Interesting Reports from H&R Block

H&R Block’s Q4 Earnings Call is interesting, not just to someone who follows tax preparation, but what the changes at this company tell us about the nature of our larger economy.

Although many would agree with Woodrow Wilson that ‘what’s good for GM is good for the country, and vice versa,” it could also be said that whatever ills plague working people are sure to have an impact on H&R Block. Block is the nation’s largest tax preparer. They file one in every seven returns in the United States.

While they do have a broader range of services than some of the other chains, they still depend upon basic 1040A and 1040Ez returns for a lot of their revenue.  Block’s Russ Smyth pointed to findings from a study, released by economists at Northeastern University in February, that shows that people whose incomes are generally below $30,000 are facing tough times. Though the unemployment rate is about 10 percent, it is 19.1 percent for people making between $12,160 and $20,725. Or at least, about one in five people that made those figures in years past are now out of work. For those with incomes below $12,160, things are even worse: unemployment is above 30 percent.

All of this points to a recession that is punishing people with fewer skills. For those who are well off, unemployment is much less of a concern. There are many stories out about hard times for associates at law firms and Wall Street financiers. Those stories don’t ring true under the scrutiny of raw numbers. Individuals making more than $130,000 are unemployed only in the rarest instances, and while it is true that unemployment among the wealthiest is twice what is was in 2007, it is still only 3.2 percent. The former textile worker that now greets at Wal-Mart is struggling to maintain even that spartan lifestyle.

People appear to be turning away from paying taxes, too. Block notes that the IRS witnessed a drop in the number of people who filed. Even though our population passed 300 million last summer, the number of returns dropped by 1.3 percent. It isn’t just that fewer people are going to a tax prep shop, although they were down 4.3 percent at Block. No, the larger story is that more people are dropping out of even filing taxes in the first place.

For many investors, the disruption in the supply of capital for refund anticipation loans created an opportunity for Block.  It is funny to say that I put words in his mouth, but I can’t help but notice when Smyth says “Chase has exited the RAL business.” Block has a stable contract with HSBC to provide RALs for several more years. By contrast, Jackson Hewitt lost its partnership with Pacific Capital. JTX was able to replace some of those dollars with contracts through Republic Bank of Kentucky, but even so, Block had an advantage. According to Block’s Russ Smyth, Block didn’t take advantage of that chance.

Another key opportunity in retail is settlement product marketing. This was a big miss for us this last year, but it promises to be an even bigger opportunity for the upcoming season. With the benefit of 20/20 hindsight, we were too late to get our message out last year. Our message wasn’t clear enough to cut through the confusion in the marketplace. And we didn’t direct enough of our marketing resources to take advantage of this particular opportunity.

This is surprising, because Block is way out in front of their competitors on social media. Block has an active Twitter voice. This kind of last-minute news should have fallen to that capacity, rather than to advertising in newspapers. Block has lots of bus advertising, too. Why it didn’t work is perplexing.

Looking to next year, people at Block are optimistic. They believe that it will be 2011 when the RAL turmoil finally drives clients to their shops. The logic is that the typical JTX RAL client that went to the JTX shop this year, only to learn that there was no RAL, might have finished their return. Next year, though, with that experience ground into their memory, many are likely to migrate across the strip mall to the Block store. Block seems to be willing to go back to its old formula of retaining customers by offering value. They’re whittling down their portfolio of subprime mortgage loans, too.

This is one more place in the realm of alternative financial services where Wal-Mart is a factor. Block has is out of the Wal-Marts. Of course, Jackson Hewitt is doing the opposite. They are moving into those stores.