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Tax Prep Chains See Business Decline

March 11, 2010

Both H&R Block and Jackson Hewitt, the two biggest tax prep chains in the country, have seen their revenues fall in the past quarter, in part because more taxpayers are doing their taxes themselves.

Jackson Hewitt was also hurt by problems with one of its major partners in the refund anticipation loan business, Santa Barbara Bank & Trust, which was not able to originate RALs this tax season. Jackson Hewitt reported a net loss of $279.0 million, or $9.75 per diluted share, in its fiscal 2010 third quarter.

"In addition to the challenges created by the continued sluggish economy, high unemployment rate and the increasingly competitive landscape in our industry, our third-quarter operational and financial results, as well as our expectations for the full 2010 fiscal year, have been significantly impacted by the last-minute loss of a refund anticipation loan product in 50 percent of our system," said Jackson Hewitt president and CEO Harry W. Buckley in a statement.

"To adjust for the absence of RALs, we implemented measures designed to retain clients in the affected markets and to reduce controllable expenses across our entire operation," he added. "Although both our franchisees and our company-owned offices have done a good job adjusting their operations, we have had to scale back our expectations for the 2010 tax season. This is a great disappointment to me, our entire management team and our franchise system, particularly after the positive strides we made in the off-season to prepare our entire system for the 2010 tax season, including the launch of our exclusive arrangement with Wal-Mart.”

In contrast, rival H&R Block saw its consolidated net income for the fiscal third quarter ended Jan. 31, 2010 rise to $50.6 million, or 15 cents per share, up 6.9 percent from the prior period of $47.4 million. However, third quarter revenues at Block declined 5.9 percent to $934.9 million, mainly because the No. 1 tax prep chain prepared fewer tax returns. Income from continuing operations of $53.6 million, or $0.16 per share, fell 19.8 percent from $66.8 million, or $0.20 per share, in the prior year period.

"While we are disappointed with our early results this tax season, we remain committed to improving our performance as the remainder of the season unfolds,” said Block president and CEO Russ Smyth in a statement. “We expect to outperform our competitors regardless of the external factors like unemployment rates, but we have not done so to-date.”

Block believes that total IRS filings across the industry have been down 4 to 5 percent through Feb. 28, partially due to weather-related slowness in February. The company anticipates that by the end of the tax season, total IRS filings will decline approximately 2.5 to 3.5 percent over the prior year, or only approximately half the rate of decline seen in the period through Feb. 28. However, this decline would nonetheless be nearly double the company's original estimate of lower returns.

Block said the shift from assisted preparation to Internet-based or other do-it-yourself tax preparation methods has accelerated in the early part of this tax season compared with previous years. "Historically late season filers, who tend to have higher incomes, have shifted to DIY at a slower rate than early season filers," said the company.

For the fiscal 2010 tax season through Feb. 28, Block's same-office tax returns prepared in retail operations fell 6.8 percent compared to the prior-year period. Total retail tax returns prepared through Feb. 28 were down 9.4 percent.

Digital returns prepared by H&R Block were down 4.4 percent, although online returns grew 2.5 percent. The aggregate number of digital returns, including those prepared via the Free File Alliance, fell 3.8 percent. Software-based returns declined by 12.1 percent due to the company's decision to exit two unprofitable distribution channels.

Total tax preparation revenues at Block through Feb. 28 fell $124.1 million, or 7.1 percent over the comparable period in 2009. That reflects a 9.4 percent decline in total retail returns prepared, partially offset by the impact of an increase of 2.4 percent in net average fees per retail return.

Not all is doom and gloom, though. The third largest tax prep chain, Liberty Tax Service, says it has been doing better business this season. The privately held company, which was founded by Jackson Hewitt founder John T. Hewitt, who also spent a dozen years working for H&R Block, reported last month that it had seen a 10.2 percent increase in the total number of tax returns filed as of Feb. 15, and a 28.1 percent increase in revenue generated. Same-store sales showed a 3 percent increase in returns, and a 21.2 percent increase in revenue. Net fees were up 16 percent.  Liberty Tax also added 350 new locations during the past year, and has a total of 3,512 brick-and-mortar locations in the U.S. and Canada.

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