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Jackson Hewitt Tax Service Inc. (JTX)

F4Q08 Earnings Call

June 5, 2008 8:30 am ET

Executives

David Weselcouch – Vice President Treasury, Investor Relations

Mike Yerington – President, Chief Executive Officer

Dan O’Brien – Executive Vice President, Chief Financial Officer

Analysts

John Healy - FTN Midwest Securities

Scott Schneeberger – Oppenheimer

Analyst for Edward Yruma – J.P. Morgan

[Vance Edelsten] – Morgan Stanley

Michael Millman – Soleil Securities

Operator

Good day ladies and gentlemen and welcome to the fourth quarter 2008 Jackson Hewitt Tax Service earnings conference call. (Operator instructions) I would now like to turn the call over to your host for today’s call, Mr. David Weselcouch. Please proceed.

David Weselcouch

Good morning everyone, I’m David Weselcouch, Vice President Treasury and Investor Relations for Jackson Hewitt and I’d like to welcome you to our 2008 fiscal year results conference call. Joining me this morning are Mike Yerington, our President and Chief Executive Officer, and Dan O’Brien, our Executive Vice President and Chief Financial Officer.

Our earnings release went out on a national wire earlier this morning and hopefully you’ve had an opportunity to review it. The earnings release can be accessed at the investor relations section of our website located at www.jacksonhewitt.com.

The format for today’s call will be as follows. First, Mike Yerington will comment on our full year results and discuss plans and initiatives already underway for next tax season. Following Mike, Dan O’Brien will review our financial results and capital structure. And finally, we’ll open the call up to your questions. This morning’s call is schedule to conclude at 9:30.

Before I turn the call over to Mike, let me briefly state our Safe Harbor disclaimer. Please note that this conference call contains statements that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied.

In addition, this conference call contains time sensitive information that reflects management’s analysis, expectations and assumptions as of the date of this live call. For further information concerning issues and risk factors that could materially affect the company’s business and financial performance, please refer to the press release we issued earlier this morning, our annual report on form 10-K for the fiscal year ended April 30, 2007 and our other SEC filings.

Jackson Hewitt does not assume or undertake any obligation to update or alter any forward-looking statements made or information presented during this call. This call is open to the public and is being webcast simultaneously on our website at www.jacksonhewitt.com. Additionally, the webcast will be available for replay on our website.

At this time, I’d like to turn the call over to Jackson Hewitt’s President and CEO, Mike Yerington.

Mike Yerington

Thank you David and good morning everyone. I want to acknowledge right up front that Jackson Hewitt’s 2008 fiscal year results were disappointing, particularly disappointing to me in my first tax season as CEO of the company. We told you in March that we had experienced a slow start to our tax season and expressed an expectation of somewhat improved performance during the second half of the season.

Although our second half was indeed stronger than the same period in 2007, we did not fully realize the level of tax return activity we anticipated. In our May 21 preliminary results press release, you saw that our key driver, tax returns prepared, had decreased by 7.1% year over year when excluding the economic stimulus rebate tax returns.

The decline in tax returns worked its way through all of our financial metrics, resulting in a sizable decline in revenues, margins, net income and earnings per share versus the prior year which Dan O’Brien will discuss shortly in his financial results update.

Please note we have no intention of making excuses. The fact is we had a difficult and disappointing tax season. We do know, however, that several factors were important contributors to our tough year. I’ll briefly outline these factors and then turn the discussion to the future and how we are planning to address the 2009 tax season.

We looked at our research, feedback, gathered from our franchisees and our company owned stores and here’s what we know. First, as you know, we did not have an early season product to help attract customers into our stores in the January and early February timeframe.

We not only lacked such a product but we also underestimated the retention impact this would have on our early season results. We were down approximately 300,000 tax returns versus the prior year, just in January alone. And while we did have growth in the second half of the season versus the prior year, we did not overcome our slow start.

Our disappointing year can in fact be largely attributed to the first several weeks of the season. When we did not have differentiated early season products to help level the playing field, the existence of illegal pay stub tax returns in the marketplace flourished and attracted tax filers during the period to other paid preparers.

Second, we experienced weakness in our brand, more so than our research predicted. In certain markets that were impacted by last year’s DOJ issue with a former franchisee and I’ll take this a step further and tell you that overall, our marketing messages and programs did not succeed in creating customer demand throughout the season.

Third, the higher level of compliance undertaken last year was critically important to regain the trust of our regulators and insure, and secure a quality foundation for future success. However, these steps likely had some negative impact on the return levels in 2008.

