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Here's Why H&R Block Stock Is Down 20% Today

By Matthew Frankel, CFP® - Jun 13, 2018 at 11:35AM

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Tax reform could reduce H&R Block's pricing power going forward.

What happened

For tax preparation specialist H&R Block (HRB 1.96%), the first quarter of the calendar year (the company's fiscal fourth quarter) is by far the busiest. After all, that's when most of tax season happens.

So since H&R Block reported earnings of $5.45 per share and revenue of $2.39 billion, both of which beat analysts' estimates, you might think that the stock would be soaring. However, you'd be wrong.

As of 10:45 a.m. EDT, shares are down nearly 20%.

Black notebook with tax reform written on cover in yellow letters.

Image source: Getty Images.

So what

The problem is that the company's 2019 guidance came in lower than expected. H&R Block expects fiscal 2019 revenue between $3.05 billion and $3.1 billion, while analysts were looking for $3.14 billion. This would also represent a drop from fiscal 2018's $3.16 billion.

H&R Block indicated that it intends to be a bit more aggressive on pricing, which is the primary reason for the reduced guidance. This could be due to the new U.S. tax code, which is generally simpler than in prior years, giving the company less pricing power. The vast majority of the tax changes passed go into effect for the 2018 tax year, meaning that they will start to affect tax returns filed in early 2019.

Now what

The bottom line is that when Americans have simpler tax returns, tax preparers like H&R Block can't get away with charging as much to prepare them. Just to name one area of complexity, roughly 30% of Americans in 2017 and prior tax years benefited from itemized deductions, which requires a more complex preparation method. Going forward, this figure is expected to drop to just 5% as more people opt for the standard deduction.

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