H&R Block (HRB) Q2 Loss Widens Y/Y, Revenues Beat Estimates

H&R Block, Inc.’s (NYSE:HRB) incurred second-quarter fiscal 2019 loss per share from continuing operations of 83 cents, narrower than the Zacks Consensus Estimate of loss of 92 cents.

Loss increased year over year by 12 cents mainly due to lower effective tax rate, which negatively impacts quarters with a seasonal net loss. The company usually incurs loss in the first three quarters of fiscal year due to seasonality of its business.

Shares of H&R Block have gained 4.9% year to date, outperforming the 0.9% increase of the Zacks S&P 500 composite.

Revenues

Revenues came in at $149 million compared with $141 million in the prior-year quarter. The year-over-year increase can be attributed to the increased Assisted tax preparation revenues and the timing of revenues from Tax Identity Shield, partially offset by lower international revenues associated with fluctuations in exchange rates. The top-line figure outpaced the Zacks Consensus Estimate of $138 million.

H&R Block, Inc. Price, Consensus and EPS Surprise

Expenses

Total operating expenses were up by $7.3 million year over year to $364 million owing to higher occupancy and compensation expenses, partially offset by lower depreciation and amortization and the timing of marketing expense.

Financial Position

H&R Block exited the quarter with cash and cash equivalents of $600.8 million compared with $979.1 million at the end of the prior quarter. Long-term debt was approximately $1.5 billion, relatively flat with the previous quarter. The company used $252.1 million of cash in operating activities and spend $54.4 million on capex.

The company paid dividends of $51.4 million in the quarter. A cash dividend of 25 cents per share is payable Jan 2, 2019 to shareholders of record on Dec 3, 2018.

Fiscal 2019 Outlook

The company reaffirmed its fiscal 2019 outlook. H&R Block expects total revenues to be in the range of $3.05-$3.1 billion, the mid-point of which is lower than the Zacks Consensus Estimate of $3.09 billion. EBITDA margin is expected to be between 24% and 26%.

Our Take

H&R Block appears well poised to gain fromopportunities offered by growing tax industry in both assisted and DIY channels. In its assisted business, the company is focused on investment in price, developing and delivering on a clear brand promise, enhancing the quality service delivery. In the DIY business, H&R Block continues focusing on competitive pricing and investment in product innovation and user experience improvement.

Notably, the company is investing in three broad areas in 2019 — price, technology, and operational excellence. On the price front, it is focusing on price reduction to attain competitive pricing.

With technology, H&R Blockis building a new tax engine to consolidate multiple systems, invest in cross-channel capabilities to streamline client experience across platforms, move its physical data centers to the cloud, and optimize data architecture and analytics platform.

With regard to operational excellence, the company is trying to improve execution of standard operating procedures for better quality and consistency of service delivery.

A strong cash position allows H&R Block to pursue opportunities that exhibit true potential.

Zacks Rank & Key Picks

Currently, H&R Block is a Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some top-ranked stocks in the Zacks Business Services sector are WEX Inc (NYSE:WEX) , Total System Services, Inc (NYSE:TSS) and Automatic Data Processing, Inc (NASDAQ:ADP) , each carrying a Zacks Rank #2.

The long-term expected EPS (three to five years) growth rate for WEX, Total System Services and Automatic Data Processing is 15%, 14.2%, and 12.5%, respectively.

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