Fourth, the overall market trend we have witnessed over the past several years whereby the timing of tax return filings throughout the industry has gradually shifted from the early season to the late season continued again in 2008. Our distribution footprint has historically favored the early season and this fact contributed to the challenge we faced in making up ground in the last two months of the tax season.

And last, as you know, we made significant senior management changes that were put in place just in advance or during the tax season, without the luxury of time to affect the types of changes we know are necessary to enhance our market position. In fact, since I became CEO in October, we have new leaders in the COO role, the CFO role, Marketing, Product Development, Technology and Distribution, as well as several key positions at the next level down.

The timing of all these key management changes relative to the all important tax season was certainly not ideal, but I can assure you that this group is firmly in place and urgently focused on positioning our company for a strong and successful 2009 tax season.

The bottom line is that the results for the year were not acceptable and as a company that historically has achieved solid top line performance and has been keenly focused on cash flow generation and shareholder value enhancement, we know we have to get ourselves back on track and we know this needs to start now.

Given the operating leverage of our business and the unusually large negative impact that lower tax return value had on our results, if we get 2009 right, we can experience an equally substantial favorable impact on our results. If there is one positive to be gleaned from this past year, it is that we largely know where things went wrong and we are already hard at work addressing the key issues.

In order to create value for our shareholders, we are focusing intently on two things. First, taking the necessary steps to realize a strong 2009 tax season which is first and foremost. Our success in 2009 will be critically, not only in proving out our business plan and putting us on the right path to growth, but also to build investor confidence that we have the right team, the right plans and the ability to execute in the field.

And second, although success in 2009 is paramount and we will not compromise our focus on it, we are also addressing changes that will improve our market position and ability to succeed over the long term. To that end, let’s talk about what we’re doing to firmly place the company back on track for the next season.

In the area of product development, from 2005 to 2007, our holiday express loan and pre-file loan products were great retention tools. These products brought people into our stores early, provided with the means to receive some cash and by and large they came back to file their tax return.

This was a Jackson Hewitt competitive advantage in this period. Our experience this past season reaffirms that Jackson Hewitt needs products and services that distinguish us in the market each season, early in the season. We know that our early season customers are high retention customers and these early season customers appreciate the opportunity to have access to cash.

To address this need, we have taken steps to significantly enhance the experience and skill set of our new product development team, whose specific objective is to deliver a competitive product in advance of next tax season. And in general, are focused on developing products that broaden our share of wallet with our customers.

Undoubtedly you would like to hear more specifics about our product plans, however, I am also sure that you appreciate the fact that I cannot get into detail on our plans for an early season product for competitive reasons. But I will tell you this, we are looking to differentiate Jackson Hewitt in the marketplace with a compelling product for our core customer base, a product that will draw customers into our stores early in the season and retain these customers for the tax filing business.

We also recognize that it is critical that we continue to enhance our product capabilities to offer unique features on an annual basis. The first thing I will tell you is that overall this is an area where we believe meaningful progress can and needs to be realized. This is the marketing branding area.

Further, as I touched on earlier, our brand was hurt more in the markets we acquired last year in connection with the DOJ issue than our research predicted. Volumes in the locations we bought were down at a rate more than three times the rate experienced elsewhere, as were the volumes of other Jackson Hewitt franchisees in the affected markets.

So we have to work to get those markets back on track. However, our need to redefine our marketing messages and strengthen our brand goes well beyond just those markets. Overall, our marketing messages have not been as effective as they need to be, particularly in support to drive a successful 2009 tax season.

Accordingly we have undertaken an extensive review of our overall marketing and branding strategy, an effort being led by an experienced marketing executive who joined us late last year. On the marketing and branding front, we are already aggressively moving forward with meaningful changes.

We have redefined the marketing organization and the role of marketing to be more than advertising, fully addressing the four P’s of marketing and with responsibility for all activities that drive customers into our stores at a local, regional and national level.

We are undertaking a more effective and robust marketing research to fully understand our customers, the market segments in which we compete and the reasons why customers will choose other providers, including the price environment and ways in which to improve the customer experience in our stores. We are looking to ensure that our messaging to customers is consistent and continually reinforcing and the products that we offer are meeting clear needs of those customers.

We aim to greatly improve marketing at the local store level, with tighter coordination and communication with our franchise community and with promotional and other offers that will be more effective in building traffic and we are completely changing our advertising and public relation agency relationships to ensure that we have the best support in these activities.

All of these efforts are being undertaken to achieve three key objectives in our 2009 fiscal year: first, to bring new customers into our stores; second, to improve same store sales performance and improve the profitability of our franchisees; and third, to increase our customer retention.

