H&R Block’s CEO Vows Turnaround, Won’t Seek Buyout

H&R Block Inc., the biggest U.S. tax preparer, expects to remain an independent company and will step up efforts to win online customers as more returns get filed electronically, Chief Executive Officer Alan Bennett said.

Bennett, who returned to the CEO job this week after Russ Smyth resigned, said in an interview that H&R Block will use advertising to spotlight prices rather than focus on brand image. Asked about acquisitions, he said the firm is “always looking for opportunities to grow revenue and profitability.”

H&R Block is trying to halt the erosion of its market share to competitors such as Intuit Inc.’s Web-based TurboTax program. Revenue has dropped for two years, and concern is growing that retail tax preparers are in “secular decline,” according to Bill Carcache, an analyst with Macquarie (USA) Equities Research. The firm’s biggest rival, Jackson Hewitt Tax Service Inc., has said it’s considering strategic alternatives.

Digital returns are “an area that we can also grow and prosper in,” Bennett said. “We have tremendous opportunities in the marketplace and are very optimistic about our future as an independent company.”

Alexander Paris, an equity analyst at Barrington Research Associates Inc., said in an interview yesterday that the Kansas City, Missouri-based company is undervalued and might attract bids from buyout firms. H&R Block’s cash flow would help to make it “a perfect private transaction,” he said.

Rival Preparers

Jackson Hewitt hired Goldman Sachs Group Inc. last year to consider “strategic and financial alternatives,” and the stock has dropped 77 percent in 2010 through yesterday. JTH Tax Inc., the parent company of Liberty Tax Service, said in March 2009 it wanted to explore a deal.

Liberty CEO John Hewitt, a founder of Parsippany, New Jersey-based Jackson Hewitt, said in an interview yesterday that H&R Block probably won’t attract buyers unless its business is growing.

“I don’t see any continuity or any movement in the right direction,” said Hewitt, whose firm is based in Virginia Beach, Virginia.

H&R Block stock dropped 37 percent this year, including 8.2 percent yesterday to $14.22 in New York Stock Exchange composite trading after the firm announced Smyth was leaving.

Subprime Mortgages

Chairman Richard Breeden, the hedge-fund manager and former Securities and Exchange Commission chief, brought in Smyth in 2008 to help turn around H&R Block after it racked up more than $1 billion in losses tied to subprime home loans. Smyth had been president of McDonald’s Corp.’s European unit.

Refocusing the firm on tax preparation, Breeden sold the investment-adviser and mortgage units. “Rather than the unsuccessful effort to build a financial supermarket, we would prefer to concentrate on building market share,” Breeden, 60, said in a letter to fellow investors in August 2007. The company declined to make him available for comment.

Bennett, 59, served as interim CEO for nine months in 2007 and 2008 and remained on the board. He said he plans to continue the strategy for adding retail clients that Smyth began.

“When you go to McDonald’s, the experience is the same, there is a good consistency across the board,” Bennett said. Smyth “has brought a lot of that discipline to Block. The business plan he developed and the strategies we have discussed with the board, we have pretty much all embraced.”

Fewer Returns

Profit from continuing operations dropped 4.7 percent in fiscal 2010 as total tax returns prepared dropped 4.3 percent. Smyth, 53, said in a telephone interview that H&R Block’s performance didn’t influence his decisions to leave. He’s joining a “very large but very private” company based in his hometown of Chicago that he declined to name, he said.

“The things that we started last year and will continue to build on in our business plan for next year are the right things to fix the fundamentals of the business,” he said.

Bennett’s prior leadership of the company in 2008, the most successful tax season of the decade, may bode well for the firm, Oppenheimer & Co. analyst Scott Schneeberger said in a note to clients yesterday. He rates the stock “outperform.”

“While a CEO change might trigger a negative knee-jerk reaction in HRB’s shares, we’d be buyers on possible weakness given the attractive valuation of the stock and Mr. Bennett’s experience and respected status,” the analyst wrote.


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