Will new business model help H&R Block (HRB) deal with the taxing times?

By now, it is almost certain that the coronavirus-induced slowdown is going to stay here for some time and the business world is busy adopting remedial measures to navigate the crisis. Tax service provider H&R Block (NYSE: HRB) is making major changes to its operating model, with a focus on innovation, to beat the slump.

The virus attack and the recent extension of the federal tax filing deadline to mid-July came as a double whammy to the company, weighing on profit and revenues in the final months of fiscal 2020. The crisis could not have come at a worse time, as it aligned with the busiest period of the year. That prompted the management to defer its full-year guidance. One of the concerns is the potential impact on the goodwill of Wave Financial, which joined the H&R Block fold last year.

New Model

A key change being brought about by the management this season is the discontinuation of partnerships with third parties, under which the company used to offer free tax filing facility to select customers for several years.

“I had a conversation with the Commissioner of the IRS to let them know that at the end of this tax season in October, we would be stepping out of the partnership with Free File Alliance. …we believe it’s in the best interest of the company to move forward in a different direction and the fact is, and I shared with the commissioner, it’s a positive program and we’ve been happy to participate in it for 20 years,” said CEO Jeffrey Jones while interacting with analysts at the fourth-quarter earnings call.

Liquidity

The next tax season will be a busy period for H&R Block, and it is important to preserve liquidity to effectively monetize that opportunity. A large number of small businesses that constitute a major share of H&R Block’s clientele have been affected by the crisis. The company, which ended the last fiscal year with a cash balance of $2.7 billion, has fully drawn its line of credit. Also, the ongoing cost-cutting efforts might not be sufficient to offset the estimated rise in expenses in the current quarter, due to the extension of the tax season.

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It is unlikely that the business that was lost in the previous quarter would return in the current quarter because the process demands direct interaction with clients at various levels. Initial estimates show that operations would return to normal only towards the end of the calendar year when markets are expected to recover reasonably.

Balance Sheet

It would be a challenging task for the executives to strengthen the balance sheet when debt stays high. But the new environment demands strategic investments in technology and digital capabilities to match the steady growth in online traffic. Past efforts to provide filing services online, incorporating features like Tax Pro and Approve Online, had resulted in a marked increase in returns last year.

Currently trading in the bearish territory, the company’s stock opened the last session sharply lower, reflecting the underlying weakness, even as experts remain cautious in their recommendations. It might not be a good time to either buy or sell the stock, rather it is advisable to wait and watch. The consensus target price signals a decent recovery in the long term.

Revenues Suffer

A report published by the company last week showed that revenues dropped 22% annually to $1.81 billion in the fourth quarter, which resulted in a one-third annual fall in earnings to $3.01 per share. Bringing relief to the stakeholders, the results came in above the consensus forecast.

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H&R Block’s stock traded at an eight-year low this week, reflecting the dismal market sentiment over the company’s financial performance that added to the downtrend that followed the recent selloff. It has been more than a year since the shares entered a downward spiral, losing about 52% since then.