We are developing new marketing messages and programs and underlying these messages will be the theme of speed and cash in the early season and quality all year round. Quality is and will remain an important aspect of the Jackson Hewitt story. A continued focus on quality in terms of training and compliance will be a table stake requirement in the future for our business and will positively reinforce our relationship with the IRS.

We recognize that one size does not fit all and are tailoring our marketing approach, our spending, tactics and product mix to address the needs of individual markets. We are actively studying the reasons customers left and developing strategies to win them back.

The bottom line is that we will have a greatly enhanced marketing effort in place for the 2009 tax season with the overriding goal of bringing more new customers into our stores and improving our same store sales performance, profitability and customer retention.

Let me now turn to distribution. First let me say that we need to build a stronger distribution system to drive growth in the business for many years to come. We’ve already strengthened our senior management in this area as we recently added a seasoned executive, skilled in managing distribution networks similar to Jackson Hewitt’s.

When I think about improving our distribution system I boil it down to these two factors. First, we need to maximize the performance of the market footprint we already have, better individual store performance and profitability, better storefront placement within our existing territories and better oversight and communication with our franchisees with improved and better aligned marketing messages to grow and retain our customer base.

And second, we need to selectively enhance our footprint, no add stores for the sake of adding stores, but to enhance our footprint in the most efficient and cost effective ways in terms of return on invested capital and in a manner that places us in more attractive growth locations. As we carefully and systematically extend beyond our current footprint, we will prioritize expansion opportunities and scarce capital among the best opportunities.

Again, we are not looking to open new offices everywhere. As you know, we’ve always focused on selling new territories. In most cases, territories were sold to existing franchisees. However, we are continuing to evolve our strategy and tactics going forward. The first of these approaches involves selling multi-territory packages to new entrepreneurs.

These territories are located in geographies where our research shows that Jackson Hewitt has the most opportunity but is not currently present. This effort will be supported by economic incentives tied to firm store build out and return thresholds that are in the process of being rolled out now.

Our second approach would be to better help our franchisees source acquisitions of existing small independent tax preparers, in addition to providing financing to help complete these transactions, we’ve already added resources to focus on this opportunity.

And our third approach would be to selectively expand our company owned operations in economically attractive, high growth markets adjacent to our current operations. We have restructured the management of our company owned stores and operations to give greater focus to these opportunities.

Another area we aim to greatly enhance our distribution capabilities is in the Hispanic market. While we currently have a meaningful share of this market in our footprint, the opportunity exists for this to be significantly enhanced and we are implementing programs to grow our share of this market, including providing new financing incentives to open locations in Hispanic communities and offering new training to franchisees and office managers to help us realize this opportunity.

Last, we have a continuing focus to enhance our alliance and partnership activities. This is an important part of our distribution strategy and an area where we have also added resources to take advantage of this opportunity. Particularly the areas of focus regarding our alliance and partnership activities include expanding our retail partnership beyond the current successful Wal-Mart relationship and working with firms to gain access not only to their employees but also to their clients.

So as you can see, we’re working hard to improve our overall distribution capabilities: changing our strategy for selling new territories, strengthening our presence in the Hispanic market and expanding our alliance and partnership activities.

Let me turn now to cost structure. The need to reassess our cost structure was apparent when our top line declined in this just concluded tax season. Entering this season with a relatively fixed cost structure that anticipated a certain level of returns put us in a difficult position when we found ourselves down approximately 300,000 tax returns in January.

Our margins and profitability were strained when the revenues didn’t materialize as planned, both in the early season and in the late season. To give us more flexibility and to improve on our overall financial performance, we need to take a hard look at our spending levels so that our costs better track our revenues and I’ve asked Dan to lead this effort.

Our goal here is first, to reduce the cost structure of our company owned stores where our margins were particularly hit hard with the decline in tax preparation activities this past year, including potentially closing certain poor performing offices and streamlining the management oversight structure.

Second, to continue to increase cost efficiency and quality of our third-party relationships in delivering technology solutions, including our external data center, customer support and telecom expenses. And third, to work to improve overall organizational efficiency with intense focus on raising the quality, training and effectiveness of our operating and corporate teams.

Better overall management of our cost will be an important contributor to our plans for success in the 2009 tax season and there will be more to come on these efforts as we progress through the year.

At this time I’ll turn the call over to Dan for comments on our 2008 fiscal year financial results and our capitalization.

Dan O’Brien

Thank you Mike. I’d like to take just a few minutes to review some of our key line item results and metrics and then I’ll move on to discuss our debt level and capitalization, dividend and share repurchase program.

