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H&R Block (NYSE:HRB) announced today that its tax preparation business is hemorrhaging clients as do-it-yourself products grab an ever larger slice of the market. Last week, we wrote a blog about the recent success of Intuit (NASDAQ:INTU) after it reported a better than expected start to the tax filing season (Tax Time is Intuit’s Favorite Time). Its do-it-yourself franchise of TurboTax experienced 11% growth from a year ago, and the web version of the program grew impressively by 23%. Following the strong performance of TurboTax, an analyst at Oppenheimer downgraded HRB because of concerns for the current tax season. At this point, his concerns are justified as H&R Block is enduring some attrition as filing revenues are down 6.3% from a year ago through February 15th. Total tax returns filed year to date have fallen 8.2% although fees paid per filing rose 1.9%.HRB

The early season weakness has caused management at HRB to believe their original guidance of $1.60 to $1.80 will turn out to be too aggressive. Analysts were expecting full year earnings (ending in April) to be about $1.61 per share, but those estimates will soon fall in order to more closely match the slipping guidance. Of course, this quarter is far and away the most important in H&R Block’s fiscal calendar as it accounts for the overwhelming majority of profits. For example, the latest estimates called for EPS of $2.24 in this quarter, so the slow start has investors very nervous. The stock is trading down more than 16% in Wednesday morning trading.

At Ockham, we have a current rating of Fairly Valued on the stock because it is clearly not expensive, but the business seems to be in decline. Consumers are searching for ways to save and having a professional do your taxes is not a necessity as good alternatives do exist. The weak economy in addition to the rise of do-it-yourself alternatives has left H&R Block with declining sales, and they are aggressively marketing to help boost the balance of the tax season. HRB does have their own version of do-it-yourself products but it is still lagging behind the industry leader from Intuit. We are unlikely to upgrade H&R Block even with the stock selling at a more attractive nominal price because the threats to their market share are very concerning for future profitability. Once someone has done their taxes on their own, it will take a greater amount of effort for them to go back to having someone else do it for more money.

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Source: H&R Block Giving Way to Intuit