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H&R Block: The Good, The Bad, The Ugly


Leafing through HRB's quarterly report...


The Good:

  • Tax volumes in the company's retail offices were up 6.8% year-over-year.
  • Mitigating factor: It could be that HRB is taking in revenues earlier than in previous years.
    • The company opened earlier this year than previous years, so it could be spreading out the same size pool over a longer period.
    • Comparisons get much tougher in the second half of the tax season and some of the early gains may be eroded.
  • Consumer Services Revenues: What was previously a giant sinking ship for HRB, consumer services, largely HR Bank, is doing much better.
    • HRB surprised to the upside by 1% (albeit from very low expectations).
    • Some of this was due to higher sales of closed-end funds.
    • Mitigating Factor: Management still seems on the fence as to the worth of this business as part of the overall HRB portfolio.

The Bad:

  • Margins eroded: Tax, the only segment that really matters, showed a decline in pre-tax income of 9.2% year-over-year, about 17% below estimates.
  • This was despite 6.8% new client growth.
    • The company is focusing on gaining market share versus Jackson Hewitt at the expense of its profits.
    • As we all remember from the internet days, this is usually a good strategy that turns out well.
  • Business Services Revenues declined 8.5 percent y-o-y and posted a pretax loss of $1.0 million.
  • The company lowered guidance, but only by 1 cent.
    • However: If HRB wasn't treating mortgages as a discontinued operation, guidance would have come in by at least 30 cents.
  • I'm not sure if it is bad, but it's interesting: The company did not buy back any shares (which means it thinks the company was overvalued during the quarter).

The Ugly:

  • HRB is treating mortgages as a discontinued operation.
    • This allows the company to give very little details about what took place in this business, including not breaking out revenues.
    • The company did give a net profit for mortgages, which missed by 21 cents.
    • If HRB is unable to sell in next quarter, it will be in the unconventional place of carrying an ongoing business as a discontinued operation. This makes comparisons for the company on a historical basis, which is pretty difficult.
  • Management reiterated that they believe there are several interested parties that they are confident will pay at least $1.3 billion for Option One.
    • Either management is delusional or not paying any attention to what has been happening to Option One's peers (or both).
    • HRB management expects that sale to take place within the quarter, but would not identify a suitor.
  • The mortgage business is still accounting for $1.3 billion of the company's book value.
    • It is unclear whether this contains liabilities due to the parent company. A question about this was asked during the conference call and HRB management was pretty cagey in its answer.
    • Given that I feel that this is a grossly overstated number, it could lead to a charge or restatement.
  • While ignoring the mortgage side and accepting that it will (eventually) be sold (at some price), the tax business-HRB's bread and butter-sucks.
    • On a two-year basis, client growth in retail operations rose on a two-year CAGR of about 1%.

Editor's Note: Steve Zausner of Vicis Capital also contributed to this article.

Position in HRB

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