H&R Block Swings to Profit on Higher Fees

H&R Block posted a higher-than-expected quarterly profit Friday as it charged more to prepare tax returns heading into the critical U.S. tax filing season, and shares rose 8 percent.

The largest U.S. tax preparer said net income totaled $47.4 million, or 14 cents per share, for the fiscal third quarter ended Jan. 31, compared with a year-earlier loss of $47.4 million, or 15 cents per share.

Profit from continuing operations rose to $66.8 million, or 20 cents per share, from $7.1 million, or 2 cents. Analysts expected 9 cents per share, according to Reuters Estimates.

Revenue climbed 11 percent to $993.4 million, topping the average analyst target of $963.5 million.

On a conference call, Chairman Richard Breeden said full-year results are "generally on track to our performance expectations." The Kansas City, Missouri-based company projected full-year operating profit of $1.60 to $1.70 per share in December. Analysts, on average, expect $1.61.

H&R Block's fiscal fourth quarter, which runs from February to April, encompasses the main U.S. tax filing season, and generates much of the company's annual profit and revenue.

"The strong third-quarter result bodes well," Oppenheimer & Co analyst Scott Schneeberger wrote. He said rising profit, revenue, margin and cash generation "are attractive attributes in the current environment, particularly in a stock currently trading at a discount to the market multiple."

In morning trading, H&R Block shares rose around $18 on the New York Stock Exchange. They began the year at $22.72.

Smaller Customers Cut Back

Since becoming chairman in 2007, Breeden has refocused H&R Block on tax preparation, and shed a money-losing subprime mortgage unit and a securities brokerage. H&R Block said it reduced debt by $2.5 billion in the last year.

Breeden is a private investor who once chaired the U.S. Securities and Exchange Commission. His firm Breeden Capital Management owns about 4 percent of H&R Block's shares, an SEC filing showed.

Quarterly tax services revenue increased 15.1 percent, as the number of clients increased 3 percent and the average retail fee per return increased 11.1 percent to $191.68.

Tax preparation revenue in February was up 6.5 percent, despite a 1.8 percent drop in total returns prepared.

Chief Executive Russ Smyth said an increase in business from higher-income customers who generate "materially higher" fees offset a decline among lower-income customers.

In other businesses, pretax profit rose 62 percent at the RSM McGladrey consulting unit, while H&R Block Bank had a $3.3 million pretax loss because it added reserves for potential mortgage losses.

Smaller rival Jackson Hewitt Tax Service said late Wednesday that quarterly profit rose 15 percent, but it expects tax season business to decline and was in talks to revise a lending agreement. Its stock fell 44.7 percent on Thursday.

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