H&R Block, Inc.
/(HRB - NYSE)
/$21.66
Note: FLASH REPORT; more details to come; changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.
Reason for Report: Flash Update: Fiscal 1Q17 Earnings Update
Prev. Ed : Fiscal 4Q16 and 2016 Earnings Update; Jul 1, 2016
Flash
On Aug 30, 2016, H&R Blockreported loss from continuing operations of $0.55 per share for fiscal first-quarter 2017, ended Jul 31, wider than the Zacks Consensus Estimate of a loss of $0.53 and the year-ago loss of $0.35.
Owing to seasonality of its tax business, H&R Block typically reports loss in the fiscal first quarter. Results were affected by the divestiture of H&R Block Bank, so much so that cost reduction initiatives and a lower share count failed to arrest the deterioration in the bottom line.
Operational Performance
H&R Block reported revenues of $125 million in fiscal first quarter, down 9.4% year over year due to the adverse impact of the divestiture of H&R Block Bank. Lower return volumes in the U.S. assisted tax business as well as currency exchange rates in international business added to the woes. Revenues missed the Zacks Consensus Estimate by 4.2%.
Total operating expenses decreased 0.6% year over year to $309.9 million driven by effective cost management. However, higher occupancy and amortization expense on acquisitions of franchises in the prior year limited the improvement. Interest expense increased $12.9 million owing to the issuance of $1 billion in long-term debt in Sep 2015.
Loss before interest, tax, depreciation and amortization was $140 million, wider than $137 million incurred in the year-ago period.
Financial Position
H&R Block exited the fiscal first quarter with cash and cash equivalents of $428.9 million, down 68% year over year. The decline was primarily due to cash payments made for the transfer of deposit liabilities owing to the bank divestiture, changes in capital structure and share buyback.
Total outstanding long-term debt at the end of the quarter was $1.5 billion, higher than the year-ago level of $0.5 million due to the issuance of $650 million of 4.125% Senior Notes and $350 million of 5.250% Senior Notes.
Net cash used in operating activities was $475.7 million, which compared unfavorably with $378.2 million cash used in the prior quarter.
Dividend and Share Repurchase
The board of directors declared a quarterly dividend of $0.22 per share, payable on Oct 3, 2016 to shareholders of record as of Sep 14, 2016. The dividend will mark the 216th consecutive payout to shareholders since the company went public in 1962.
The company bought back 2 million shares in the reported quarter for $48.6 million and had 219.1 million shares remaining under the authorization as of Jul 3, 2016.
MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON HRB
Portfolio Manager Executive Summary[Note: Only highlighted material has been changed.]
Kansas City-based H&R Block, Inc. (HRB) is a diversified company providing tax, accounting and consulting services.
Of the firms in the Digest group covering the stock, 33% assigned positive ratings, while the remaining 67% assigned a neutral rating. None rated the stock negative. The firms provided the lowest target price of $25.00 (up 9% from the current price) and a highest target price of $33.00 (up 43% from the current price).
H&R Block continued to intensify its focus on core tax business. The company inked a deal with BofI Federal Bank to divest some of its assets and liabilities to the latter. The divestiture will allow the company to be free from Federal Reserve Bank regulations as a savings and loan holding company. However, due to regulatory issues the deal got delayed till the next tax season.
Neutral or equivalent outlook – (6/9 firms or 66.7%): Though the firms believe H&R Block will continue to reward shareholders, but remains apprehensive about share price appreciation. They are of the opinion that share price will likely rise once filing increases.
Firms expect H&R Block to repurchase significant amount of shares that would lead to an increase in the firm’s capital as well as drop in the total number of shares outstanding.
Another group of cautious firms strongly believe that HRB has to limit the decrease in assisted volumes before the shares resume the previous level. They also expect that the firm will go through intensive customer-acquisition strategies, mostly driven by cost cuts and headcount rationalizations.
Buy or equivalent outlook – (3/9 firms or 33.3%) – According to these firms, H&R Block’s competitive advantage lies in its strong brand name, dual channel storefront and digital model that helps it to buy stake from smaller players and generate growth through the Affordable Care Act (ACA).
The firms expect the solid position in the assisted and online tax preparation markets to help the company deliver steady shareholder returns. Further, higher revenues per filing based on the implementation of the ACA and realization of the potential of the re-loadable prepaid business will add to the upside.
Additionally, with the divestiture to BofI Federal Bank, H&R Block will immediately have excess capital that can be deployed for share repurchases and dividend increase (leading to an above-average dividend yield). The firms believe that the company might increase its financial leverage as part of its return-of-capital strategy without disturbing its investment-grade rating.
