Dollar Financial Corp. (Berwyn, PA) is an international financial services company serving under-banked consumers. DLLR provides a range of consumer financial products and services primarily consisting of check cashing, short-term consumer loans, Western Union money orders and money transfers, along with other conveniences such as utility bill payments, currency exchange and tax preparation. As of September 30, 2007, the company operated 1,327 stores (of which 953 were company-owned), representing the largest network in Canada and the U.K. and the second-largest in the U.S. The company also has 374 franchised locations in Canada, the United Kingdom, and the United States. In the U.S., DLLR operates under the name "Money Mart" (roughly half of the stores, typically offering a full range of financial products and services), "Loan Mart (roughly one-sixth, offering short-term consumer loans, with other services varying by location), and "We the People" (roughly one-third, offering retail-based legal document preparation services).
Management believes that DLLR is the most diversified company in its sector, both in terms of products and geography. Certainly the check-cashing and payday-lending businesses are both highly fragmented. DLLR's strategy is to use this diversification to smooth out risks and deliver sustainable earnings growth and shareholder value.
DLLR has enormous NOL carry-forwards, primarily due to losses in the U.S. businesses. Unfortunately, DLLR has not been able to realize those NOLs while its U.S. operations continued losing money. Given all of the recent activities (debt restructurings, acquisitions, etc.) and improving profitability of US business, the management believes that use of the NOLs could begin immediately.
Dollar Financial provides high-quality customer service through both the company's stores and centralized support centers. The company's stores are located in convenient locations and operate for extended hours in attractive and secure environments. The company has a range of consumer financial products and services which combined with the company's geographic diversification provide a diverse stream of revenue growth opportunities. The company actively manages customer risk profiles and collection efforts in order to maximize its consumer-lending and check-cashing revenue while minimizing losses to a great extent.
DLLR serves a basic need of lower- and middle-income working-class individuals, who represent the largest part of the population in each country in which DLLR operates. Many of these individuals work in the service sector, which is the fastest growing segment of the workforce in the U.S. Their need for convenient access to cash is evident in the growing demand for check cashing and short-term loans. The providers of these services are fragmented, and range from specialty finance offices to retail stores in other industries that offer ancillary services. Thus, there are significant opportunities for growth.
International growth has been much stronger than U.S. growth, as the markets in Canada and the U.K. are significantly less saturated (far fewer stores of this type per capita). According to management, DLLR "absolutely dominates" the market in Canada, and is the only national player in the U.K. DLLR has a clear advantage therefore in terms of scale. Acquisitions of similar entities and franchised locations allow DLLR to leverage its corporate infrastructure, while acquisitions of complementary businesses (such as We the People) have the added benefit of leveraging DLLR's existing store footprint by adding additional services.
DLLR's public equity offering in July 2006 was a positive for a number of reasons. Using the additional capital to retire senior U.S. notes was a key step in the plan to begin posting a normalized tax rate and using some of those NOLs, which will go a long way in our thinking toward reducing operating risk.
The company has been going through a continued period of growth over the last five years, a period in which its annual revenue has more than doubled. In fiscal 2007, the company continued to expand its global store footprints, through the acquisition of 115 financial service stores, in addition to opening 52 de novo stores across the U.S., Canada and the United Kingdom. During the 4Q 07, the company also benefited from the investments made in international business thereby achieving nearly 40% increase in total revenue.
We still think that the biggest risk for DLLR is that its tax strategies fail, or that the realization of benefits is prolonged, and that its GAAP earnings prove closer to reality than its pro forma earnings. As shown below, GAAP earnings were positive for the first time in fiscal 2006 and remain significantly lower than pro forma earnings. This is a low-probability / high severity risk in our view, and deserves careful consideration. DLLR is also currently subject to several legal proceedings, some of which could be material. For one, their check cashing / payday lending business is the subject of class action litigation in several Canadian provinces, alleging violations of a Canadian federal law and seeking restitution and damages, including punitive damages.