For Pawnshops, the Recession Is a Golden Egg

Cash America is boosting the loans it offers online, and is expanding a payday cash-advance feature. But will Obama cap interest rates?

By Aili McConnon

Think pawnshops, and you probably conjure up old jewelry, desperate customers, and seedy storefronts. Hardly, it would seem, the ingredients for innovation. Yet amid recession, the country's largest chain, Cash America International (CSH), is using the credit-crunch boom time to lure new customers and expand. To woo the growing number of consumers facing a credit squeeze, Cash America is boosting the amount of short-term loans it offers online, and is adding a cash-advance feature to electronic payroll cards. Such cards are gaining popularity among employees with poor credit, or those without traditional bank accounts.

"We see the continued contraction of available consumer credit as a great opportunity to expand our offerings to try to attract new customers," CEO Daniel Feehan says. But amid the flush times, Cash America is becoming increasingly reliant on its payday lending division—just as many states and the Obama Administration are threatening to clamp down on that industry. On Jan. 7, Sterne Agee analyst Henry Coffey highlighted Obama's pledge to "cap outlandish interest rates on payday loans"—a note to clients that sent Cash America shares slumping 12% in a day. The prospect of regulation has caused the stock to slide more than 35% in less than a month. Shares are down from 48 in April 2008 and now trade at 18, their lowest point since June 2005.

Mexico Beckons

Cash America has been leveraging the downturn through the firm's 613 pawnshops and 248 stand-alone short-term cash-advance outlets (two-thirds of the pawnshops also offer cash-advance and payday lending loans). While most retailers and financial-services firms tanked in the fall, Cash America's total revenue increased 7% in the fourth quarter and 11% for 2008. The company added market share in December by acquiring an 80% stake in a Mexican pawnshop operator, which will let the firm open an additional 50 to 60 stores this year in Mexico, nearly double the amount it opens in a typical year globally. Moving into Mexico is smart, say analysts like Elizabeth Pierce of Roth Capital Partners, because the firm can open new outlets without building new stores. Mexico is also appealing because it is a cash-driven economy where approximately 80% of transactions are done in cash, says Pierce. "Given the fact that it is much more of a low-wage economy, there are tremendous growth prospects in Mexico."

Since its founding 25 years ago in Fort Worth, Cash America has sought to make the pawn industry respectable. Unlike the dark and dank shops with bulletproof glass featured in Hollywood classics like The Pawnbroker, Cash America's pawn stores more closely resemble mall jewelers or a local Blockbuster (BBI) outlet. Pawnshops lend customers money, without running a credit check, in exchange for pawned merchandise ranging from Grandma's diamond ring to iPods to electric lawn mowers. If a customer can't pay back the loan, then the shop sells the goods, usually at about 50% to 60% of the price of what an item would cost new. Though fees vary by state, the cost of a typical $100 loan is about $10 to $20 per month and 3 out of every 10 people "foreclose" on their goods on average, says the CEO.