The firms believe that H&R Block is well positioned for consistent double-digit shareholder returns on the strength of 3–4% revenue growth, operating leverage, share buy backs and an above-market dividend yield.
The firms believe that post completion of disposition of its bank, HRB will be able to deliver sustainable double-digit shareholder returns based on low single digit revenue growth, operating leverage, meaningful buy backs and above-market dividend yield.
July 1, 2016
Overview [Note: Only highlighted material has been changed.]
Key investment considerations, as identified by the analysts, are as follows:
Key Positive Arguments / Key Negative Arguments- Strong Brand Value: The company’s brand is highly recognizable and steps have been taken by management to increase its market share further.
- Enhanced Programs: A new series of enhanced online tax-cut programs and servicesare likely to help remove the complexity and doubts often associated with tax payment.
- Superior Digital Business: The digital business poses nice growth opportunities for H&R Block, going forward.
- Improvement in Housing Market: Any improvement in the housing market would be beneficial for the company’s mortgage portfolio. If delinquencies decline or home prices stabilize or possibly increase, losses on the company’s portfolio will likely decline.
- Reform implication: Higher revenues per filing based on the implementation of the Affordable Care Act and realization of the potential of the re-loadable prepaid business will add to the upside.
- Bank Divestiture: Divesting H&R Block Bank will free H&R Block from Federal Reserve Bank regulations as a savings and loan holding company.
- Competition in Tax Business: Rising competition in the Tax business may reduce volumes and margins.
- Downcast Macroeconomic Conditions: The company’s Tax segment is affected by macroeconomic conditions and employment rates.
- Change in Availability of RALs:HSBC has terminated its contract with H&R Block, leaving the company without a RAL product for the upcoming tax season.
The company offers customers various options for receiving their income tax refund, such as by check, directly from the Internal Revenue Service, an electronic deposit directly to their bank account, and a refund verification notice. H&R Block’s investment products include annuities, insurance, fee-based accounts, online account access, equity research and focus lists, model portfolios, asset allocation strategies, and other investment tools and information. Further, H&R Block offers accounting, tax, and consulting services to middle-market companies. These services include wealth management, retirement resources, payroll services, corporate finance, and financial process outsourcing.
Based in Kansas City, MO, H&R Block is a leading provider of tax preparation, financial advice, investment, and business services. The company is the largest provider of tax preparation services in the world, serving taxpayers primarily in the U.S., Canada, and Australia through more than 13,000 retail outlets and its digital tax solutions
For more information about the company, please visit its website at
Note: H&R Block’s fiscal year ends on Apr 30.
July 1, 2016
Long-Term Growth[Note: Only highlighted material has been changed.]
H&R Block is the leader in the paid tax preparation business but faces intense competition at the same time. Tax code simplification and free tax preparation are long-term concerns.
According to the firms, the company will be implementing a number of initiatives for the improvement of its retail offices in order to attract and retain more customers by enhancing the quality and consistency of clients’ experience. Management’s focus will be to reduce the amount of client walkouts and increase client retention rates. H&R Block remains confident that its strategy is helping with client retention and will drive long-term growth. The initiatives include getting more of its clients face-to-face with its best performing and more experienced tax professionals, better-trained front desk service associates, and improvement of office appearance. H&R Block also announced enhancement of its digital products, which will include a change in the overall look for the products for the upcoming tax season.
The company believes that the tax business is a good one both from a retail and digital standpoint and it has significant opportunities to further penetrate the large market. H&R Block’s strategy over the next few years is to implement a variety of measures that will allow the company to win clients who currently do not conduct business with it. Management believes that by improving customer experience, enhancing brand messaging and reducing price points, the company can achieve market share gains. H&R Block management appears confident that improved marketing, customer relations and lower price points are the key elements to a strategy that will allow the company to gain between 5–10 percentage points of customer growth (in excess of market growth) over the next five years.
H&R Block not only is confident of long-term growth and margin improvement potential, but is also equally hopeful of steadily returning capital to shareholders. The company remains committed to maintain a strong balance sheet and make continuous payment of dividends. Further, the company remains optimistic regarding its share repurchases.
July 1, 2016
Target Price/Valuation [Note: Only highlighted material has been changed.]
Rating DistributionPositive / 33.3%↓
Neutral / 66.7%↑
Negative / 0%
Avg. Target Price / $30.83↓
Digest High / $36.00 ↓
Digest Low / $25.00↓
No. of Analysts with Target Price/Total / 6/9
Key risks that can impede the target price include regulatory pressures, pricing pressure, and changes to the implementation of the ACA.
