SecProbe.io

CORRESP
1
filename1.htm

FCFS FORM CORRESP 09142009

First Cash Financial Services, Inc.

Direct: 817-505-3142

dougo@firstcash.com

September 14, 2009

VIA EDGAR

Mr. H. Christopher Owings

Assistant Director

United States Securities and Exchange Commission

Washington, DC 20549

Re:

First Cash Financial Services, Inc.

Form 10-K for the Fiscal Year Ended December 31, 2008

Filed March 16, 2009

Definitive Proxy Statement on Schedule 14A

Filed April 30, 2009

Forms 10-Q for the Fiscal Quarters Ended March 31, 2009 and June 30, 2009

Filed May 8, 2009 and August 4, 2009, Respectively

File No. 000-19133

Dear Mr. Owings:

We are in receipt of the comments of the Staff (the "Staff") of the Division of Corporation Finance of the Securities and Exchange Commission (the "Commission") set forth in the Staff's letter dated August 18, 2009 to R. Douglas Orr, Executive Vice President and Chief Financial Officer of First Cash Financial Services, Inc. (the "Company"), regarding the Company's (i) Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on March 16, 2009 (the "Form 10-K"), (ii) Definitive Proxy Statement on Schedule 14A, filed April 30, 2009 ("Proxy") and (iii) Forms 10-Q for the Fiscal Quarters Ended March 31, 2009 and June 30, 2009, filed May 8, 2009 and August 4, 2009 (respectively, the "March 10-Q" and the "June 10-Q").

The Staff's comments are set forth below in italics, followed by our responses to the comments.

Form 10-K for the Fiscal Year Ended December 31, 2008

Item 1. Business, page 4

Short-Term Loan and Credit Services Activities, page 7

1.     Given that you state that the profitability of the Company's short-term operations is dependent upon adequate collection of these returned items, please quantify, by way of percentage or other means, the "significant number" of customer checks that are returned for insufficient funds and the "large percentage" that you subsequently collect from your customers.

Company's Response:

The Company provides an explanation of the accounting for its short-term loan and credit services loss provision in the Critical Accounting Policies in Item 7 of the Form 10-K and discloses its net credit loss provision from combined short-term loan and credit services operations on the face of the income statement.  In addition, the net credit loss provision as a percentage of revenues is provided in Item 7 of the Form 10-K in the table of selected operating metrics, and fluctuations of these results are further discussed in the subsequent narrative.  You have asked that the Company report the number or percentage of returned items and subsequent redeposits/collections of such.  While the Company tracks returned items and re-deposits/collections at a transactional level, the gross amounts and/or percentage of such amounts are not directly relevant to the net credit loss provision, as a single returned item may be re-deposited (either physically or via ACH) and returned for insufficient funds multiple times before it is collected or deemed uncollectible.  For example, during the first half of 2009 (six months ending June 30, 2009), total posted returned items related to U.S. short-term loans were $2.3 million, while offsettting redeposits/collections were $1.7 million.  As a percentage of U.S. short-term loan revenues, the gross returned check amount was 39%, while redeposits/collections represented a gross offset of 28%.  However, after netting the effect of the multiple redeposits and returns of the same checks, the net credit loss on the short-term loan product was only 11% of revenues.  Accordingly, we believe that reporting these multiple returns and re-deposits as a percentage of a singular, static revenue amount for each loan does not provide meaningful information to investors.  As a result, the Company believes the credit loss information as currently provided is sufficient and the most relevant disclosure of our credit loss provision.

2.     With respect to your CSO program, please quantify by way of percentage or other means the "significant number" of customer checks deposited into the independent lender's account due to insufficient funds in the customers' accounts and the amount you subsequently collect.

Company's Response:

As stated in the previous response, the Company provides an explanation of the accounting for its short-term loan and credit services loss provision in the Critical Accounting Policies section in Item 7 of the Form 10-K and discloses its net credit loss provision from combined short-term loan and credit services operations on the face of the income statement, and the net credit loss provision as a percentage of revenues is provided in Item 7 of the Form 10-K in the table of selected operating metrics, and fluctuations of these results are further discussed in the subsequent narrative.  The Company believes, as set forth in our previous response, credit loss information as currently provided is sufficient and the most relevant disclosure of our credit loss provision.