Our total revenues for the 2008 fiscal year were $279.7 million, slightly below the guidance range provided to you back in March and reflecting a decline of 4.6% versus the prior year.

The revenue reduction was attributable to a 7.1% year over year decline in tax returns prepared, when excluding the economic stimulus rebate tax returns, and the lower tax returns contributed to a 9.9% reduction in financial product fees.

The number of financial products facilitated declined by 8.1% versus the 2007 tax season to 3.1 million products. This decrease primarily resulted from the lower tax return activity as our attachment rate of loan and non-loan refund based products declined slightly to 77.5% versus 78.3% in the prior year.

We are in primarily a fixed fee under our financial product program with our bank providers. However, we were negatively impacted by the reduction in return levels. This resulted in a lower variable fee given that such fees are tied to growth in the overall program.

As a result, the average fee per financial product for those building financial models was $23.00 or 1.9% below last year’s average. In terms of pricing, our year over year average revenue per tax return was essentially flat. Again, when excluding the economic stimulus returns.

You may recall that we experienced 5-6% of non-recurring pricing opportunities in the 2007 tax year due largely to the yearend tax planning product that was not offered this year as well as the telephone excise tax and certain other charges. The absence of these revenue opportunities in 2008 contributed to this year’s overall flat average revenue per return as compared to last year.

In aggregate, expense levels came in approximately as expected. Net income as adjusted decreased to $40.8 million versus $66.8 million in 2007 and the resulting 2008 fiscal year adjusted diluted earnings per share was $1.37 versus a comparable earnings per share of $1.98 a year ago.

The significant reduction to adjusted EPS in 2008 versus 2007 was largely the result of the 7.1% decline in tax returns prepared coupled with the fact that we entered the tax season with a generally fixed level of marketing and other costs. Our results clearly show as Mike had said the substantial operating leverage of our business, which can work for or in this case work against us in the sense that the returns we did not get this year represented high margin cash flow that would have fallen right to the bottom line.

Again as Mike had mentioned earlier, one of my focal points as we [inaudible] for next year is to look closely at our cost structure to ensure that it tracks our revenue performance more closely.

Before I move on to my comments, I should mention that as you think about quarterly modeling for 2009, please keep in mind that our expenses in the company owned business will increase as we carry costs for the full off season this year. This is due to the increase from just over 700 to 1,000 company owned stores that took place in the 2008 fiscal year.

I want to spend just a couple minutes now reviewing a few capitalization issues with you beginning with our year end debt position. We ended our 2008 fiscal year on April 30 with a debt balance of $231 million which was favorable to the guidance range we provided in March and left the unused portion of our $450 million credit facility at $219 million at fiscal year end.

As you know from our May 21 press release, we recently completed an amendment to our credit facility. The combination of a weaker than anticipated tax season with our aggressive share repurchase program over the past couple of years resulted in us needing to amend our credit facility to provide for additional flexibility in the off season in connection with the allowable leverage ratio under our covenants.

The maximum consolidated leverage ratio which had been 3 times has been amended to be 3.5 times for the fiscal quarters ended July 31, 2008 through January 31, 2009, 3.15 times for the fiscal quarters ending April 30, 2009 through October 31, 2009 and 3 times thereafter.

The amendment also contains certain limitations with respect to share repurchases and acquisitions. With regard to share repurchases, we are restricted from such repurchasing until we achieve two consecutive quarters of 2.5 times leverage or lower. And once share repurchases are reinitiated, the leverage covenant ration will revert to 3 times going forward.

We are not currently in the market today repurchasing our shares and because of the average debt calculation in the ratio, it is likely to be at least until the end of next tax season before we can begin repurchasing shares again.

In terms of acquisitions on the amended credit facility, we will have no restrictions when our leverage ratio is at 3 times or lower. This is unchanged from our prior agreement. But we will be limited to an annual amount of $15 million for acquisitions if our leverage ratio is greater than 3 times.

A current report on form 8-K was filed with the SEC on May 21 regarding this amendment and the detailed amendment will be filed in connection with our annual report on form 10-K later this month.

Turning now to our dividend. We’re pleased to report today that our Board of Directors declared a quarterly dividend of $0.18 per share which will be payable on July 15, 2008 to shareholders of record on June 30, 2008. This dividend marked the sixteenth consecutive quarterly dividend since our IPO back in mid-2004.

Maintenance of our current dividend is consistent with our overall approach to return cash to shareholders as an important ongoing component of total return to them on their investment in Jackson Hewitt.

Concurrent with this approach, we will continue to assess ways in which we can selectively invest to grow our business. However with a disciplined aim to make sure that these investment choices are made only when we can achieve returns at or above our cost of capital and only when these investments support our primary financial objective which is to maximize the long term total return of our shares.

