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Better Than Expected 2Q at H&R Block

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H&R Block Inc.’s (HRB - Free Report) second quarter 2013, ending October 30, adjusted loss from continuing operations came in at 37 cents per share ,narrower than the Zacks Consensus Estimate loss of 40 cents. It was in line with the loss reported in the year-ago period.

Adjusted net loss from continuing operations for the quarter was $99.9 million, improving nearly 11% from $112 million incurred in the year-ago quarter.

Including loss contingencies – litigation charges of $1.5 million, impairment of goodwill and intangibles of $0.9 million, severance cost of $0.9 million, gain on sale of tax offices of $0.4 million and discrete tax item of $1.5 million, and net loss from discontinued operations of $4 million – the company reported net loss of $105 million or 39 cents per share. The loss narrowed from $142 million or 47 cents per share incurred in the year-ago quarter.

Operational Performance

Revenue, in the quarter under review, stood at $137 million, up 6% year over year. The year-over-year rise was the result of strong tax season in Australia. Revenue surpassed the Zacks Consensus Estimate of $129 million.

Total expense in the quarter was $302.3 million, waning 10% over the prior-year quarter, primarily aided by lower selling, general and administrative expenses, lower compensation and benefits as well as lower occupancy and equipment costs.

Operating loss in the quarter narrowed to $165.1 million from $206.4 million in the second quarter of fiscal 2012.

Segment Performance

Tax Services revenue was $130 million in the reported quarter, reflecting an improvement of 7%, primarily due to an increase in tax returns prepared in Australia.

Pre-tax loss for the segment was $26 million, plummeting 17% year over year on the back lower field wages and occupancy costs due to cost reduction initiatives.

Corporate and Eliminations posted revenue of $7.4 million, down 9.7% 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 $32 million, wider from the loss of $30 million in the year-ago quarter.

Financial Position

H&R Block ended fiscal second quarter 2013 with cash and cash equivalents of $1.3 billion, increasing more than two fold from $0.6 billion reported at the end of fiscal second quarter 2012. Total outstanding long-term debt at the end of the reported quarter was $0.9 billion, a 10% drop from the year-ago level.

Net cash used in operating activities in the first half of fiscal 2013 was $567 million, higher than $583 million used in the year-ago quarter.


On January 2, 2013, the company will pay a dividend of 20 cents per share to the shareholders of record as of December 10, 2012.

Guidance Affirmed

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

Peer Comparison

Intuit Inc. (INTU - Free Report) reported first quarter 2013 adjusted loss per share of 14 cents, narrower than the Zacks Consensus Estimate of a loss of 17 cents per share.

Intuit reported revenues of $647.0 million in the first quarter, up 12.5% from $575.0 million in the prior-year quarter. Reported revenue was above the management’s guidance range of $630.0–$640.0 million.

Our Take

H&R Block’s leading position in the tax preparer market along with 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 investors’ confidence in the stock. Also, H&R Block is 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. It also entered into an agreement with Sears , where it intends to focus on 112 best performing Sear locations while shutting down the rest. H&R Block expects this move to be slightly accretive to fiscal 2013 earnings.

Nevertheless, H&R Block expects to retain its clients, as it experienced 75% client retention despite shutting down 200 Sears locations since 2008. The agreement also entails it to establish temporary offices in other Sears locations during the peak tax season.

H&R Block is also exploring alternatives in order to stop H&R Block Bank from being regulated by the Federal Reserve as a savings and loan holding company, since the proposed rules of Federal Reserve would require higher capital requirements on savings and loan holding companies.

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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