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Dismal Start for HRB in FY13

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H&R Block Inc.’s (HRB - Free Report) loss from continuing operations was 38 cents per share in the first quarter of fiscal 2013, ending July 31, wider than the Zacks Consensus Estimate loss of 37 cents and loss of 37 cents incurred in the year-ago quarter.

Net loss from continuing operations for the quarter was $105 million, improving 6% from $119 million incurred in the year-ago quarter.

Operational Performance

Revenue in the quarter under review was $96.8 million, down 4.1% year over year. Also, reported revenue fell short of the Zacks Consensus Estimate of $101 million.

Total expense in the quarter reached $268.9 million, waning 12% over the prior-year quarter, primarily aided by lower selling, general and administrative expenses, lower compensation and benefits and lower occupancy and equipment costs.

Operating loss in the quarter narrowed to $172.4 million from $204.6 million in the first quarter of fiscal 2012.

Segment Performance

Tax Services revenue was $90 million in the reported quarter, reflecting a decline of 1.3%, primarily due to an extension of the Canadian tax filing season in the first quarter of fiscal 2012.

Pre-tax loss for the segment was $140.9 million, narrowing from the loss of $169.5 million incurred in the year-ago quarter.

Corporate and Eliminations posted revenue of $6.2 million, down 32.2% from the prior-year quarter. The decline was attributable to lower interest income from H&R Block Bank's shrinking mortgage loan portfolio.

The segment’s pre-tax loss in the quarter was $28.3 million, narrowing from the loss of $31.1 million in the year-ago quarter.

Financial Position

H&R Block ended fiscal first quarter 2013 with cash and cash equivalents of $0.98 billion, falling 7% from $1.06 billion reported at the end of fiscal first quarter 2012. Total outstanding long-term debt at the reported quarter end was $0.409 billion, a 59% drop from $1.00 billion at the end of the first quarter of fiscal 2012.

Net cash used in operating activities in the quarter was $373 million, compared with $394 million used in the year-ago quarter.

Share repurchase and Dividend

In the reported quarter, H&R Block spent $315 million to buy back 21.3 million shares at a cost of $14.82 per share.

On October 2, the company will pay a dividend of 20 cents per share to the shareholders of record as of September 14, 2012.


H&R Block expects cost reduction initiatives to help it deliver $85 to $100 million of pretax earnings in fiscal 2013.

Peer Comparison

Intuit Inc. (INTU - Free Report) reported fourth quarter 2012 adjusted loss per share of 8 cents, wider than the Zacks Consensus Estimate loss of 4 cents.

Revenues of $651.0 million in the fourth quarter increased 13.6% from $573.0 million in the prior-year quarter. Reported revenue was within management’s guidance of $647.0 million – $662.0 million.

Our Take

H&R Block’s leading position in the tax preparer market, its strategic initiatives to grow its business by gaining and retaining customers augur well for long-term growth. The company’s efforts to return more value to its shareholders will also help retain investor confidence in the stock. H&R Block is also increasing its share in the digital and assisted space.

With cost reduction initiatives bearing fruit and a successful first tax season in Brazil and India, we believe H&R Block remains well positioned.

We retain our Neutral recommendation on H&R Block. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.

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