Recent Events [Note: Only highlighted material has been changed.]
On Jun 9, 2016, H&R Block Inc. reported adjusted earning per share continuing operations of $3.16 for 4Q16 ending on Apr 30, 2016. The adjusted EPS had beaten the Zacks Consensus Estimate of $3.09. Earnings however decreased 18% due to lower revenues and higher expenses.
Coming to the full-year comparison, Adjusted EPS for the year ended at Apr 30, 2016 was $1.59 against $1.75 for last year, indicating a decrease of 9%. Earnings for fiscal 2016 missed the Zacks Consensus Estimate of $1.65.
Financial Position
H&R Block exited the quarter with cash and cash equivalents of $896.8 million, down 55% year-over-year (y-o-y). The decline was primarily due to cash payments made for the transfer of deposit liabilities owing to bank divestiture, changes in capital structure and share buyback.
Total outstanding long-term debt at the end of the fiscal year was $1.5 billion, higher than the year-ago level of $0.5 million due to the issuance of $650 million of 4.125% Senior Notes and $350 million of 5.250% Senior Notes.
Net cash from operating activities was $329.5 million in fiscal 2016, comparing favorably with $148.9 million cash used in the prior fiscal year.
Dividend and Share Repurchase
The board of directors approved a 10% increase in dividend to $0.22 per share. On Jul 1, 2016, H&R Block will pay this dividend to investors of record as of Jun 20. The dividend will mark the 215th consecutive payout to shareholders since the company went public in 1962.
The company bought back 3.9 million shares in the reported quarter, taking the fiscal-year tally to 56.4 million shares repurchased.
Revenue [Note: Only highlighted material has been changed.]
H&R Block’s revenues for 4Q16 came at $2.3 billion after a decline of 0.4% y-o-y. The same for fiscal 2016 is reported as $3 million reflecting a drop of 1.3% from fiscal 2015 due to lower client volumes, the adverse impact of the divestiture of H&R Block Bank and unfavorable foreign currency translation.
However, increased pricing and an improved business mix limited the downside. Tax preparation fees remained almost flat y-o-y.
Service revenues for the reported quarter was $2.29 billion after 1% increase from the year-ago quarter but for the fiscal, it declined 1.2% y-o-y to $3.03 billion. In 4Q16, the Royalty, product and otherrevenues declined 8% to $264 million over the year-ago quarter and for the year ended on Apr 30, the same showed a fall of 10% to $384 million over the last fiscal.
Outlook
Management assures that in fiscal 2017, HRB will be growing its business to more than 350 locations. The firm is planning their fiscal 2017 strategy, mainly focusing on increasing their client base for which they have decided to implement various client-engagement programs.
Margins [Note: Only highlighted material has been changed.]
Cost of revenues in the quarter were $853 million, up 4.5% y-o-y, while for fiscal 2016, it was 1.7 million, up 6.2%.
Selling, general and administrative expenses increased 5.2% y-o-y to $283 million while for fiscal 2016, it has increased by 10% to $719 million.
Total operating expenses improved 4.6% to $1.3 billion y-o-y while for fiscal 2016, the same has increased to $2.4 billion by 5.2%.
Earnings before interest, tax, depreciation and amortization (EBITDA) were $839 million, which compares unfavorably with $951 million reported in the year-ago period
Outlook
Management of HRB is planning to review their cost structure for fiscal 2017. For this, they want to realign their field management. They also feel the need of identifying efficiency drivers at their corporate headquarters with a motto of reducing unproductive headcount in order to deliver client delight. Concurrently, they will be spending less on marketing and control IT infrastructure and support costs.
Earnings per Share [Note: Only highlighted material has been changed.]
H&R Block. reported adjusted earning per share continuing operations of $3.16 for fiscal 4Q16 ending on Apr 30, 2016.The adjusted EPS had beaten than the Zacks Consensus Estimate of $3.09. Earnings however decreased 18% due to lower revenues and higher expenses.
Adjusted EPS for the year ended at Apr 30, 2016 was $1.59 against $ 1.75 for the last year indicating a fall of 9%. Earnings for fiscal 2016 missed the Zacks Consensus Estimate of $1.65.
A firm with neutral outlook lowered the EPS estimates for fiscal 2017–2018. The firm believes the company will deliver better margins with heightened focus on expense control.
Research Analyst / Tanuka DeCopy Editor
Content Ed. / Tanuka De
Lead Analyst / Tanuka De
QCA / Tanuka De
No. of brokers reported/Total brokers
Reason for Update / Flash
Zacks Investment ResearchPage 1