Commentary

Hit By The Realities Of The Tax Act, H&R Block Closing 400 Offices

Like homeowners in states like New York and California who also pay high state and local taxes, H&R Block is not expected to do as well as others may under the Tax Cuts and Jobs Act passed by Congress last December. On Tuesday, it said it expected revenue to drop in fiscal 2019, sending its shares plunging 18% yesterday. Block CEO Jeffrey Jones also said the company would close about 400 of its company-owned retail locations, although he does not anticipate any layoffs.

“On the post-earnings-report conference call with analysts, chief financial officer Tony Brown said fiscal 2019 revenue was expected to be between $3.05 billion and $3.1 billion, according to a transcript provided by FactSet. That was below 2018’s $3.16 billion, as well as the FactSet analyst consensus as of May 31 of $3.14 billion,” writes Tomi Kilgore for MarketWatch.

“The disappointing outlook comes after the stock had run up 20.4% since April 2 to close Tuesday at a 10-month high,” Kilgore also points out.

One wonders why.

“One of the key aspects of our bearish thesis on H&R Block (HRB) has been that tax simplification arising from the U.S. tax reform enacted in December 2017 ultimately would have a negative impact on the company's revenues and earnings,” BTIG analyst Mark Palmer wrote in a note to clients Tuesday cited by CNBC’s Tae Kim. “The 4Q18 report that HRB delivered today after the market close saw simplification finally take a bite out of the company's future prospects.”

In fiscal 2018, Block said  in its release about its earnings report, “revenues increased 4% to $3.2 billion, driven by improvement in the company's U.S. assisted and do-it-yourself (DIY) businesses.”

According to a company fact sheet, an “H&R Block branded retail office is located within five miles of 95% of Americans — covering all demographics and income levels.” That is over-saturation, it realizes, particularly given the trend toward digital solutions.

“The company does not plan to cut any jobs as a result of the closures, a spokeswoman for H&R Block tells CNNMoney’s Paul R. La Monica, pointing out that offices being closed are all within five miles of other locations.

“H&R Block may be suffering from a Starbucks-like phenomenon — having a bunch of locations that are too close to other ones,” La Monica writes. 

“The closures are part of a broader strategy to better position the company to retain customers and attract new one,” Aisha Al-Muslim writes for the Wall Street Journal.

“We aren’t as relevant as we need to be to today’s consumer,’ [Jones] said during a conference call,” Al-Muslim continues.  “… By differentiating ourselves and demonstrating why we are the best choice for consumers, we will position H&R Block as a modern brand with momentum,” Jones says.

“As firms such as Intuit Inc., maker of the popular TurboTax products, and personal-finance portal Credit Karma Inc. gain customers, H&R Block expects to succeed as a cross-channel player, where users can easily move between filing returns online or getting in-person assistance. As part of the new strategy, the company plans to invest more in the ability to seamlessly go between the two channels,” Al-Muslim continues.

Block itself offers do-it-yourself tax software, but Jones — a marketing-oriented veteran of Uber, Target, Gap, Coca-Cola and Leo Burnett — “noted that many people, including Millennials, still want assistance when doing their taxes,” CNN’s La Monica writes, and says that “half of the company's new customers are under the age of 35.”

Meanwhile, Kathy Collins, former chief marketing and strategy officer for Block, is getting out of town. Collins, who is also a director of The Ad Council, has accepted a job as chief marketing officer for Massage Envy and is moving to Scottsdale, Ariz. 

Collins, a native of Overland Park, Kan., told the Business Journal that she hates to be leaving Kansas City, but is excited for the opportunities that lie ahead,” writes James Dornbrook for the Kansas City Business Journal

The future is probably looking rosier for massage therapists than it is for tax preparers.

“From 2012 to 2017, revenue from alternative/complementary healthcare providers, which includes massage therapists, increased 4%, and employment increased 3.3%. Revenue growth is projected to continue at an average rate of 4% per year through 2022,” according to a IBIS World Industry Report Alternative Healthcare Providers in the U.S. cited by the American Massage Therapy Association.

But is it deductible? H&R Block knows.

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