H&R Block Inc. (HRB) is scheduled to report its fiscal third quarter 2010 (ending Jan, 31) financial results on Monday, March 8, after the closing bell. According to the Zacks Consensus Estimate, the company will report earnings of 15 cents per share, down 25.0% from 20 cents reported in the prior-year period.
Recently, the company has announced that it would not be able to meet its previously announced guidance for fiscal year 2010 (ending Apr 30, 2010) as it is preparing fewer tax returns than it had previously expected. As per H&R Block’s previous guidance, the company expected to report earnings of $1.60–$1.80 per share from continuing operations.
Though H&R Block enjoys a market leading position, has a sustained focus on expense reduction initiatives and is implementing several strategies for gaining and retaining customers, we think that the ongoing challenges which the company is facing would truncate its earnings in the near term.
The tax filing market is experiencing a shrinking due to the rise in unemployment. Also, there is a continued shift from assisted tax preparation to the digital space, where the company’s growth is not yet satisfactory.
As a result of the stressed economic conditions, there is a decline in consumer and business spending. The consumers have become increasingly sensitive to price changes. Though, the company is making aggressive price cuts to increase market share, we believe such actions will restrict margin expansion.
In its preliminary tax season results for the interim period through Feb 15, 2010, the company said that its same-office tax returns prepared in retail operations dropped 5.6% from the prior-year period while the total number of tax returns prepared decreased 6.3% year-over-year.
Total retail tax returns prepared year-to-date fell 8.2% even though the net average retail fee per tax return rose 1.9%. In addition, H&R Block’s online tax return services’ growth of 3.1% was more than offset by a 7.6% drop in its software-based tax return programs.
This interim result clearly shows the erosion of its market share to its competitors, particularly the online preparers. Though H&R Block’s tax software H&R Block At Home, formerly known as TaxCut, competes with Intuit Inc.’s (INTU) TurboTax, the latter is more widely recognized in the digital space.
Additionally, we noticed that Intuit has recently raised its full year guidance and said that sales of its TurboTax is gaining significant momentum and would surpass previous expectations.
Estimate Revision Trend
Following the weaker outlook announcement by H&R Block, over the past week, 3 of 9 analysts covering the stock lowered their estimates for the fiscal third quarter while no upward revisions were recorded.
For full fiscal 2010, H&R Block will report earnings of $1.53 per share as per the Zacks Consensus Estimate. However, in the past week, 3 of 9 analysts have reduced projections while over the past month, 5 of them have made a downward revision and none moved in the opposite direction.
In terms of earnings surprises, we noticed that the company has beaten the Zacks Consensus Estimate thrice in the last four quarters with a four-quarter average of 30.8%. This means that the company has exceeded the Zacks Consensus Estimate by that percentage over the last year.
However, the downside potential (essentially a proxy for future earnings surprises) for the fiscal third quarter estimate is roughly 6.7%. Also, the downside potential for fiscal 2010 estimate is approximately 5.2%.
The absence of upward estimate revisions indicates a likelihood of downward pressure on the performance of the stock in the near term. As a result, H&R Block currently has a Zacks Rank #5 (“Strong Sell”) rating. Also, considering the current tax environment, the company’s headwinds and its performance as against its peers, we have downgraded the company’s long-term recommendation to Underperform.
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