For the 2008 fiscal year, we repurchased a total of 3.5 million shares for a total of $99 million. When coupled with the $21.3 million in common dividends we paid in the past year, we returned a total of $120.3 million to our shareholders in the 2008 fiscal year.

I’m often asked how external investors should think about the company’s targeted capital structure in guiding spending decisions and in the use of excess cash. In general, we plan to target and will seek to maintain a capital structure that is consistent with a low investment grade credit profile, broadly modeled in the triple-B area.

To be clear, we have no near term intention to seek a formal credit rating, but we use this profile for guidance. We believe that targeting this capital structure profile over the long term will result in an appropriate balance between the needs of equity and debt providers, between financial risk and financial flexibility for our company while providing a prudent use of leverage to minimize Jackson Hewitt’s weighted average cost of capital.

As we assess our future dividend and share repurchase strategies, we plan to do so within the context of maintaining this targeted capital structure. In closing, I should also reinforce the message regarding guidance that was outlined in our earnings release this morning.

At this time we are withdrawing all previously communicated guidance that Jackson Hewitt has provided, specifically the five year revenue and earnings targets. Clearly, while we continue to believe in the fundamental ability to grow this business and the new team is highly motivated to do just that, 2008 was not a year consistent with such previous guidance.

We are just now in the midst of finalizing our plans for and financial view of the 2009 tax season as we further develop these plans for 2009 and beyond, we will give consideration to providing select near term guidance if and when we feel it is helpful and appropriate to do so.

With that, let me turn the call back to Mike.

Mike Yerington

Thanks Dan. To summarize, we’re coming off a challenging 2008 tax season that produced disappointing results, a season that underscored the significance of achieving early season success. We have a good understanding of the causes of our weak season.

We are already hard at working putting the company back on a path to a successful 2009 tax season with a keen focus on new product development with emphasis on being in the market with a compelling early season product, significantly enhancing our marketing and branding programs, improving same store sales and profitability, selectively broadening our distribution and partnership arrangements and creating a more efficient and flexible cost structure through our organization.

I can assure you that we are approaching all of these activities with a renewed sense of purpose and urgency from the top down. I am confident we have the right plans in place for a successful 2009 season and that we will be prepared to execute those plans in advance of and throughout the next tax season.

I also want to reiterate some of Dan’s comments on our dividend and say that I am pleased that our Board declared an $0.18 per share dividend. This dividend represents a substantial payout greater than 50% of our 2008 fiscal year earnings as well as a solid yield of 5.1% based on yesterday’s closing price.

As you know, we raised our dividend 50% per year at both the outset of our 2007 and 2008 fiscal years. And I am pleased to be able to maintain this $0.18 per share quarterly dividend.

I also want to mention that over the coming quarters we will make every effort to provide you with as much information as we can. So that you’re able to gauge our progress as we prepare for the next tax season. Further, we are in the early stages of planning an analyst day to be held sometime in early December in advance of the tax season.

We’ll communicate that precise date, location and time of this event to you in the coming months. Lastly, before we move to Q&A, I want to publicly thank the Jackson Hewitt employees, our franchisees and our vendors for all their efforts over the last year. It’s been a challenging tax season but from this challenge we will emerge a stronger and better focused company, eager to effectively execute against our 2009 tax plan.

At this time, we’ll open up the call to your questions and I ask that you please provide your name and company affiliation at the outset of your question.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from John Healy – FTN Midwest Securities.

John Healy - FTN Midwest Securities

When you gave some of the reasons why the tax season was a little bit tougher than you thought, you mentioned regulators impacting some of the return levels. Could you provide some color regarding that? I was hoping you could explain that a little bit more.

Mike Yerington

One, I referred to a comment I made in the remarks about the fact that franchisees were getting a lot more training and compliance programs to work with and I think probably that had some bearing on the returns being down.

I think that that was probably critical that they were spending more time and maybe being even more focused on that area and probably some of the preparers were maybe focusing too much on it, I don’t know. But it seems to be that’s one of the issues.

John Healy - FTN Midwest Securities

When you look at the 2009 tax season, I know return count is probably a wild card but I was hoping we could talk a little bit about pricing.

I know in the past you and your competitors have been able to get mid to high single digit pricing, when you look at the company today and you look at the industry, do you think the pricing opportunity is still there and is kind of the mid to high single digit pricing, is that a strategy that you guys still think makes sense for the company as you pursue to try to get the price increases on an annual basis?

