CEO Smyth Promises "Peace of Mind" at H&R Block With Customer-Centric Focus

Last Updated Sep 14, 2009 4:22 PM EDT

H&R Block performed miserably in the 2009 tax season, handling 5.8 percent fewer in-store, retail tax returns, as clients sought lower-cost IRS filing alternatives due to difficult economic conditions. Can the largest provider of tax preparation services in the U.S, with almost 13,000 retail outlets, draw more customers to its stores for the 2010 tax season by re-focusing marketing and operational initiatives back towards its core, store-front business?

Overall retail tax returns in its 2009 U.S. tax season ended April declined 3.2 percent to 21.1 million, offset by 45.2 percent growth in its prepared online service to 2.8 million users. The company still remained the top tax preparation provider in the U.S., constituting 15.8 percent of all estimated individual tax returns prepared and filed with the IRS, according to the company's 2009 annual regulatory filing.

One positive financial metric, greater complexity in return-filings and a targeted shift toward customers with higher income levels, combined with an average one-percent price hike, boosted net average fee per prepared tax return 7.2 percent to $187.36 in 2009.

Nonetheless, chief executive Russ Smyth told analysts on the recent first-quarter 2010 earnings call that the total number of tax returns filed in the U.S. would likely decline one to two percent, based on IRS projections and unemployment data. He cautioned, too, new tax law provisions resulting from the American Recovery and Reinvestment Act passed earlier this year would not significantly increase the number of filers as the Economic Stimulus Act did in 2008. More headwinds pushing against the company this year -- like the sluggish economy -- said Smyth, will likely push more filers to do their own taxes or to try the "do-it-yourself" category, such as competitors' online, assisted tax preparation services (think TurboTax by Intuit).

The single biggest opportunity for growing -- and retaining -- clients in 2010, according to Smyth, is improving retail service operations. Although the company can't quantify the number of walkouts or dropouts resulting from poor service or lack of attention when they enter or attempt to call H&R Block offices, Smyth strongly believes that these problems -- as they are directly under the control of management -- represent the best opportunities to impact client growth this tax season. He said the company believes it can attract between 400,000 and 500,000 additional clients this tax season by better execution of in-store and telephone contacts with potential customers.

Smyth also said on the call the company was retooling its marketing message to make it "more credible and serious in tone, and more consistent in addressing key client priorities." Advertisement of the H&R Block brand, he said, "would be broader and delivered across multiple media channels," focusing on the expertise of H&R Block tax professionals. Granted, the specifics of its ad campaign need be kept quiet for competitive reasons, but one needs to see more flesh on the bone to take seriously anticipated traffic gains.

Ironically, most of Smyth's comments could have been taken right out of rival Jackson Hewitt playbook, whose chief executive Harry Buckley (former CEO of H&R Block!) promised a similar return to basics -- with a keen focus on the core tax preparation business and the client -- in that company's first-quarter 2010 press release last week.

Less than three months before the onset of its busy quarter (the company generates substantially all of its tax service revenue from January to April), H&R Block could find itself coming up against another headwind with no short-term fix. Come the 2010 tax-filing season, H&R Block could line up at the starting gate short by an estimated three to four percent of its client base, or between 630,000 to 840,000 customers. In addition to a previously announced intention to close 300 or so poorly performing retail store-fronts, the company lost 1,030 kiosks operated in Wal-Mart stores, as the discount retailer chose not to renew its leasing agreement, which expired in May. (Wal-Mart re-upped with Buckley & Company.)

Although successful execution of these operational improvements and a revised marketing message are necessary to enhance long-term client growth, they are not sufficient to guarantee "Peace of Mind." Come next year, the company faces two new obstacles:

  1. Its Sears license agreement (which covers 722 office) expires in July 2010.
  2. The accounting firm McGladrey & Pullen, which jointly operates a accounting, tax and business consulting firm primarily serving middle-market companies, recently terminated a lucrative administrative services agreement.
  • David Phillips

    David Phillips has more than 25 years' experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog The 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, The International Herald Tribune, Investor's Business Daily, Kiplinger's Personal Finance, and The Wall Street Journal.