H&R Block intends to close 400 of its company-run outlets, as the tax prep chain foresees fewer customers coming in to have their returns prepared as a result of the new tax law.
Shares in the Kansas City, Missouri-based company plummeted Wednesday after Block cut its guidance during an earnings call, even though it reported mostly positive results for the quarter (see H&R Block shares plunge as simpler tax code weighs on forecast).
“For 2019, we have a number of initiatives that are planned or in process,” said Block CEO Jeffrey Jones during the call, according to a transcript from Seeking Alpha. “We will make investments to modernize our key technology platform to enable more innovation and reduce our IT run rate spend over time. Additionally, we will invest to improve cross-channel client experiences and enhance our marketing and advertising capabilities. We’ll improve the service quality and consistency in our offices. This work is in process and we’ve already started to make some changes, including our decision to consolidate 400 smaller company-run offices. This action will help optimize our footprint and enable us to more effectively manage our field operations, elevate our talent and deliver more consistent quality to our clients.”
The Tax Cuts and Jobs Act that Congress passed last December doubles the amount of the standard deduction and either eliminates or sharply limits many popular tax deductions in an effort to simplify the tax prep process. That is expected to encourage more taxpayers to claim the standard deduction instead of itemizing.
H&R Block, like many tax practitioners, tends to charge larger fees for more complex returns. Jones said Block may need to adjust its pricing accordingly. “Additionally, we will focus on improving the value proposition by evaluating how we price for tax preparation taking into account the recent tax legislation,” he said. “These changes will require an investment in fiscal 2019.”
However, the new tax law also promises to bring many taxpayers to tax professionals for advice on how to adjust their tax planning and take advantage of favorable provisions in the new tax code.
“As a great example of how our tax pros help clients, this season we offered personalized assessments of the future impact of the new tax law,” said Jones. “Our clients learn whether they would have paid more or less if the new tax law had been in effect for 2017, which helped them determine how to appropriately adjust their withholdings for 2018. We know due to lower withholdings it’s likely many consumers will now receive lower refunds and they can turn to us throughout the year with any questions they have.”
He noted that while Block didn’t see the growth it would have wanted in new clients, it is continuing to see millennials turning to H&R Block, with over half of its new assisted clients under the age of 35. “From an overall mix and pricing perspective, our net average charge grew 2 percent, which translated to growth in assisted revenues, as expected,” said Jones.
One of H&R Block’s competitors in the tax franchise space, Happy Tax CEO Mario Costanz, had a different perspective on millennial tax prep customers. “Store fronts were down 28 percent in terms of market share from 2011 through 2017,” he said. “The reason for this is that millennials and Gen X consumers don't want to be inconvenienced by having to go somewhere and sit in a waiting room for hours on end. Independents have gained share vs. store fronts and now prepare 82 percent of the returns on the assisted side of the industry vs. 76 percent that they prepared in 2011. None of that has to do with tax reform. It has to do with changing consumer behaviors. What we don't see in standard store front business models is that they are not embracing the new ways taxpayers want to interact with their service providers. Service providers are not going away.”
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