One quarterly earnings report cannot make or break a company. Sure, it can provide a fair depiction of a company's current state of affairs, but by definition it is a backward-looking tool. Ultimately, future results are more important than those from the prior three months. With that in mind, shareholders of tax-preparation specialist H&R Block (NYSE:HRB) may want to pretend that the firm's first quarter never even happened.
After finally finding a way to post profits in all four quarters last year, rather than just the seasonally strong fourth (which ends in April), the company took a big step backward yesterday, announcing a stunning $44.1 million loss on a 2.6% drop in revenues to $482.7 million. The $0.26 retreat in earnings reversed last year's $0.03 gain and was far wider than the $0.05 loss forecast by analysts.
The results may have caught Wall Street somewhat off guard, but they were in line with internal projections and not surprising to management, which warned of the core problem -- margin compression in the mortgage business due to rising rates -- months ago. CEO Mark Ernst summed up the outlook fairly well in last quarter's earnings release: "A changing interest rate environment will likely result in a flattening or slight decline in mortgage earnings, which will partially offset solid earnings growth in our other businesses."
There was no problem with loan production, which grew 28.4% to $6.8 billion, but revenues from mortgage services fell 8.4%, and pre-tax income plummeted 42.9% to $93.5 million. The disappointing mortgage results played the largest role in H&R Block's first-quarter woes, but each of the other three business segments also moved in the wrong direction.
Business services revenues rose 10.8%, but pre-tax losses widened from $6.7 million to $10.1 million. Investment services revenues from the firm's H&R Block Financial Advisors subsidiary dropped 6%, again with losses widening from $13.8 million to $18.3 million. Revenues in the firm's bread-and-butter tax-services segment rose 9.7%, but last year's $99.6 million loss fell to $113 million.
While first-quarter results were weak across the board, especially compared with rival Jackson Hewitt's (NYSE:JTX) respectable performance, H&R Block doesn't typically look good early in the year. The company looks more presentable in time for the fourth quarter.
This year should be no exception, as the firm has made investments that will pay off when tax season arrives. More than 400 additional Wal-Mart (NYSE:WMT) stores will have H&R Block tax-preparation assistance available, and the company is on track for expansion of 500 to 600 new offices in "underpenetrated" markets.
Assuming that H&R Block can mute the impact of rising rates on mortgage margins, turn around the struggling investment business (which has lost $248 million over the last three years), and hold its ground with Intuit (NASDAQ:INTU) in the tax-preparation software battle, this past quarter can be easily forgotten. File it away like an old tax return -- to be used only for future reference.
Only seven more months until tax season. It's never too early to visit the Fool's Tax Center.
Fool contributor Nathan Slaughter owns none of the companies mentioned.