Mike Yerington

I think there’s two things there. To answer your question directly, I think that there probably is the opportunity for mid single digit price increases year over year, it seems to be that’s been pretty standard throughout the industry and I think we believe that we can attract that kind of price increase in our own franchise and company owned stores.

I think the other thing you need to look at though is that there may be opportunities to sell other products to our existing customers that may also improve the value of the, I referred to as share of wallet, that we get from our customers. We’re also looking at that as a strategy going forward.

I think that our customers like the Jackson Hewitt brand, we have a high retention rate. We think certainly we can charge a little bit more for our services each year but I think we can also sell other products and services to the same customer base.

John Healy - FTN Midwest Securities

Obviously the season wasn’t what you guys had wanted it to be, I was hoping you could comment a little bit on the communications you’ve had with your franchisees. Maybe give us an update on what their mood is and maybe their level of excitement going into 2009. If it’s going to be a difficult sell for them to get to open more offices and kind of describe what you’re hearing from your franchisees would be helpful.

Mike Yerington

Yes, I talk a lot to our franchise community. In fact, we’re getting ready to head out to our convention here in a couple days. We have ongoing dialogue with a variety of different high level as well as mid and small level franchisees. And the tone that we get is cautious optimism I guess is the right way to look at it.

They’re coming off a year where they didn’t have the kind of results that we wanted or they wanted. But I think that they’re optimistic about the plans that we’ve talked about. I think they’re optimistic about the team that we have in place and I think they’re optimistic about the fact that they can turn the situation around as am I.

Operator

Your next question comes from Scott Schneeberger – Oppenheimer.

Scott Schneeberger – Oppenheimer

On the franchisee area, Mike you addressed a lot of initiatives in that area. I guess I’d like to start off by asking, I think you did about 130 new territory openings this year as opposed to a run rate of 200 in the past and then the number of offices was down this year relative to the past. Could you give us an idea of ballpark what type goals you’re looking for? Are you looking to expand aggressively into 09 or kind of keep the status quo?

Mike Yerington

Just a clarification, territories were 130 this year compared to around 200 in prior years and then office locations were I think right around 275-300 in that area. Let me just talk a little bit strategically about that. I think that the fact that we need to sell new territories is still an important part of the mix going forward.

I think the willingness on the part of franchisees is probably going to be based on how strong we start and unfortunately with the start of the season, the need for offices is already passed. So I think they’re probably going to be a little bit cautious about looking at opening new stores.

We’re going to try to help them in some financing programs where we think that we need to have a store in a particular location. So we’ll be helping in that area. As far as new territories, we’re in the process of redefining our strategic direction in that area.

I mentioned selling multi territories, we have a concept we’re working on, the term pod doesn’t mean anything to you but it means a lot to people internally about taking a particular territory and looking at the potential of that territory and making sure that we have the territory owned by somebody who is willing to build it out.

And that they’re willing to sign up for building out the whole territory but committing to certain volume requirements in that territory. So it’s a long winded answer to your short question, but territories, I’m not sure I want to give you guidance on how many territories we’ll sell next year. I don’t think that’s as critical as our same store sales focus in the coming year.

And I think as far as offices per, new offices all in, you’re probably going to find it somewhere north of where we were this year. But as I mentioned also, we’re looking at some stores which probably need to close. So there’s going to be a mix of new as well as closing. And so probably somewhere around where we were this year, maybe a little bit north of that.

Scott Schneeberger – Oppenheimer

Going back to this multi territory strategy where I believe you said in your prepared remarks, you’re looking for new entrepreneurs, not existing franchisees to go in and make that kind of commitment to a new territory. Is that accurate?

Mike Yerington

Yes.

Scott Schneeberger – Oppenheimer

It’s early, the summertime is when the brunt of that activity occurs, just on the prior questions, you addressed the morale of the existing franchise base, how do you attend or expect to go out to new entrepreneurs, what types of strategies are you using and how many do you expect to collect there?

Historically you have the three quarters selling to existing franchisees, a quarter to new franchisees. What type of mix are you thinking there and how are you going to go after the new ones?

Mike Yerington

Let me make a slight course correction on, we would sell these new pods that I talked about or multi territories to existing franchisees and some have already indicated an interest in that. So it’s not like it’s starting from scratch. We do have existing franchisees who have territories that are adjacent to where we have a new pod arrangement and we’d be offering those to those franchisees as well.

Dan O’Brien

I might just add just a bit a word beyond that as well which is I think these are sales of more than one territory, so maybe three to five territories. And clearly, looking within our existing franchisee community, we’d be looking for our better capitalized franchisees who might be interested in that opportunity.

