H&R Block: The Good, The Bad, The Ugly
Leafing through HRB's quarterly report...
- 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.
- 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).
- 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.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter