H&R Block reports strong fourth-quarter profit on higher bank income, tax prep fees

H&R Block reports better-than-expected 4Q profit

KANSAS CITY, Mo. — H&R Block Inc., the nation’s largest tax preparer, reported better-than-expected profit for its fiscal fourth quarter on Monday as higher fees and more consumer financial services income offset a decline in the number of tax returns it prepared.

The news sent shares up more than 5 percent in after-hours trading.

The Kansas City, Mo.-based company said it earned $706.9 million, or $2.09 per share, during the three months ended April 30. That’s up from year-ago profit of $543.6 million, or $1.66 per share, and above the $2.05 per share expected by analysts surveyed by Thomson Reuters.

Revenue for the quarter sank 3 percent to $2.47 billion, coming in shy of Wall Street’s $2.52 billion estimate.

Tax services revenue declined 3.2 percent during the quarter to $2.1 billion as the number of clients coming into H&R Block’s retail offices to have their taxes prepared declined in a shift toward online filing.

For the year, the company said its retail offices prepared 5.8 percent fewer returns, which was partially offset by a 21 percent increase in returns filed through the company’s online services and TaxCut software. H&R Block has ramped up its digital competition in the past year, providing a free online tax filing program for lower income customers and keeping the price of its TaxCut tax preparation software below that of industry leader Intuit Inc.’s TurboTax.

The company also reported that the average fee for retail tax returns increased 7.2 percent, reflecting more complex returns and a shift towards more affluent customers.

But company officials were clearly unhappy with the decline in retail clients, who are generally more profitable than digital clients. During a conference call with analysts, CEO Russ Smyth estimated 1.8 million potential clients entered an H&R Block office during the 2009 tax season but, for myriad reasons, left without filing a return.

“We believe that better operations can bring this number down substantially in the future and I am convinced that we can solve this problem quite readily,” Smyth said, adding that the company plans to increase training for its tax professionals, retool its marketing and close poorly performing offices.

Also, H&R Block last month said it was restructuring some of its operations to lower costs and improve responsiveness. The company said it will combine its retail tax, digital tax, franchise operations, field operations and corporate units into a single unit to be overseen directly by Smyth.

“Frankly, we haven’t kept up,” he said. “But we will catch up and then we’ll move ahead of the competition.”

The company last year divested its troubled mortgage and securities brokerage business units.

H&R Block Bank saw quarterly revenue rise almost 15 percent and profit climb to $21.5 million, compared with a loss of $1.3 million during the same quarter a year ago. Revenue from RSM McGladrey, the company’s business accounting arm, declined 4 percent to $304.9 million.

For fiscal 2009, the company said it earned $485.7 million, or $1.45 per share, compared with a loss of $308.6 million, or 94 cents per share, during the same period a year ago. Excluding discontinued operations, the company said it would have earned $1.53 per share, compared with $1.36 in the year-ago period.

Analysts, which typically exclude one-time items and discontinued operations from their estimates, had expected full-year earnings of $1.47 per share.

Annual revenue remained flat at $4.1 billion, slighly below the $4.2 billion expected by analysts.

Looking ahead, H&R Block forecast 2010 annual earnings between $1.60 and $1.80 per share, compared with analysts’ $1.66-per-share average estimate.

The company released its earnings results after trading closed Monday. The report sent shares up 88 cents, or 5.6 percent, to $16.55 in aftermarket electronic trading, having finished the regular session up 25 cents at $15.67.

Last week, No. 2 U.S. tax preparer Jackson Hewitt Tax Service Inc. said profit for its fourth quarter fell 28 percent as the company saw a double-digit decline in the number of tax returns prepared.