H&R Block Misses Estimate

H&R Block Inc.’s (HRB - Analyst Report) first quarter (ended July 31) results were two cents below the Zacks Consensus Estimate as higher losses in its Tax Services segment more than offset the gains from improved pre-season results from Business Services and lower corporate expenses.

For the quarter, the company reported a net loss from continuing operations of 39 cents per share compared to the Zacks Consensus loss estimate of 37 cents.

Revenues were up 1.3% year-over-year to $275.5 million. Tax Services revenues increased 7.7% year-over-year to $88.0 million. Favorable results from the company’s Australian tax operations resulted in a 14.2% increase in tax preparation fees.

However, expenses were high due to the Southwest franchise acquisition, severance costs and increased expenses for information technology projects to prepare for the forthcoming tax season. As a result, the Tax Services segment reported a pretax loss of $172.0 million compared to $163.7 million a year ago.

The Business Services segment revenues increased 1.7% to $177.6 million. Pretax income was $1.3 million compared to a pretax-loss of $0.3 million a year ago, driven by revenue growth and cost reduction efforts.

The Corporate segment reported a pretax loss of $40.2 million compared to a loss of $49.0 million in the prior year, driven by improved performance of its mortgage loan securitization portfolio. Nevertheless, H&R Block has increased its reserves for potential loan losses to $91.7 million at July 31, 2009, compared to $84.1 million at year-end fiscal 2009.

H&R Block has reiterated its earnings guidance for the full fiscal year 2010. The company expects to report EPS of $1.60–$1.80.

As a result of unemployment and other factors associated with the stressed economy, the balance sheet of tax preparers such as H&R Block and its competitor Jackson Hewitt Tax Service Inc (JTX) has been severely impacted. We believe that the earnings of these companies will remain restricted in the short term as the economy will require more time to revive. We have a Neutral recommendation on the shares of H&R Block.

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