Item 2. Properties, page 21

3.     We note that the leases on your pawn and short-term loan operations expire anywhere from 2009 through 2019.  Please state the approximate number of leases that are set to terminate over the next fiscal year and provide your general belief as to the likelihood that you will be able to renew these leases.  We note your statement of belief that termination of any particular lease would not have a material adverse effect on the Company's operations; please advise if you believe that the failure to renew the leases set to expire in the next year will have a material impact on your operations.

Company's Response:

As of January 1, 2009, approximately 63 store leases were due to expire during fiscal year 2009.  Of these 63 leases due to expire, approximately 58 leases included a provision allowing the Company, at its option, to automatically renew and extend the lease for terms ranging from 3 to 5 years under terms and conditions similar to the expiring lease. As of the date of this letter, management believes that the leases at all 63 stores will have been automatically renewed and extended or replaced with new leases by year-end.  In summary, as stated in the Form 10-K, we believe that the termination of any particular lease would not have a material adverse effect on its operations, and for the reasons outlined above, we do not believe that a significant number of individual leases will fail to be successfully renewed or replaced.  Accordingly, we believe that our existing disclosures are adequate, although we will add commentary in future filings, if we believe that a significant number of leases expiring in the next fiscal year will not be renewed or extended and that failure to renew/extend such leases will have a potentially material adverse impact on Company operations.

Item 7. Management's Discussion and Analysis of Financial Condition and Results, page 25

General

4.     Please expand your discussion to discuss known material trends, demands, commitments, events, or uncertainties that will have, or are reasonably likely to have, a material impact on your financial condition, operating performance, revenues, or income, or result in your liquidity decreasing or increasing in any material way. In doing so, provide additional information about the quality and variability of your earnings and cash flows so that investors can ascertain the likelihood of the extent past performance is indicative of future performance.  In addition, please discuss in reasonable detail:

economic or industry-wide factors relevant to your company, and

material opportunities, challenges and risks in short and long term and the actions you are

taking to address them.

For example, we note that you discontinued your short-term loan operations in Washington D.C. due to legislation that capped the interest rate that you could charge for these loans.  Please identify, to the extent you know, any other jurisdictions in which you operate that maybe close to passing similar legislation, which if enacted, may result in you ceasing your short-term loan operations in that jurisdiction.  Please discuss how the cessation of such operations would affect your overall operations and liquidity.  Also, in light of the current economic turmoil in the U.S. and Mexico, to the extent material, you should discuss the affect that the current economic turmoil may have on your ability to recoup amounts due on loans that are in default.  Please see Item 303 of Regulation S-K and SEC Release No. 33-8350.

Company's Response:

We believe that we have identified and discussed the key, material economic factors and regulatory trends potentially affecting the Company's revenues, cash flow, profitability and liquidity throughout the various sections of the Form 10-K filing.  We note that Item 7 of our Form 10-K and Item 2 of Forms 10-Q provide charts and commentary regarding fluctuations, in both dollar amounts and percentages, of detailed revenues and customer receivable balances by both product line and geographic region.  In addition, in Form 10-K in Item 1A Risk Factors, the Company provides detailed discussion of the challenges and risks associated with specific economic and industry-wide factors such as regulatory trends, competition, sustained deterioration of economic conditions, gold market fluctuations and exchange rate fluctuations.  Further discussion and quantification of interest rate, foreign currency and gold price risks is provided in Item 7A of the Form 10-K.  Opportunities for the Company's growth and expansion are specifically identified in Item 1 of the Form 10-K where industry trends and the business strategy in both the U.S. and Mexico are discussed.

