H&R Block 3rd-qtr profit rises 7 percent despite sharp decline in number of returns prepared

Monday, March 8, 2010

H&R Block 3Q profit rises despite fewer returns

KANSAS CITY, Mo. — H&R Block Inc. on Monday said its fiscal third quarter profit rose 7 percent, as lower costs offset a revenue drop that stemmed from handling fewer returns.

For the three months ended Jan. 31, the nation’s largest tax preparer earned $50.6 million, or 15 cents per share, compared with $47.4 million, or 14 cents per share, in the year-ago quarter.

Revenue fell 6 percent to $934.9 million from $993.4 million last year.

Analysts surveyed by Thomson Reuters, on average, were expecting profit of 14 cents per share, on revenue of $949.6 million.

Through Feb. 28, H&R Block said the number of returns it prepared in its storefronts open at least a year fell 6.8 percent from last year. Total returns, which includes do-it-yourself software and online preparation, were down 9.4 percent.

“While we are disappointed with our early results this tax season, we remain committed to improving our performance as the remainder of the season unfolds,” said President and CEO Russ Smyth in a statement.

Revenue in its tax segment, H&R Block’s largest, fell 6 percent to $747.7 million. That reflected the drop in the number of returns prepared.

In its business services segment, revenue fell 4 percent to $178.5 million. Its corporate segment saw revenue fall 24 percent to $8.7 million.

The company said the drop in returns prepared and in related revenue reflects fewer people filing early returns, partly because of bad weather in February throughout much of the country, along with high unemployment and fewer refund-linked loans available this year. During a conference call to discuss the results, Smyth noted the company relies more on lower-income tax filers early in the season.

H&R Block expects that by the end of tax season, total filings to the Internal Revenue Service will decline between 2.5 percent and 3.5 percent, about half the rate seen so far. That drop would still be nearly double the company’s original expectations how much returns were supposed to drop this season.

The company noted that the shift to Internet-based and other do-it-yourself options has been faster this year than in the past. But the number of clients using its digital products is down nearly 4 percent versus last year.

The segment counts several sets of customers, among them people who use the IRS Free File program and don’t pay to file, those who use options H&R Block offers for sale online because they earn too much to qualify to file free as well as software sales.

A 12 drop in software sales led to the overall decline.

Online sales rose 2.5 percent year-over-year. But Smyth said that small increase “is unacceptable in a category growing at double-digits.”

The market leader in the digital part of the industry, Intuit Inc.’s TurboTax, last month reported 23 percent growth its Web-based units through Feb. 13, and 11 percent growth overall.

Another cause of the decline in returns prepared in storefronts is a drop in refund anticipation loans, or advances on refunds that have traditionally been popular with low-income consumers. H&R Block estimated they were down 20 to 25 percent industrywide, as some large preparers, most notably Jackson Hewitt Tax Service Inc., were unable to get banks to back their refund loan programs.

“Frankly, we expected to see an increase in new clients,” because of the competition’s problems, Smyth said. “We had RAL funding and many competitors did not. However, we didn’t see any meaningful client growth driven by RAL availability.” He said the loans of this type they sold in states where competitors didn’t have funding was not “meaningfully different from states where they did.”

Block executives refused during the call to offer new guidance for the current quarter or the fiscal year. Smyth said that was because of the uncertainty surround the number of returns, the large-than-expected shift to digital and unhappiness with its early-tax-season marketing campaign, which is being revamped.

In aftermarket electronic trading, H&R Block shares dipped 22 cents to $16.52, from a close of $16.74 in Monday’s regular session.

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