H&R Block (NYSE: HRB) is the world's largest tax preparation business. The IRS estimates that H&R Block prepares 1 in every 7 tax returns in the U.S. In addition to retail tax offices in the U.S., Canada and Australia, the company offers business services through RSM McGladrey, and financial products to support its tax business through the H&R Block Bank.
H&R Block has struggled to remain profitable, and has cut 400 jobs and shut down 400 tax offices as part of a restructuring which will save up to $150 million a year. In April 2010, H&R Block prepared 4.9% fewer tax returns than a year earlier despite increases in users of its online filing services. The fall in returns filed with H&R Block may be due to the recession and high unemployment, which lead more people to do their taxes themselves.
H&R Block and its subsidiaries provide tax return preparation services as well as other financial and business services and products. Tax services are available in the U.S., Canada, Australia and the United Kingdom. H&R Block's business usually operates at a loss up until tax season, which lasts from January to April, making it a cyclical business with the bulk of revenues coming in during the four months of tax season.
H&R Block reported net income of $486 million, or $1.45 per share, compared with a net loss of $309 million or $(0.94) per share in 2008. Revenues were flat at $4.1 billion. Tax Services revenues grew 1.5% to $3.0 billion, compared to the prior year. Business Services revenues declined 4.7% to $897.8 million from $941.7 million in the prior year due to decreased performance in the Capital Markets business, and a change in reporting relating to accounting for leased employees. Core Tax and Consulting revenues grew 4.1% in 2009.
H&R Block prepared approximately 24.0 million tax returns worldwide during fiscal year 2009, compared to 24.6 million in 2008 and 24.0 million in 2007. The company prepared 21.1 million tax returns in the U.S. during fiscal year 2009, down from 21.8 million in 2008 and 21.5 million in 2007. H&R Block's U.S. tax returns prepared, including those prepared and filed at no charge, for the 2009 tax season constituted 15.8% of an Internal Revenue Service (IRS) estimate of total individual income tax returns filed during the fiscal year 2009 tax season. This compares to 16.2% in the 2008 tax season, excluding tax returns filed as a result of the Economic Stimulus Act of 2008 (Stimulus Act), and 16.5% in 2007.
The tax services and previous mortgage services segments made up just over 75% of revenue (50% and 25% respectively) and 94% of pretax income. The tax services segment derives its revenue from tax return preparation fees and related services/products such as tax return prep courses, sales of software, peace of mind guarantees, online tax preparation help, and electronic filing fees. Tax prep is conducted by professionals in retail offices/franchises or through a number of online do-it-yourself channels. Although H&R Block's TaxCut software product and online-based program is experiencing slight user growth, the program only began to be properly advertised in FY06, and as of now is no match for the massively successful Intuit (INTU) program Turbo Tax.
H&R Block offers TaxCut income tax preparation software. TaxCut offers a simple step-by-step tax preparation interview, data imports from money management software and tax preparation software, calculations, completion of the appropriate tax forms, checking for errors and electronic filing. The primary software product, TaxWorks, is designed for small to mid-sized CPA firms who file tax returns for individuals and businesses.
H&R Block offers a comprehensive range of online tax services, from tax advice to complete professional and do-it-yourself tax return preparation and electronic filing. The company's websites allow clients to prepare their federal and state income tax returns using the TaxCut Online Tax Program, access tax tips, advice and tax-related news and use calculators for tax planning.
H&R Block participates in the Free File Alliance (FFA). This alliance was created by the tax return preparation industry and the IRS, and allows qualified filers with adjusted gross incomes less than $56,000 to prepare and file their federal return online at no charge.
H&R Block's RSM McGladrey brand makes up its business services segment. RSM McGladrey is the largest business to focus on the middle market, which represents companies whose revenues are less than 500 million. It is a market with a potential of 13 billion in fees. RSM is the fifth largest U.S. accounting firm, but it does not face much competition from its larger rivals, who tend to focus their energies on larger customers.
Although H&R Block believes this segment has promising potential, RSM suffers from a lack of brand-name recognition (which H&R Block has been building up) and made up only 6% of HRB's operating margin.
H&R Block Financial Advisors H&R Block has strengthened its financial advisors by replacing underperforming advisors. HRBFA provides advice-based brokerage services and investment planning.
H&R Block Mortgage Corp. H&R Block Mortgage Corp. originates retail non-prime and prime mortgage loans (75% and 25% respectively). Non-prime loans (unlike prime mortgages) are not offered through government-sponsored loan agencies and are for consumers that may have bad credit, a lot of debt and other problems. These loans are secured by the equity in the properties of these consumers.
H&R Block Bank The H&R Block Bank received its bank charter in 2006. H&R Block is using its Bank as a key cross-selling strategy. It is hoping to increase retention rates of its consumers generally (currently at 60-70%), and pre-tax season consumers specifically by offering them discounted fees on Refund Anticipation Loans (RAL) once enrolled in the Emerald Master Card debit card program. Initially, the debit card is used to receive anticipated tax refund proceeds, but it may also be used for general banking services.
Also, H&R Block bank is allowing H&R Block to widen its consumer base by providing banking services to an untapped 7 million unbanked clients.