In regard to specific questions about the effect of regulatory changes affecting the short-term loan and credit services products, the Company notes that the potential impact of governmental regulatory risks are discussed and quantified in significant detail in Item 1 of the Form 10-K.  For example, when discussing potential negative legislative proposals in Texas under the subsection titled "U.S. State and Local Regulations" of the Form 10-K, we stated that enactment of such legislation "would have a material adverse impact on the revenue and profitability of the Company, as the Company derived approximately $43.6 million in revenue, which is 13% of total revenue, from its credit services product in Texas."  The regulatory discussion was further updated in our June 10-Q, where the Company noted in the subsection titled "Regulatory Developments" under Item 2, "Subsequent to the filing of the Form 10-K, legislation affecting the short-term/payday loan products in the states of Washington and South Carolina has been enacted.  When this legislation becomes effective in late 2009 and/or 2010, it is likely to further restrict consumer access to short-term/payday loan products, which would have a negative impact on the Company's short-term loan revenue in these markets.  For the trailing twelve months ended June 30, 2009, the Company realized pre-tax store-level net income related to short-term/payday loan products in these states of approximately $340,000, which the Company does not consider to be significant."

With regard to the specific question regarding the Company's ability to recoup amounts due on loans in default, we believe that this risk has been and remains limited.  The Company's pawn loans receivable, which represented 88% of total customer loans receivable on the balance sheet at December 31, 2008, are fully collaterized by the borrowers' personal property, which we hold in our pawn stores.  Non-performing pawn loans are satisfied within approximately 14 to 30 days past the due date through the forfeiture of the pawn collateral, which is transferred into inventory at a cost equal to the loan amount being satisfied.  As the typical loan amount on a pawn is only 40% to 60% of the estimated selling price of the collateral, we believe that we have limited risk of loss from non-performing loans, which is substantiated by the fact that sales margins on the sale of forfeited collateral consistently exceed 40%.  The credit risk associated with the $5.9 million of short-term loans on the balance sheet and the $12.9 million of CSO loans held by third parties is limited as well.  These loans have extremely short durations, with terms that typically range from 7 to 30 days in length.  As described in our Critical Accounting Policies under Item 7 of the Form 10-K, past due short-term loans are considered to be immediately in default and are written off, leaving only active loans in the reported balance.  Historically, the percentage of these loans that are ultimately non-performing is approximately 4% to 5%.  At December 31, 2008, we carried reserves and accruals, as reported in the MD&A section of the Form 10-K, which were consistent with these historical exposures.  We further note that as reported in the 2009 filings on Form 10-Q, that the credit loss experienced on the loans and credit services products actually improved in the first half of 2009, as compared to 2008.  In summary, while the Staff raises a logical question about the potential for loans being in default, the reality for the Company and the industry in general, has been that credit loss exposures for pawn, short-term loan and credit services products remain limited and relatively unaffected by recent economic trends.

We further add that since the date of our Form 10-K filing, and as reported in subsequent Form 10-Q filings, the Company has not experienced a material negative impact on revenue or profitability from the current global economic turmoil.  In short, the Company's business model appears to be generally less impacted by such macro-economic factors.  To the extent we begin to see a material negative impact on our operations as a result of the current global economic turmoil in particular, or our ability to recoup amounts due on loans that are in default secondarily, we will expand our disclosures accordingly in future filings.

In light of the Staff's comment, the Company will add in future filings specific references to the topics/risks outlined above, either as expanded discussions or through direct references to other relevant sections of the Form 10-K.

Liquidity and Capital Resources, page 38

5.     We note that you intend to continue expansion primarily through new store openings.  We further note your indication that "the majority of capital expenditures, working capital requirements and start-up losses related to this expansion are expected to be funded through operating cash flows and the credit facilities."  Please revise to quantify how much you will need in order to proceed with your expansion plans this fiscal year and how much you spent last fiscal year.  Also, as you indicate that ''the majority" of such costs will come from the 2 sources you mention, please disclose the source(s) of any remaining costs. Refer to Item 303(a)(2) of Regulation S-K.

Company's Response:

The Company recorded capital expenditures of approximately $10 million related to new store openings in fiscal year 2008, and it expects to spend approximately $13 to $15 million on new store openings in fiscal year 2009.  At the same time, the Company's cash flows and liquidity to fund this expansion included net cash flows from operating activities of $57.5 million for the fiscal year ended December 31, 2008 and $67.2 million for the trailing twelve months ended June 30, 2009.  In addition, the Company had $21.5 million available under its existing credit facilities at December 31, 2008 and $46.5 million available at June 30, 2009.  As the Company had more than sufficient cash flows and liquidity available from either of these two sources to fund new store openings, management believes, and believed at the time of the fil