H&R Block posts 3Q profit, beats expectations

H&R Block posts 3rd-qtr profit, tops Wall Street view

KANSAS CITY, Mo. (AP) -- H&R Block Inc. is bracing for what could be a make-or-break final stretch of this year's income tax season.

The nation's largest tax preparer reported better-than-expected earnings for its fiscal third quarter Friday. But it also said the total number of tax returns prepared by its network of retail offices or through its online and TaxCut software products was down 1.8 percent through the end of February versus a year ago.
The retail offices, which generate the highest fees, saw a 3.9 percent decline from a year ago.

Executives were quick to note that the Kansas City-based company has seen a last-minute rush of taxpayers in the final weeks of the tax season over the last three years and that those procrastinators often generate higher fees because their returns are more complex.

They also acknowledged, however, that the struggling economy has made the situation more opaque this year with many of the company's traditional moderate- and low-income clients either foregoing a tax return because of their income, using free online products or attempting to prepare their taxes themselves to save money.

"At this stage we remain generally on track to our financial program and to our performance expectations for the full year, although achieving even the bottom end of our earnings guidance is not risk-free," Chairman Richard Breeden told analysts during a conference call after the company released its third-quarter earnings.

H&R Block, which makes the bulk of its revenue and profits in the fourth quarter, has said it expects annual earnings in the range of $1.60 to $1.70 per share. Analysts surveyed by Thomson Reuters expect per-share earnings of $1.61, on average.

Its shares rose $1.36, or 7.9 percent, to close at $18.68 Friday.

The company reported earning $47.4 million, or 14 cents per share, during the three months ended Jan. 31, versus a loss of $47.4 million, or 14 cents per share, a year ago.

Analysts had expected earnings of 10 cents per share.

Income from continuing operations jumped to $66.8 million, or 20 cents per share, from $7.1 million, or 2 cents per share. Meanwhile, losses from discontinued operations declined 64 percent to $19.5 million, or 6 cents per share, from $54.5 million, or 16 cents per share.

The discontinued operations include the H&R Block Financial Advisors unit, which was sold in November. Last year's results also included the last parts of the company's sale of its mortgage lending operation.

Revenue during the quarter rose 11 percent to $993.5 million, surpassing analysts' expectations of $975.3 million.

Tax services revenue increased 15 percent to $761.7 million as the company said it saw a 3 percent increase in the number of tax returns prepared by its retail offices, software and online products through Jan. 31.

Including February returns, however, the number of tax returns prepared declined 1.8 percent versus a year ago, which was partially offset by an 8.5 percent increase in average fees. Those results don't include an additional leap day in February last year or clients who filed tax returns only because it was required to receive an economic stimulus payment.

Retail operations, through February, saw a 3.9 percent decrease in tax returns filed and 5.7 percent fewer taxpayers used H&R Block's TaxCut software to prepare their taxes themselves. The company's online products, including a new free service aimed at lower-income consumers, saw a 56.5 percent jump in returns filed, the company said.

Chief Executive Officer Russ Smyth said H&R Block will increase marketing to grab more late-season filers and hope the shift of taxpayers towards doing their own taxes isn't long-lived.

"How long will that last? Part of the answer to that is how long we think people are going to be extremely price-sensitive. It's probably a good couple years," Smyth said.

He added that the decline in low-income customers is being offset by a continued increase in customers with average gross incomes of $90,000 or more, who typically generate higher fees.

The company's consumer financial services unit, which includes the H&R Block Bank, lost $3.3 million pretax during the quarter as it set aside another $13.5 million to cover potential losses on mortgage loans.

UBS analyst Andrew Fones said in a research note that he was maintaining his "buy" recommendation for the company's stock and felt the company will benefit next year from parts of President Barack Obama's economic stimulus plan that will increase the complexity of income tax returns, increasing potential clients and fees.