And you thought tax season was stressful on you?
Tax preparer Jackson Hewitt (NYSE: JTX ) plunged to its lowest levels ever yesterday, falling more than 32% after a slower-than-expected start to the tax-filing season left third-quarter earnings below expectations.
Net income came in at $18.2 million, or $0.61 per share, 34% below what it earned in the same period last year.
Keeping up a multiyear, industrywide trend, tax filings remained weak early in the year, partly attributable to pending legislation regarding the alternative minimum tax that hits wealthy families.
Another reason for the decline stemmed from (surprise, surprise) ripples in the banking sector. In years past, Jackson Hewitt offered customers tax return loans backed up by Uncle Sam's annual refund. This year, the banks Jackson Hewitt worked with in the past didn't offer those services, so customers didn't have as much of an incentive to hurry into the tax office.
Finally, an ongoing claim by the Department of Justice that charged 125 Jackson Hewitt franchises with fraudulent tax practices continued to take its toll. That case affected its reputation in select locations, adding to the unexpected slowdown in business.
Or, heck, maybe it's just that consumers wait until crunch time to take care of what many cringe thinking about: the complicated and daunting world of taxes.
Keep an eye on the White House
This year may be a deciding one for Jackson Hewitt, along with rivals H&R Block (NYSE: HRB ) and Intuit (Nasdaq: INTU ) . All three major presidential candidates -- Obama, Clinton, and McCain -- propose measures to drastically simplify the tax code. Obama's tax plan brags that any worker with a bank account would be able to complete a tax return in a matter of minutes. The "fair tax" plan championed by Mike Huckabee proposed eliminating the IRS altogether, which would pretty much stick a sword though tax preparers' chests.
The more simplified taxes become, the less consumers and business rely on tax preparers. The IRS expects more than 80 million tax returns to come through its self-directed e-file program this year. For tax preparers whose most valuable asset is the service they provide, those aren't pretty numbers.
That dwindling outlook may have been what sparked Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) to throw in the towel on longtime holding H&R Block last year. Warren Buffett isn't known to sell an investment unless a) it's overpriced or b) it has lost a part of its moat. Since H&R Block has been on a multiyear slide, you can eliminate option A. That leaves investors in a spot where nobody likes to be: in disagreement with the world's greatest investor.
Going forward, Jackson Hewitt has enough problems to deal with before it can even start to worry about how ugly the economics of the industry are. With pending litigation, a weakened reputation, and a massive debt load, it's going to take some serious work to get back on track.
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