Cash America International, Inc. Business Information, Profile, and History
Fort Worth, Texas 76102-2599
In last year's annual report, we discussed a return to our roots--a renewed focus on core lending activities. It was a strategy that had begun to show signs of success, and we made it our mission to continue these efforts throughout 2002.
We're proud to say that we're on the right course.
Our success is largely due to the people throughout Cash America. They are working hard to deliver the best service and products to our customers. The response has been very favorable and customer demand is unprecedented. Cash America is working to fill the short-term capital gap for thousands of people in America and Europe.
Our strategy has become our compass as we move forward. A compass is a tool that, in the right hands, can get people where they need to be. Guide them. Keep them moving in the right direction. This year we've reaffirmed that, in the hands of the right people, it will do the same for our Company.
History of Cash America International, Inc.
Cash America International, Inc. is the world's largest international pawn company. In addition to providing secured non-recourse loans (pawn loans) to individuals, the company provides check-cashing services through its Mr. Payroll Corporation subsidiary and short-term unsecured cash advances, known as payday advance loans, at Cash America pawnshops and through its Cashland subsidiary. As of September 2003, the company had 592 lending locations in the United States, Great Britain, and Sweden.
Getting Started: 1983-89
Jack Daugherty, the chairman and CEO of Cash America, opened his first pawnshop in Texas in the early 1970s and was so successful he moved into the oil business. When that industry went bust, he returned to pawnshops, founding the company in 1983, and incorporating it the following year as Cash America Investments, Inc. Daugherty took the company public in 1987, making it the first pawnshop company to be publicly owned. The initial offering raised $14.5 million, with five million shares sold. Using the money to expand, Cash America acquired the Big State chain of 47 pawnshops later that year. The company continued to grow, primarily through acquisitions. In 1988, five years after its founding, the chain opened its 100th location.
The stores in the Cash America chain did not fit the dark, dingy image of a storefront pawnshop. Daugherty's strategy was to provide big, well-lit stores, to computerize the inventory, and to centralize management. The company established a three-month training program for new employees that included classroom and on-the-job training in loans, layaways, merchandise, and general administration of store operations. More experienced workers received training in the fundamentals of management, and managers went through a year-long program that dealt with recruitment, merchandise control, income maximization, and cost efficiency. Each store had a unit manager who reported to a market manager responsible for about ten locations. The market manager in turn reported to a division vice-president.
"Cash America is bringing modern management to a backward industry," Prudential analyst John D. Morris told Ellen Stark of the Wall Street Journal. Investors, including some of the nation's largest banks according to Michael Hudson of the Nation, appeared to like it. In 1988, the company sold an additional 4.92 million shares, raising $24 million to finance its expansion.
Cash America used the term "non-traditional borrowers" to refer to its customers. These were people not willing or unable to use a credit card or get a bank loan to cover the cost of repairing their car, paying a utility bill, or other short-term need for cash. Many did not have a checking account and usually conducted their business on a cash basis.
Customers brought in items of personal value--wedding rings, silver tea sets, televisions, firearms, bicycles, radar detectors, weed whackers--to use as collateral for an immediate loan of money. Using sources such as catalogues, blue books, newspapers, previous similar pawn loan transactions, and his or her own experience, the Cash America employee determined the estimated value of the item and the amount to be financed.
The Cash America customer received a computerized pawn ticket that gave a detailed description of the collateral, amount loaned, and identifying information about the customer (address, age, driver's license number). The average Cash America loan was for less than $100 and was outstanding for less than two months. The customer redeemed the item by paying the loan amount and service charge. About 70 percent of the company's loans were repaid. For those that were not, the collateral became the property of Cash America and could be sold.
The company's gross revenue was calculated by adding the amount received from the sales of unredeemed items plus the amount earned from service charges. Sales were generally around 70 percent of the gross revenue. But when the cost of the sales was subtracted, service charges accounted for at least half the net revenue each year.