Because one of the unique features of this program is a very stringent commitment to store build out and return levels in that to achieve an economic package that would be attractive to that better capitalized investor, whether it’s internal or a new third-party or external investor.

Mike Yerington

On the way we’re looking at building out these sales, we just brought a new sales VP on board to help us formulate our strategy there.

And I don’t know all the particulars on that but the intent there is that if you’re selling 80% of your existing franchise locations to existing franchisees or territories to your existing franchisees, you probably have to come up with a different strategy and a different whole approach to going out after these new entrepreneurs or existing franchisees that want to buy five or more territories or three to five more territories. So we’re in the process of developing that.

Scott Schneeberger – Oppenheimer

Could you speak a little bit more to the financing that you’d offer new and or existing franchisees. Dan you just mentioned obviously the better capitalized ones certainly are attractive to you. But how willing are you to do some lending to fire up some new ones?

Dan O’Brien

I think with respect to the program we just described, we really don’t look at ourselves as doing any substantial lending to that group. Again we’re selling to, in that case, a better capitalized investor set. We will offer up as I said some unique features within an economic package that we think would be attractive long term for those parties.

We have, as you know, had a series of financing arrangements around store front financing, around financing of our territory purchases initially around conversions of independents. Those programs remain in place. They have been shifted a little bit in respect of features.

But by and large we have similar sorts of programs this year. The one area that we mentioned within our comments though was we have a particular focus in a couple of spaces and one I’ll probably just point to is on the Hispanic side where we are providing specific financing to try to attract openings in those areas where we believe we can be more effective in attracting those Hispanic customers.

So again, I think by and large the programs are similar. There are some different features and we are cutting it in a way to try to incent ourselves for openings and for expansions in areas where we think that growth could be helpful to us long term. The similar sort of targeted approach that you’ve heard historically, but then with specific focus on customer segments like Hispanics.

I would also just reinforce that when we talk about these programs, we’re talking about kind of similar sorts of amounts which we would commit, typically there in the area of $25,000, can be in certain very targeted areas as high as $50,000. But typically we’re in that $25,000 area on a store front financing.

Operator

Your next question comes from Edward Yruma – J.P. Morgan.

Analyst for Edward Yruma – J.P. Morgan

This is [Hayman] for Edward. There is no [different] improvement in the performance of the locations impacted by the DOJ investigation as the tax year progressed?

Mike Yerington

Did we see an improvement in the volume?

Analyst for Edward Yruma – J.P. Morgan

In the locations that were impacted by the DOJ investigation during the tax season?

Dan O’Brien

I think we did see improvement on a relative basis. I think when we had mentioned in our last quarter call in the early season, were down as much as 45% in those specific locations.

You know we ended up the year down some 25%, so on a relative basis better. But recognize that’s about as Mike had mentioned in his comments, a little more than 3 times where the level we were down overall you know in our business. So again performance improvement was relatively better. But still it’s an area that we need to continue to work at and try to recover from as we move forward in future seasons.

Operator

Your next question comes from [Vance Edelsten] – Morgan Stanley.

[Vance Edelsten] – Morgan Stanley

There are a lot of initiatives to be accomplished ahead of the 09 season. How long has it taken in the past to develop new products, how far down the road would you say the new team is in that regard and is there any reason to think that some of the goals, whether it’s the new products and services or the new branding and marketing will have more of an impact in 2010 than in 09? Thanks.

Mike Yerington

On the product development side, you know again different products take different amounts of time. I would tell you that the products that we’re looking at are not starting from scratch. I mean we had looked last year, providing some products, didn’t really get them to the market and didn’t feel based on some input from franchisees at that point that they were ready to open early season.

So we had some things that were on the burner if you will. So I think that we’ll be utilizing some of that research and development that we’ve already started. So it’s not like we’re starting from scratch. So I guess that’s a tidbit of when we think we can get these products out.

I mentioned it will be in the early season, I’m not going to tell you when but I will tell you that we clearly understand that early season is an important mix for us because our customers that buy those products in early season do come back and do tax returns in high percent. So it’s an important thing.

As far as the marketing message, we have just gone through an extensive agency review. I mentioned we have a new guy that’s running a marketing group this year. We’ll be spending a lot of time on understanding our customer, understanding what the messages are that attract our customer and I think you will see a very different look from Jackson Hewitt in a variety of media come next tax season.

I think you will also see more of a focus on not just the message in the media but also what are the things that it takes in the local market to be successful. One of the things that we know is important is that the local franchisees support the brand, the national brand advertising with local programs in their market.

So I think you’ll see a very specific and very calculated program at the local level to make sure that the franchisees are doing what they can to build their volume in the local market, coordinated well with the national program.