H&R Block has 400 jobs and shut down 400 tax offices as part of a restructuring which will save up to $150 million a year. In April 2010, H&R Block prepared 4.9% fewer tax returns this tax season than a year earlier despite increases in users of its online filing services. The fall in returns filed with H&R Block may be due to the recession and high unemployment, which lead more people to do their taxes themselves.
The restructuring affects about 3.6% of H&R Block's retail offices. H&R Block expects a $28 million pretax charge from severance related costs, which will be reported in the fiscal first quarter, which ends July 31, 2010.
Option One Mortgage Corporation, H&R Block's non-prime mortgage loan business, previously made up H&R Block's mortgage services segment. 75 percent of business in the mortgage services segment came from Option One's "wholesale" non-prime loan originations, which are procured through the help of independent brokers and financial institutions. Non-prime loans are for risky consumers who tend to have bad credit histories and are more likely to default. As a result of heightened competition, a soft housing market and rising interest rates, the once successful sub-prime mortgage lending industry suffered severe losses, even forcing some companies into bankruptcy. Because of decreased profitability, H&R Block announced the sale or spin-off of Option One 2006.
H&R Block was only able to get a selling agreement in April; it was crucial at the time that H&R Block find a buyer for Option One and at a good price amidst the tales of the diseased subprime mortgage lending industry. As time passed, its opportunities dwindled and possibly H&R Block's stock price with it. H&R Block agreed to sell Option One to Cerberus Capital Management for the net tangible asset value determined at the time of closing, scheduled to be in the second fiscal quarter (ending October). The price amount is estimated to be 300 million minus the 1.27 million net tangible asset value estimated this past January. Also included in the deal is a provision which entitles H&R Block to half of Option One's cumulative income from its loan originations for the 18 months after closing (an amount up to 300 million). This price, although not bad (considering the ailing industrial conditions), is less than the amount the company would have liked to use towards share repurchases. (Share repurchasing and dividend hikes are short-term strategies used by H&R Block to increase stock value in light of slow earnings growth for the company.)
In addition, H&R Block is closing down Option One's wholly-owned subsidiary, HRBMC (part of consumer financial services segment), and leaving the mortgage lending business for good.
Not too many years ago citizens looking to get their tax return filled out knew only one way to do it: they paid to get it done (that is, if they didn’t already do it themselves) and then paid to send it via regular mail. The Free File program, a free online tax return preparation and e-filing service, debuted in 2003 when the Internal Revenue Service (IRS) joined up with a collection of tax software companies called the Free File Alliance LLC. These free digital tax products include H&R Block’s TaxAct, Intuit’s TurboTax Freedom Edition, Liberty Tax online and many others. The purpose of the IRS’ creation of the Free File program is to increase the numbers of tax returns filed electronically, allowing for time and cost efficiency.
Ironically, these free tax services point in the way of cannibalization, or the companies’ stealing (usurping) of their own market share. The only thing redeeming them is the low income taxpayers that these free services are restricted to. Most require that taxpayers have an adjusted gross income of 52,000 or less and/or other criteria. Intuit’s free digital tax product is offered to consumers with an adjusted gross income of 28,500 or less or other special criteria.
H&R Block is facing lawsuits stemming from and inherent to its Refund Anticipation Loan program, Peace of Mind guarantee program, electronic filing of tax returns, Express IRAs and others. In these programs H&R Block is mainly accused of fraudulent business practices. Litigation is detrimental to HRB's growth as H&R Block may lose consumers in the wake of such negative publicity related to the lawsuits, on top of the large settlements that H&R Block could be subject to.
The Refund Anticipation Loan program has been viewed by the US government as "predatory". Instead of terminating RALs, the Federal government is focusing on forcing the cutting down of excessive fees charged in relation with RALs. It is moving to take away the debt indicator, which allows providers of RALs to find out if the consumer owes money to the government, and may not receive their full refund (to pay back the loan). H&R Block has lowered fees recently to comply with this regulation. RAL legislation may prove unfavorable for H&R Block if stricter legislation regulating RALs is passed.
The tax prep industry is a very competitive one. It consists mainly of two segments: tax preparation done through "paid professionals" and the "do-it-yourself" (DIY) channel.
The "paid professionals" segment can be further segmented into "franchised preparation" and "professional preparation." Franchised prep represents H&R Block and competitor Jackson Hewitt Tax Services (JTX), and professional preparation represents CPA's and small accounting firms. The do-it yourself filers either file manually (or through a friend), or via software provided by the tax prep companies.
H&R Block's market share in all segments of its "for a fee" tax preparation services is 19% compared with only other direct competitor Jackson Hewitt's 4-5% and privately-owned Liberty Tax's estimated 1%. The largest growth opportunity for H&R Block lies in the services provided by CPA's through which 47% of US Federal returns are filed.
|Market Share||Company-owned offices (US)||Franchised offices (US)||Average Fee per return|
Net average fee includes the gross tax preparation and related fees, less coupons and discounts, which is divided by number of clients served.
In the DIY online/software channel, H&R Block's TaxCut program is far behind primary competitor's Intuit's TurboTax. There isn't an available statistic comparing TaxCut and TurboTax in the online channel, but in the software channel, Taxcut sells about one program for every 4 of TurboTax. In addition, free online services like H&R Block's own TaxAct steal market share from the paid professionals. The remaining 29% is composed of at-home traditional pen and paper filers, which represent a potential consumer base for H&R Block.