H&R Block posts 3Q loss; tax season figures rise

NEW YORK — H&R Block Inc. on Wednesday posted a net loss for its fiscal third quarter, but offered positive data on the first part of tax season.

Through February, the Kansas City, Mo.-based company said it prepared 6 percent more tax returns than a year ago. Total digital returns gained 13 percent, with online returns leaping 30 percent. The increase in online returns is a positive sign for Block, which has lagged the competition for do-it-yourself customers in recent years.

The positive data helped to offset Block's third-quarter results.

For the three months ended Jan. 31, the nation's largest tax preparer said its net loss was $12.7 million, or 4 cent per share, reversing a year-ago profit of $50.6 million, or 15 cents per share.

Adjusted for various one-time items, third-quarter profit was 14 cents per share.

Revenue fell 9 percent to $851.5 million, from $934.9 million last year. Block said it deferred $19.7 million in revenue to the fourth quarter because of a delay in processing certain returns by the Internal Revenue Service.

Analysts, on average, were expecting adjusted profit of 4 cents per share, on revenue of $871.5 million.

The positive data sent shares up in aftermarket trading, gaining 92 cents, or 6 percent, to $16.11.

The company said that after a slow start to the tax season, total returns prepared in its retail stores rose 3.2 percent through Feb. 28. Those gains came despite not being able to offer refund anticipation loans, also known as "rapid refunds," which are short-term loans backed by refunds that are popular with low-income customers who typically file very early in the season. H&R Block lost its refund loan program in late December after regulators told HSBC it could no longer fund it.

"Despite the competitive disadvantage of not being able to offer RALs, we believe we gained share in both retail and online within the highly competitive early-season," said President and CEO Alan Bennett in a statement.

During a conference call to discuss the results, Bennett said about 63 percent of customers who got loans in the past chose to stay with Block, versus about 65 percent last year. The absence of the loans led many to choose to use accounts called refund anticipation checks, which allow them to have their preparation fees taken out of their refunds.

"After losing our RAL product in the 11th hour, we entered this season at a meaningful competitive disadvantage," Bennett said during the call. "As a result, many people externally expected us to report significant early-season client and market share losses."

While that did not happen, losing RALs did result in part of the charges recorded during the quarter. Interim Chief Financial Officer Jefferey Brown also said by the end of the year, revenue from refund loan and check products is expected to drop about $20 million.

The loss of refund loans also led to an increase in the number of bad debts seen in Block's Emerald Card program, which offers a separate loan product before tax season. Customers who got those loans in the past often paid them down with money obtained through a refund anticipation loan, and many of those customers apparently went elsewhere to get refund loans, the company said. In the third quarter, additional losses from this issue totaled about $13 million, or 4 cents per share.

During the call, the company estimated it's gained about 1 percent of market share in the online segment. These gains reflected increased website traffic and a higher number of visitors deciding to use Block's online software. The company did see a 1 percent decline in use of its desktop software product, which is expected to continue to decline as more customers choose the online version.

One item that may concern investors was a 7.1 percent drop in the net average charge per return filed at retail stores through the end of February. The company said the decline was due to its offer to file early 1040EZ forms at no charge, and the IRS delay that prevented filing of more complex, and therefore more expensive, returns until Feb. 14.

Block's strategy in offering the free returns is to gain goodwill and demonstrate its expertise to these customers, and continue doing their taxes as their situations get more complex and require more expensive preparation.

Block said it expects the net average charge to rise through the rest of the season, but end the season down 2 to 4 percent because of the free 1040EZ promotion. "We firmly believe this program will provide a pipeline of new filers to the H&R Block brand for future years, allowing us to monetize these clients as they transition to more complex returns," Bennett said.

However, with the promotion over, Block expects slower growth through the rest of the season. By the end of the season, retail returns are expected to increase between a half percent and 1.5 percent.