H&R Block Inc.'s results showed that the mortgage unit it has agreed to sell continues to lose a significant amount of money, but also provided evidence that it is making progress in building a consumer financial services business to augment its core tax-preparation line.
The Kansas City, Mo., company's bank and financial advisory unit swung to a profit of $19.8 million in its fiscal fourth quarter, which ended April 30, from a loss of $32.8 million a year earlier. