H&R Block Inc. (HRB) has recently announced that it would not be able to meet its previously announced fiscal 2010 guidance 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 a share from continuing operations. This compares to the Zacks Consensus Estimate of $1.61 per share.
However, following this weaker outlook announcement, we expect a large number of analysts to revise their estimates for the fourth quarter (ending April 30) and the full fiscal year 2010 downward in the next couple of days.
In its preliminary tax season results for the interim period through Feb 15, 2010, the company said 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.
Though H&R Block is the nation’s largest tax preparer, we think that this interim result clearly shows the erosion of its market share to its competitors, particularly the online preparers.
The economic weakness and the high level of unemployment are resulting in a continued shift from assisted tax preparation to the cheaper do-it-yourself mode, primarily driven by the growth in digital online space.
The company’s primary rival in the online space is Intuit Inc.’s (INTU) TurboTax tax-preparation software. Intuit raised its full year guidance and said that sales of its TurboTax is gaining significant momentum and would surpass its previous expectations.
Though H&R Block’s tax software H&R Block At Home, formerly known as TaxCut, competes with Intuit’s TurboTax, we note that the latter is the more widely recognized brand in the digital space.
Additionally, historically, H&R Block’s retail business viewed the digital space as the competition rather than an opportunity. Though the company is now growing its digital business, we believe that the pace of growth is not yet satisfactory.
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