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HR Block Gets Back to Basics: Better Plan that Getting More RALs

Adam Rust's picture

Posted August 24, 2011

The details can be extracted from the firm's two most recent annual reports.

There was a significant change to how Block ran its tax business in 2011. During the most recent tax season, Block did not offer any refund anticipation loans. Block, through a partnership with Household Finance, was the first tax company to offer the tax refund loan. Last year, HSBC pulled out of the market. Block reported $146 million in fee

revenue from its share of the profits from RALs in 2010 and $139.7 million in 2009. Although Block had no new loans in 2011, they did report approximately $17 million in deferred revenue from loans made in prior years.

Did Block's core business model suffer because they could not offer these products to their consumers? It would seem that at least some parts of management felt that they were an essential complement to their tax prep services. Otherwise, why would Block suffer through risk to its public reputation? Why would Block ignore the peril of lawsuits?

I think management was split on the issue. Although he never offered a clear reason (other than a wish to step back for personal reasons), Tom Bloch's departure from the Board at the point in time when Block decided to push back against HSBC for its decision to drop RALs seems like more than a coincidence. Senior management (Alan Bennett and Richard Breeden) might have felt like the revenue was too valuable, or that customers would walk away from their tax prep services if they could not get a refund.

Those assumptions have been proven wrong.

The lost RAL fees have been made up by much higher refund anticipation check fees. In 2011, Block recorded $181.6 million in RAC fees - a jump of 107 percent from the year prior.

Customers did not walk away from the stores. Retail stores actually saw more traffic. The retail stores prepared 14.8 million returns. That represented a gain of more than 3.5 percent over 2010.

These numbers, combined with news this week, drive home the truth: Block should have stuck with preparing taxes and never moved into all its exotic side businesses. Sand Canyon Capital, the shell that is obligated to buy back failed mortgages made by Block's old Option One mortgage loan division, has drained more than one hundred million dollars from the company. Block agreed to sell its RSM McGladrey Business Services subsidiary for $610 million. They will record a loss of $53 million.

Block still has not managed to get permission to complete its purchase of TaxAct, also known as 2SS Holdings. Block announced an agreement to buy the company for $287.5 million in October 2010. Last May, the Department of Justice filed a civil antitrust lawsuit that seeks to block the sale.