The pawnshop industry has long been an extensively regulated activity. States determined the process to be followed in applying for a pawnshop license, what records had to be maintained and whether the local police could inspect them or whether transactions had to be reported to local law enforcement officials, how old a customer must be to be served, and what hours the business could be open. States also established the range of loan amounts and the maximum annual service charge for each range. In Texas, for example, in 1997, the most a pawnshop could charge was 240 percent per annum, and that only for loans of $1-$132. No pawn loan could be more than $11,000, for which the maximum annual rate was 12 percent. Oklahoma also had 240 percent as the maximum annual rate, but for loans of $1 to $150. Loans in that state could not exceed $25,000, with a maximum annual rate for that amount of 36 percent. Other states, including Florida and Georgia, allowed a maximum of 25 percent of the loan for each 30-day period of the transaction, with no breakdown by loan amount.
Rapid Expansion: 1990-95
By 1990, Cash America was operating 123 company-owned locations. That year the company was listed on the New York Stock Exchange and the stock split 3 for 2. In 1992, a 4.6 million stock offering raised $45 million, the stock split 2 for 1, and the company opened its 200th store, in Mission, Texas. It was at this point that Daugherty decided to take his company international. He acquired Harvey & Thompson, a U.K. chain with more than 100 years in the pawnshop business. Harvey & Thompson was based in London and had 26 locations in England and Scotland. The pawnshop business in the United Kingdom was essentially the same as that in the United States. Pawn loans, however, generally were secured only by jewelry and gold or silver items and the average loan was larger, approximately $120. In addition, for loans larger than about $40, unredeemed items were sold at auction. Finally, the Consumer Credit Act of 1974 prohibited pawnbrokers from entering into "extortionate credit bargains" with customers and Cash America charged a rate of around 6 percent per month.
The company continued to expand in the United States as well, opening more stores, buying the 18-store Express Cash chain and entering Alabama and Missouri in 1993. At the end of the year the chain operated 280 locations. In 1994, Cash America opened its 300th store and had more than 1,800 employees. That same year it bought shares in Mr. Payroll, a check-cashing franchise operation, and also acquired the ten-store Svensk Pantbelåning, one of the oldest operating pawnshop chains in Sweden. As in the United Kingdom, the pawnshops in Sweden handled primarily jewelry and precious metals, catering to a more affluent customer. Under a new pawnbroking act passed in 1996, loan terms were not to exceed one year, but the act set no maximum interest rates for pawn loans and did not authorize local boards to regulate those rates as the statute had in the past. Also as with Harvey & Thompson, unredeemed merchandise was sold at public auction, although pawnbrokers could sell items they purchased at auction to the public from their pawnshop. The average loan amount in Sweden was approximately $300. In both Sweden and the United Kingdom, loans generally were outstanding for 180 days or less and forfeiture rates were one-third less than in the United States. At the end of 1994, the company had gross revenues of $221.9 million and $15 million in net profits.
During 1995, the company faced increased competition in the United States. Several companies, including EZCorp, Inc. with 240 locations, and First Cash, Inc., with 50 operating units, completed initial public offerings and announced plans to expand through new locations and acquisitions. A number of smaller companies also entered the market.
The competition affected the company's Cash America VIP program, which offered discounts on unredeemed merchandise to frequent shoppers in an effort to attract bargain shoppers. Cash America turned to its proprietary loan and inventory tracking system to analyze the problems. The system linked all its U.S. stores to coordinate and manage thousands of loans and more than a million different items of inventory. Using information from that system, Daugherty found that inventory was too high, that unredeemed items were not being turned over quickly enough despite the discounts. He also decided that too much emphasis was being placed on retail to the detriment of the actual loan business.
The company established two goals for 1996: to reinforce U.S. operations on the importance of successful lending at the unit level and to sharpen the emphasis on cash-on-cash returns at every level of the organization, both domestic and foreign. Cash America also decided to slow its rate of growth, with a net gain of nine units during the year, for a total of 382.
