Even during tax season, H&R Block can’t hide slowing growth

Share

Tax Day is nearing in the United States – which for H&R Block Inc. means payday.

You wouldn't know it by looking at the tax-service provider's shares, which slumped to a new 52-week low on Friday. Though they may stage a rally in June when the company posts results from its busiest quarter, the overall picture is one of slowing growth, if not stagnation.

Revenue from the quarter is expected to account for 76 per cent of H&R Block's estimated $3.1-billion (U.S.) haul for fiscal 2016. That's less than 1 per cent above last year's $3-billion total, and would mark its slowest annual growth rate since fiscal 2013.

Despite increasing revenue, however minutely, H&R Block's earnings before interest, taxes, depreciation and amortization and net income are expected to sink to their lowest level since 2013 and 2012, respectively. That's due in part to the sale of H&R Block's bank unit and the company's purchase of its franchised stores. But it also reflects a consumer shift as a portion of users migrate to do-it-yourself products (which are lower-margin than so-called assisted returns) or to competitors. According to U.S. Internal Revenue Service data for the week ended March 25, the number of self-prepared electronic filings is up 3.8 per cent compared with a year prior, while those prepared by tax professionals (including the folks at H&R Block) is down 3.1 per cent.

H&R Block is doing its best to combat the competition from alternative providers such as TurboTax and other independent tax professionals. It ran a half-off promotion for new clients through March 31, a move intended to draw customers through the doors of its stores at a time when its staff are not at full capacity. CEO Bill Cobb even tried to pitch everyone on its most recent conference call, even giving a shout-out to specific locations in the New York area.

"I encourage everyone on the phone, we'd love for you to be a client. We have 20 Block Advisors open in the New York area, including four downtown in Hanover Square, two on 23rd Street, one on 31st. So, I'm always pitching, we have a big contest in the company of trying to get additional clients. So, we'll help all you, investors and analysts who would love to come visit us. We can do any one of your taxes."

That slight desperation hasn't swayed analysts from their broad belief that the company's prospects are bright. On average, they expect the stock to reach $36 in the next 12 months, just below the $37 that H&R Block paid to buy back $1.5-billion of its shares (part of a $3.5-billion program) last September.

Analysts have also managed to drown out noise from the presidential race. Ted Cruz's flat tax plans and Donald Trump's intention to simplify the tax code would mean a much-reduced need for H&R Block's services. Notably, H&R Block's CEO Mr. Cobb isn't panicking – he's also in favour of simplifying the tax code and during the company's most recent earnings call last month pointed out that it stands "ready to work with whoever."

Regardless of the election and its outcome, the stakes are rising for H&R Block. The company's short interest as a percentage of its free float recently reached 9.9 per cent, 10 times where it was this time a year ago and its highest since 2011, according to data compiled by Markit.

H&R Block hasn't been the target of an activist since 2011, and it's forged ahead by divesting non-core assets and returning capital to shareholders through dividends and buybacks. But to avoid reliving the past, it should aim to find mechanisms for growth, potentially through its tax identity-theft services and other fraud-prevention tools. Either way, a sustained rebound in H&R Block isn't as guaranteed as the fact that you'll file your taxes.

Gillian Tan is a columnist with Bloomberg News