Operator

Your last question comes from Michael Millman – Soleil Securities.

Michael Millman – Soleil Securities

Regarding these early season products, without talking about details, have you tied them down? And you didn’t mention military RALs and 36% RALs, [inaudible] in your mix as well.

Mike Yerington

That was by design. You know part of what we are very cautious about, as you are aware, is we’re a very competitive market. And we’re trying to give as much information as we can to get our investors comfortable with the fact that we know what the issues are and what we need to do to correct the issues and that in our case is largely early season products. But we’re also trying to not be specific about the product mix until we get closer to the season.

Michael Millman – Soleil Securities

But I’m not clear if in fact you have tied these products down at this point and can you talk about whether you’re going to have to subsidize some of these products?

Mike Yerington

As I mentioned earlier, we have partners for these products. We had partners that we were working with last year. So these are not new negotiations or new discussions. We’re refining those discussions as we go forward.

On the military program, only about 1% of our customers are eligible or in that category where they would need a military RAL so it’s not a huge percent of our customers. We’re still working on arrangements with potential partners for that. So I really can’t get into much detail beyond that.

Dan O’Brien

You asked a question about subsidization as well, and clearly we don’t have a balance sheet that is set to provide subsidization of these kinds of products. I mean you never say never about things as you look about this space and you look forward, but that clearly is not our intent, it’s not the way we direct ourselves and you should take some understanding of that as you think about what we’re going to be doing from a new product standpoint.

Michael Millman – Soleil Securities

Following up on that, I would assume Block is not going to move away from the products they’ve been offering and maybe enhance them, so can you talk about why you think you’ll make up some of that 300,000 January loss even if you do have these new products?

Dan O’Brien

I think Block certainly is a formidable competitor and we respect them. But I think the issue for us is there are 167,000 independents out there that are probably not going to be able to come up with products like that.

And I mentioned that early season customer wants cash, they want it quickly and I think many of those folks were going to people that maybe not as focused on quality as we were regarding paystub refunds. And I think if we have a product for our customers that may have gone that route this year, we’ll be fine.

Michael Millman – Soleil Securities

Regarding your financial products, I guess I was surprised that it was down, I think you said 9.9%, yet the actual number was down less than that. And I think I’ve assumed in the past at least that it’s primarily a fixed product. Can you reconcile some of the difference?

Dan O’Brien

I think it is primarily fixed as I said in my comments. But there is a very important variable feature that plays into it once you get above a certain level of returns and in all cases we did enter into that variable portion of our contract with our bank providers.

But clearly the returns and the structure was such that financial product revenue was down. It is very materially a fixed contract relative to the amount of revenue that we recognize this year. But nonetheless, that variable feature was not unimportant.

Michael Millman – Soleil Securities

Does that feature relate in any way to the mix between RALs and RTs?

Dan O’Brien

No, we are absolutely indifferent between whether our customer gets a RAL or an assisted refund.

Michael Millman – Soleil Securities

Can you help us regarding the, you mentioned there would be some impact of having those company owned stores now in the first and second quarters what we should be looking at?

Dan O’Brien

I think you should be thinking about the cost structure being consistent with having those stores fully in place. And recognize that we went from 723 stores to 1,000 from the beginning of our 08 season through the end of 08. I would say as we got towards the latter part of that, clearly all of those stores were up and running.

So again, you should just think there will be a material increase in our recurring costs, probably not inconsistent in the off season with that kind of increase in stores, particularly in the first quarter of this.

Michael Millman – Soleil Securities

And that’s something that won’t be made up at the end of the year either, that’s just additional cost for the quarter and the year?

Dan O’Brien

I certainly hope that it does get made up. One of the particular areas we are looking at is around that business, the company owned business as Mike had said, trying to drive more profitability in it. But the thing that we saw in these stores is the same thing that we saw elsewhere in our franchise community as well. We did not realize the kind of return level consistent with that cost structure.

We’ve got to work very, very hard to drive that revenue on top of a fixed store cost structure and through that drive greater profitability. We will also look as you would expect and certainly probably hope that we do, for those poorer performing of those stores to close some of those down and maybe look to other areas where we have better competitive opportunities to succeed.

Operator

There are no further questions.

Mike Yerington

I’d like to thank all of you for participating in our call this morning and for your continuing interest in Jackson Hewitt. I look forward to reporting our progress in early September following the conclusion of our fiscal first quarter and thank you for your time this morning and have a great day.

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Source: Jackson Hewitt Tax Service Inc. F4Q08 (Qtr End 04/30/08) Earnings Call Transcript
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