Broad-Based Diversification in the Mid-1990s
The refocus did not stop Daugherty from moving into other alternative financial businesses. By December 1996, Cash America had purchased all the shares of Mr. Payroll, which then had about 160 locations in 21 states. Mr. Payroll was started by John Templer in 1988 as he lay in a hospital bed in High Plains, Texas, after battling Guillain-Barré, a rare neurological disease, for two years. Templer and his partner, Michael Stinson, began by cashing checks for nurses at the hospital, using an armored car. Running the armored car two days a week, they also cashed checks for workers at two nearby manufacturing plants.
Mr. Payroll expanded to Amarillo in 1989, putting check-cashing booths in eight Toot'n Totum Food Stores. People kept calling Templer, wanting to open booths in other towns, and he decided to franchise the concept. By the time it became a wholly owned subsidiary of Cash America, national companies such as Texaco, Circle K, and Diamond-Shamrock wanted to be franchisees. In Shreveport, Louisiana, for example, Mr. Payroll built eight locations for Circle K. "They want it. It adds value to them. They take the cash out of the store and recycle it through checks they cash and the customers spend the money in the store. That's a big advantage to the stores," Templer explained to the Amarillo Business Journal. The acquisition was also advantageous to Cash America in its efforts to serve the non-banking segment of the population and become, to quote the 1996 annual report, "a broader based, specialty financial services entity." Neither Mr. Payroll nor the company's affiliate, Express Rent-a-Tire, Ltd., contributed to earnings in 1996.
Cash America's income from its domestic operations increased in 1996 after dropping in 1995. Loan balances increased 23 percent while inventory levels dropped by 14 percent. The company ended the year with an all-time high average domestic loan balance of $190,000 per location and a year-end inventory level of $145,000 per location, the lowest in several years. Daugherty credited the company's ability to respond to a stronger than expected demand for loans, with the increase coming from more loans, not larger loans. This was evidence that the company was increasing its customer base and market penetration. For the first time in its history, Cash America had more than $100 million in outstanding loans.
In November, the company announced a "Dutch Auction" to buy back 4.5 million shares. Under that process, shareholders tendered shares at prices between $7.00 and $8.50 and Cash America then determined the single share price within that range that would allow it to purchase 4.5 million or fewer shares. In December the company purchased 4.5 million shares at $8.50 per share. In January 1997, the board of directors was authorized to repurchase up to one million shares on the open market. In May 1997, Cash America acquired Rothchilds Sales & Loans, the largest pawnshop chain in Utah with five locations in and around Salt Lake City. That same month, Mr. Payroll expected to have its first self-service check-cashing and automated teller machines up and running in three towns in Texas. With the TrueFace technology used in the machines, customers would be able to cash any check in less than a minute without showing any photo identification. Instead, the technology verified a customer's identity by recognizing the contour of his or her face.
The company's earnings continued to grow during 1997, with its loan balance standing at more than $100 million and its inventory down 12 percent at the end of the first quarter. While law enforcement officers remained concerned about customers pawning stolen property, the company stated that stolen property accounted for less than one half of 1 percent of property pawned with the chain.
In June, Daugherty announced a new franchise program: selected independent pawnshops would be franchised under the Cash America brand name starting later in 1997. "By joining forces with hundreds of other quality and service-minded pawnbrokers, we will be able to reach markets beyond those served by our existing and planned company-owned stores," COO Daniel Feehan explained. According to Mike Rapoport, an analyst with Dabnehy/Resnick, in addition to Cash America's successful pawn business, the company was among the nation's largest gold producers. It sold gold melted down from unredeemed, unsold jewelry on the metals exchange as bullion. "This thing makes money," Rapoport told the Sun Sentinel.
By 1998, however, with the explosive growth of Internet-related businesses and the U.S. economic boom taking a bite out of demand for short-term loans, Cash America began to second-guess its longstanding reliance on its core business activities. Jumping on the high-tech bandwagon, the company launched innoVentry, a strategic joint venture with Wells Fargo Bank aimed at providing a broad range of e-based financial products and services to a larger, more diverse, group of customers. Expanding on the idea of Mr. Payroll's automated check-cashing machine, innoVentry harnessed Internet and biometric technologies to create its own signature "Rapid Payment Machine" (RPM) cash management and information access machines, to be installed in retail outlets such as Albertson's, Kmart, Kroger, Circle K, and Wal-Mart. The investment seemed promising. Also in 1998, having tested the rent-to-own concept at four stores in the Dallas-Fort Worth area and believing there was great potential in adding to the range of services it offered to its traditional pawn customer, Cash America increased its ownership of its Rent-a-Tire subsidiary from 40 percent to 99 percent and launched an aggressive course of expansion into markets throughout Texas. Although Cash America saw little return on these investments during 1999, the company's management resolved to stay the course, promising shareholders that these new initiatives would yield positive results by the end of 2000.
