Competitors The independents will do better in changes in return volume than both Block and JH, according to Hewitt, who made his statements this week in an annual industry update for analysts. Neither Block nor JH responded to requests for comments about Hewitt's statement. The IRS has projected the number of returns to drop because of the recession. Liberty, however, is projecting a rise for its filing business.
"We see Block having a decrease in low single digits, three to five percent," Hewitt said about that chain's volume. He said that JH had a decrease of 300,000 returns in 2008, 400,000 in 2009 "and it's going to be even worse this year." Hewitt said his pre-season prediction was that JH would lose 600,000 to 1 million returns, but that the company has been able to hold on to many customers who are unable to get RALs.
Hewitt said that while Block has closed stores, which will contribute to reduced volume, he expects that the removal of poor performing locations will increase margins and Block's profitability. Hewitt also predicted Block will continue to lose market share, despite efforts by new management to revitalize the tax preparation business.
JH took over the locations in WalMarts after it won that business from Block. However, despite the additional locations, JH has closed more offices for a net decrease, Hewitt claimed.
Both Block and Liberty have gained from JH's inability to provide RALS at all locations but nowhere nearly by the amount Hewitt he had originally expected.
JH's problems stem from the forced exit of Santa Barbara Bank & Trust from the RAL Business. Both Liberty and JH turned to Republic Bank & Trust. But while Liberty was able to get full funding, JH said it obtained enough backing for only 50 percent of its program.
Hewitt said the big problem he believes the competitor faces is that rather than distributing the funds across all franchisees, some have received 100 percent RAL funding, while others have received none.
"They will have trouble collecting fees from franchisees who are not getting the opportunity to offer RALs," said Hewitt, who reported anger and disappointment from those store operators that have been shut out of the RAL business. The other impact will be the loss of fees paid to Jackson Hewitt by the bank.
"They will lose tens of millions of dollars from banks," said Hewitt. The SEC filings of Pacific Capital, the parent of Santa Barbara, showed that in 2008 it paid JH $46.3 million in marketing and technology fees for the 2009 tax operations.
One analyst asked if Hewitt though JH could survive this tax season. Hewitt responded because of the size of Jackson Hewitt's line of credit, "Whether they make it to next year is in the hands of the banks,” The analyst noted that because of its results last year, Jackson Hewitt had violated loan covenants.
Both Jackson Hewitt and Block have had management changes in the two years. Last year, Harry W. Buckley, Block's former CEO, was named to the post at JH replacing Michael Yerington, who left the company. It also suspended its quarterly dividend in March. Net income at Jackson Hewitt dropped to $19.5 million for the year ended April 30, 2009, down from $32.4 million the prior year and from $65.4 million in 2007. Revenue for 2009 was $248.3 million, down from $278.5 million in 2008 and $293.2 million in 2007.
In April, JH and the banks agreed to a change in its revolving line of $450 million under which it had $264 million outstanding. That amount was converted to a term loan $225 million with a revolving line of credit of $175 million. JH has a $25 million payment due on the term loan on April 30 with $30 million due the following year.
Since January 2008, H&R Block has replaced its CEO, CFO and the presidents its two major divisions, the tax group and RSM McGladrey and added a chief marketing officer. It reported revenue of $4.1 billion for the year ended April 30, 2009, virtually unchanged from the prior year. The number of tax returns prepared at stores dropped by 1 million for that year, but the number of digital returns rose by 240,000 at the same time. Block earned $485.7 million for fiscal 2009, compared to a loss of $308.6 million that reflected losses from discontinued operations.
