Zacks_Analysts' Blog : Dollar Financial Tops Estimates - Analyst Blog

Dollar Financial Corporation (DLLR) reported its first-quarter earnings (excluding one-time gains) of 47 cents per share, ahead of the Zacks Consensus Estimate of 46 cents. However, Dollar Financial lagged the year-ago quarter’s estimate of 60 cents.

The operating results exclude non-recurring gains, the non-cash interest expense resulting from the adoption of ASC 470-20, and the non-cash amortization associated with the legacy cross-currency interest rate swap agreements, which are adjusted for pro forma effective income tax rates. Including these charges, GAAP net income was 49 cents per share in the first quarter compared to the 22 cents in the prior-year quarter.

Results for the quarter benefited primarily from increased revenues as a result of improvements in all revenue sources. However, higher operating expenses were the downside. Dollar Financial’s global business units continued to deliver strong earnings growth and cash flows during the reported quarter.

Quarterly Results

Total revenues for the quarter increased 19.7% year over year to $174.2 million, exceeding the Zacks Consensus Estimate of $167.0 million. Consumer lending revenues increased 18.8% year over year to $92.0 million, while check cashing revenues declined 7.2% year over year to $35.3 million.

Operating expenses for the reported quarter increased 18.1% year over year to $105.9 million. Salaries and benefits increased 10.7% year over year to $40.7 million.

Operating margin jumped 22.2% year over year to $68.3 million. The increase was driven by strong organic revenue growth, supported by expanded advertising programs and contributions from recent acquisitions.

Dollar Financial also reported adjusted EBITDA of $49.0 million in the reported quarter, which increased 19.7% year over year.

The loan loss provision as a percentage of gross consumer-lending revenues was a tad higher at 15.2% from 15.1% in the prior-year quarter of 2010. Dollar Financial has been conservative in its approach toward consumer lending and cashing third-party checks in a weak global economy. The implementation of proprietary credit scoring models for the global loan products also benefited the company. Provision for loan losses climbed 19.4% to $14.0 million.

Evaluation of Capital and Balance Sheet

At the end of September 30, 2010, the debt structure of Dollar Financial consisted of $44.8 million of U.S. senior convertible notes due 2027 and $120.0 million of U.S. senior convertible notes due 2028. In addition, Dollar Financial has $600.0 million of senior unsecured notes which are not due until December 2016. Thus, Dollar Financial has no mandatory debt principal repayment obligations between now and the first potential put date of December 2012 for $44.8 million of U.S. senior convertible notes.

Dollar Financial’s strong operating cash flows will be helped by the absence of mandatory debt repayment obligations until December 2012. The company has approximately $200.0 million of available funds for investment.

As of September 30, 2010, Dollar Financial’s total assets were $1.25 billion and total shareholders’ equity was $240.7 million.

Investments and Acquisitions Update

During the reported quarter, Dollar Financiallaunched a nation-wide television advertising campaign in Canada, which is expected to facilitate growth in revenue and further enhance the "Money Mart" brand of Dollar Financial and its leading share of the Canadian market.

In addition, Dollar Financialopened 14 new stores in the United Kingdom during the quarter, and expanded its internet media and local area marketing programs in the Merchant Cash Express business in the United Kingdom, (which provides cash advances to small businesses), and in Dollar's Financial Services business, (which provides military lending services in the United States). This is expected to further increase customer reach and generate additional revenue in the future.

Dollar Financial also expanded its Polish lending business into two new geographic provinces, including the towns of Walbrzych and Zielona Gora, which are expected to begin to contribute incremental revenue in the coming quarters. The company also opened its first gold buying store in Gdansk, and expects to open additional company-operated stores in Poland pending the successful test of this pilot store.

Also, Dollar Financial agreed to buy the Swedish Internet lending business Folkia Group AS for $28 million as announced on August, 2010. Folkia currently originates loans through both the Internet and SMS text cell phone technology in Sweden, Finland, Denmark and Estonia.

The acquisition will provide an Internet and cell-phone lending platform for expansion within Northern Europe and Scandinavia, and credit and finance licenses for expansion into other European Union countries. However, the completion of the acquisition is contingent upon local regulatory approval. Dollar Financial expects the acquisition to be finalized in the near future.

Outlook for Fiscal 2011

Dollar Financial reiterates its operating earnings guidance of $2.05 to $2.30 per share, excluding one-time charges or gains, the non-cash impact of adopting ASC 470-20, the non-cash amortization associated with the cross-currency interest rate swap agreements. The guidance considers an expected effective income tax rate from operations of 37%. Further, Dollar Financial’sfiscal 2011 guidance does not include the potential earnings contribution of the Folkia acquisition, which is pending local regulatory approval.

The outlook for adjusted EBITDA is also maintained between $205.0 million and $215.0 million for fiscal 2011.

Our Take

We remain concerned about the risks related to Dollar Financial’s tax strategies, extremely fragmented nature of business and international dependence. However, an exposure to a somewhat recession-proof sector and cost containment measures will drive future growth.

Moreover, Dollar Financial has a solid liquidity position, with approximately $200.0 million of available funds for investment, which will help the company deploy these funds in accretive opportunities that will further enhance future earnings as well as expand and grow the business across the globe.