Cash America 2011 Annual Report Download - page 8

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CASH AMERICA INTERNATIONAL, INC.
To my fellow
shareholders
Ialways look forward to
composing an annual message to
you, sharing my current thoughts and
outlook for our business. I spend a
signicant amount of my waking hours
thinking about the strategic framework
underpinning our operations, and the
annual Shareholder message is a great
opportunity to communicate a concise
and meaningful view of the strategic
opportunities and challenges we face as
an international provider of alternative
nancial services. I am gratied when
many of you reference my annual
message during the course of the year.
Your feedback is important to me.
This year’s message is even more
concise than usual as I am somewhat
restricted by the Securities and Exchange
Commission’s rules associated with the
pending Registration Statement on Form
S-1 led in connection with the proposed
initial public offering of common stock
of our wholly owned subsidiary that
comprises our E-Commerce segment,
Enova International, Inc. The Registration
Statement had not been declared
effective by the Securities and Exchange
Commission as of the publication
deadline for our 2011 Annual Report, and
we remain limited in what we can discuss
about that portion of our business.
What I can share with you is my
satisfaction with the ongoing nancial
and operational success of our Company.
In 2011, we exceeded all of our key
consolidated nancial goals and posted
another record-setting year for revenue
and earnings. That nancial performance,
in turn, helped us achieve a key objective
I shared with you in last year’s message:
closing the valuation gap with a small
subset of our peer competitors. Our
share price advanced approximately
26% in 2011, far outpacing the share
performance of our peer group in 2011.
We have more work to do on this front,
which is predominantly a matter of
executing our strategic plan and further
communicating the attributes we believe
create positive points of differentiation
with our competitors.
The Retail Services segment of Cash
America enjoyed its most successful
year since the onset of the downturn of
the economy in 2008. This segment is
now comprised of 974 lending locations
in the U.S. and Mexico and 110 mostly
franchised check cashing centers in the
U.S. The U.S., or domestic, portion of this
segment provided 97% of total Retail
Services revenue for 2011 and provided
all of the segment’s earnings. The key
components contributing to domestic
earnings growth for the year include
pawn loan growth, favorable disposition
activities and unit growth.
Pawn Loan Growth – Same store
pawn loan growth in our U.S. business
ranged from 12% to 14% for most of 2011,
following the previous two years when
same store pawn loan growth hovered
in the mid-single digits. A meaningful
incremental component of this growth in
2011 can be attributed to our increased
marketing spend and operational
execution, but I believe the most
signicant portion is directly attributable
to the slowly improving U.S. economy
and strengthening consumer condence.
At year-end, total pawn loans were up
16% compared to the end of 2010.
For over 25 years, I have consistently
exposed the error of conventional
wisdom, which automatically defaults
to the assumption of our business being
counter-cyclical. The theory is simply that
falling GDP and rising unemployment
creates a boon for businesses serving the
nancial needs of low-to-moderate income
consumers. Not so. Cash America is rst
and foremost a lending institution. As such,
our nancial success is directly dependent
upon making quality loans to people
who are likely to repay, even for those
providing collateral. The fundamental
model of our business – small loan
amounts with short durations – helps
insulate us from wild cyclical economic
swings up or down, but recessions are
clearly not great for business. I would
expect to continue seeing growth in
our Retail Services segment as the U.S.
economy improves.
A small portion of the benet from
pawn loan growth in 2011 was diluted
by lower aggregate pawn loan yields.
The shift in pawn loan yield is entirely
associated with a changing geographic
mix of our pawn loan portfolio. We
experienced greater loan growth in 2011
in our western states, where statutory
loan rates are lower than other markets
in the central and southeastern portions
of the U.S. A signicant portion of the
mix change resulted from our October
2010 acquisition of Maxit, which has 39
locations in two of these western states.
Disposition Activities – Typically
three out of 10 customers default on a
pawn loan, and when this happens we
must dispose of the pledged collateral to
recover the principal that we have loaned
and cover the costs associated with loan
administration and disposition activity.
We also sell merchandise, primarily gold,
that we purchase from customers. In
2011, we were successful in disposing of
merchandise at a yield of 157% of the
amount we had invested, which is either
the loan amount or the purchase price.
Our disposition activity consists of
both retail sales (in store and online)
and commercial sales of scrap gold and
diamonds. This combined disposition
activity on a same store basis was up
approximately 11% for the full year of
2011. Both disposition activities grew at
healthy rates in 2011, with the commercial
activity capturing a slightly larger portion
of the overall pie. Combined gross
prot margins were relatively at in 2011
compared to 2010. I expect to see steady
demand from our retail customers in
2012, and the spot price of gold should
continue to provide a very uid market
for our commercial activities.
Unit Growth – Most of the earnings
impact from unit growth in 2011 was
provided by the 39 Maxit locations