In the last years of the decade, Cash America continued to grow its core business as well, keeping pace with four other publicly traded pawnshop companies, including First Cash, Inc., and EZCorp, Inc., which were vying for market share by grabbing up acquisitions. In 1998, Cash America acquired Doc Holliday's Pawnbrokers and Jewelers, Inc., an Austin, Texas-based company with 40 locations in six states, among the largest privately owned pawnshop chains in the United States. Chairman and CEO Jack Daugherty hailed the acquisition as key to building Cash America's presence in a variety of new and existing markets. Although Cash America did not disclose the terms of the acquisition, the purchase price of Doc Holliday's was estimated around $22 million. Roughly six times more than the total value of Doc Holliday's loans, the steep price was evidence of increasing competition in the rapidly consolidating industry.
Back to Basics for the 21st Century
Having attempted to play the odds with broad-based diversification, by the end of 2000 Cash America's management was forced to concede that its noncore investments were not going to pay off as expected. That year, the company reported a loss of $1.7 million, or 7 cents a share, a significant downturn, considering that it had reaped $3.9 million, or 15 cents a share, in 1999. In 2001 Dan Feehan, who had succeeded Jack Daugherty as chief executive in 1999, announced Cash America's decisive return to its core lending activities, along with the company's assured withdrawal from both its Rent-a-Tire and innoVentry business segments. While rededicating its resources to its pawnshop activities, the company would seek opportunities to bring in additional revenue through added fee-based financial services more compatible with its core competencies, such as money transfer, check cashing, bill payment, tax refund anticipation loans, and others. According to the new vision, Cash America would transform its image over time from a pawnshop operator to a neighborhood financial service center.
As luck would have it, Cash America's strategic retrenchment coincided beautifully with the long-anticipated downturn in the U.S. economy, and demand for short-term loans began to grow at a dramatic rate. Indeed, in 2002, Cash America's customers borrowed more than half a billion dollars, collectively, bringing loan volume to an unprecedented high for the first time in three years. The company also saw marked success with one of its newest services, the payday advance loan--a small, short-term loan designed to help customers solve cash flow problems until their next paycheck--which accounted for about 50 percent of the company's revenue growth in the first quarter of 2003. So promising was this service that in August 2003, Cash America spent $51 million to acquire Cashland, a check casher and payday loanmaker with 121 locations, mainly in Ohio. With the acquisition, Cash America now boasted 592 lending locations in 17 states and two foreign countries. With no reprieve in sight for the U.S. economy, the company appeared well positioned for continued robust growth and tidy profits well into the first decade of the 21st century.
Principal Subsidiaries: Mr. Payroll Corporation; Cashland.
Principal Competitors: Ace Cash Express, Inc.; EZCORP, Inc.; World Acceptance Corporation.
- Key Dates:
- 1983: Jack Daugherty founds Cash America.
- 1984: The company incorporates under the name Cash America Investments, Inc.
- 1987: Cash America becomes the first pawnshop company to go public, raising $14.5 million in its initial public offering of five million shares.
- 1992: Daugherty takes Cash America international, acquiring Harvey & Thompson, a London-based pawnshop chain with 26 locations in England and Scotland.
- 1994: Cash America acquires shares in Mr. Payroll, a check-cashing franchise operation; it also acquires Svensk Pantbelåning, one of the oldest operating pawnshop chains in Sweden.
- 1996: Mr. Payroll becomes a wholly owned subsidiary of Cash America.
- 2003: Cash America acquires Ohio-based Cashland for $51 million.
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