retail purchases and an increase in the percentage mix of refined gold sales, which
typically have lower gross profit margins.
Management emphasized disposition activities throughout the year but particularly in the second
half of 2008, which resulted in the improved mix of merchandise under one year old but also contributed to
lower gross profit margins in the second half of 2008. The table below summarizes the age of merchandise
held for disposition before valuation allowance of $0.7 million and $2.0 million, respectively, at December
31, 2008 and 2007 (dollars in thousands).
2008 2007
Amount % Amount %
Merchandise held for 1 year or less –
Jewelry.......................................................... $ 72,780 66.1 % $ 60,702 60.6 %
Other merchandise ........................................ 28,979 26.3 29,437 29.4
101,759 92.4 90,139 90.0
Merchandise held for more than 1 year –
Jewelry.......................................................... 5,306 4.8 6,264 6.3
Other merchandise ........................................ 3,128 2.8 3,731 3.7
8,434 7.6 9,995 10.0
Total merchandise held for disposition...... $ 110,193 100.0 % $ 100,134 100.0 %
During 2008, the Company modified its methodology for assessing the reasonableness of its
inventory allowance by taking a more comprehensive view of factors impacting the valuation of
merchandise held for disposition. Beginning in 2008, a greater emphasis was placed on shrinkage rates as a
measure of adequacy of the allowance, while maintaining the other measures of merchandise quality used in
prior periods. Management believes that this approach more accurately reflects the near-term vulnerability
of merchandise valuation impairment based on historical perspectives. As a result, the allowance was
reduced from $2.0 million as of December 31, 2007 to $0.7 million as of December 31, 2008, representing
0.6% of the balance of merchandise held for disposition at December 31, 2008. The Company conducts
multiple physical count assessments of merchandise in all of its locations and immediately records the
results of those activities directly to the income statement. For the trailing six months ended December 31,
2008, the merchandise shortages charged to income was $0.4 million, approximately 0.2% of merchandise
sales for the same period. This change causes the increase in merchandise balance to be higher than it
would have been if the allowance had not changed. Applying the prior year allowance of $2.0 million,
reported net merchandise levels would have been up only 10.3%, compared to the currently reported
increase from 2007 to 2008 of 11.6%.
Cash Advance Fees. Cash advance fees increased $9.4 million, or 2.6%, to $364.6 million in 2008, as
compared to $355.2 million in 2007. The increase in revenue from cash advance fees is predominantly due
to the increase in customers using the Company’s online distribution channel, which offset the 17.3%
decrease in cash advance fees from storefront activities. Storefront cash advance fees and cash advance fees
generated in pawn locations decreased 17.2% in 2008 as the Company adjusted underwriting criteria late in
2007 to reduce losses on cash advance loans and closed 56 storefront cash advance locations during the
year.