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Price of Gold Harming the Pawn Shops

Adam Rust's picture

Posted December 20, 2011

The national media says that pawn shops are riding the wave of down-and-out consumers all the way to the bank. The idea seems to be that pawn shops are a better deal than any of the low-margin retail

chains.

"This holiday season has been the best one yet," says a spokesman for the National Pawn Brokers Association. "Many pawnshops, in turn, are embracing holiday shoppers like never before, offering promotions long deployed by more traditional stores, like “25 Days of Deals,” “Black Friday” specials — even visits from Santa. It underlines how the recession has hit those at the bottom of the economic spectrum, for whom even Wal-Mart can be too expensive."

That is a nice idea and it is too bad that it really doesn't reflect reality. That is because when it comes to running a business, sales are nice but profits are better. The author may have it right that pawn lending is proving to be more attractive with consumers. That said, pawn shops are suddenly facing a global threat to their business model.

EZ Corp, the parent company for EZ Pawn and a variety of other storefront pawn chains, has seen its share price drop almost 20 percent in the last two months. Cash America, which offers both payday loans and pawn advances, is down 20 percent as well.

What's the matter?

Publicly-traded pawn shop companies are seeing their valuations fall in line with the recent drop in the price of gold. In the past few weeks, gold has dropped to $1,600 an ounce. This is still a very high number by any standard, of course, but it does represent a step back from its high of $1,900 in August.

Just a few months ago, the gold bug was making things rosy at the local pawn shop. In its November 23rd 10-K, EZ Corp reported that its profits from gold increased almost $16 million. In all, gold scrapping made up 38 percent of EZ Corp's annual operating income at their United States pawn locations. The margins on selling pawned goods are far lower than with gold scrapping.

Cash America actually derives more revenue from pawn lending than it does from short-term consumer loans. Moreover, the margins on pawn loans are getting better. In an environment of surging acquisitions, the percentage increase in the cost of good sold is less than the increase in pawn merchandise sales. Cash America reports that its margin on pawn sales is more than 36 percent.

The real change at pawn shops is that more traffic in their stores gives them a better chance to sell more than one product to each relationship. This is sort of a down-market Wells Fargo approach. Today, pawn shops offer more than cut-price merchandise. In states where it is legal, pawn shops can offer signature loans and auto title loans. They can market prepaid cards. Some probably offer tax preparation, as well. It is a cyclical business. Sales pick up with the Christmas season and remain strong through Valentine's Day. Tax season stimulates customer demand.

Don't worry too much for the local pawn shop. If things do not go so well with Kim Jong Un could do a lot to restore the price of gold, as could some of the budget directors in Europe.