Volume Growth Fails to Elevate H&R Block

While rival Intuit (Nasdaq: INTU  ) posted a 19% jump in its latest quarter profits, U.S. biggest tax-preparer H&R Block (NYSE: HRB  ) disappointed investors by reporting a drop in its fourth-quarter profit. Despite a rise in filing volume, net profits declined by 4.7% on a year-over-year basis. Let’s take a look at the happenings in the quarter.

The numbers
Comparing the performance of this quarter with last year’s corresponding quarter, Block didn’t look so great. Net income for the quarter, which included an after-tax litigation charge of $17.0 million, slipped to $658.2 million from $692.4 million, while total revenue was down slightly to $3.8 billion.

Block’s tax services business’ revenue for the year ended April 30 declined 2.1% from the last quarter as the company sold 280 of its locations to franchisees. The company's inability to offer refund anticipation loans in this tax season also added to the declining top line. HSBC (NYSE: HBC  ) terminated its agreement to provide financing for H&R Block’s refund anticipation loans on the contention that these loans are too risky without debt indicators.

Competition
Intuit, with its coveted TurboTax software, has managed to dominate the online tax-filing market. To challenge its dominance, Block had planned to buy 2SS Holdings, which develops TaxACT digital tax-preparation products. But its efforts were thwarted by the U.S. Justice Department, which sued Block to prevent the deal. Block, however, didn’t stop there.

The tax preparer has turned its focus to digital business. It managed to add 500,000 customers to its retails stores and 800,000 through its recently developed digital products, with online do-it-yourself preparation growing 29%. Not too shabby—but still not nearly good enough to challenge the top dog in the industry.

The Foolish bottom line
With declining revenues, stiff competition and bottlenecks to its growth strategies, Block doesn’t look very attractive. With results like what we’ve seen combined with a troubled underlying business, Foolish investors should be concerned. The company has a lot of work to do before it receives my signature of approval.

Fool contributor Zeeshan Siddique does not own any of the stocks mentioned in the article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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