How H&R Block’s Cost Reduction Plan Backfired

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H&R Block Inc. (NYSE: HRB) reported its fiscal first-quarter financial results after the markets closed on Tuesday. The first quarter is generally one of the slower quarters for H&R Block as the tax season has just passed. Over the course of this quarter, the company was looking to reduce costs across the board with changes in its capital structure, but seemingly this backfired.

The company posted a net loss per share of $0.55 on revenues of $125.2 million, which measures up to the consensus estimates from Thomson Reuters of a net loss of $0.53 per share and $132.62 million in revenue. The same period from last year reportedly had a net loss of $0.35 per share and revenue of $138 million.

The divestiture of the H&R Block Bank had the largest impact on overall revenues, which decreased $12.5 million year over year. The bank impact included payments to the company’s third-party bank partner, the reclassification of certain revenue as other income, and lower investment income due to the sale of securities previously held by the bank. At the same time, lower client volumes in the United States and foreign currency exchange rates contributed to the decline.

Savings resulting from these cost reduction efforts were offset by the impact of acquisitions of franchises in the prior year. Also interest expense increased by $12.9 million, which was tied to the issuance of $1 billion of long-term debt back in September 2015.

Bill Cobb, president and CEO of H&R Block, commented on earnings:

Because of the highly seasonal nature of our business, the fiscal first quarter is not indicative of our full year results. That said, all of the company’s efforts remain laser-focused on executing a successful tax season. We will have compelling client offers and improvements to the client experience. I’m truly looking forward to the next tax season and demonstrating our ability to deliver strong results for the fiscal year.

On the books, the company’s cash and cash equivalents totaled $428.9 million at the end of the quarter, versus $1.36 billion in the same period from last year.

Shares of H&R Block were trading down over 13% at $20.92 on Wednesday, with a consensus analyst price target of $28.33 and a 52-week trading range of $19.18 to $37.53.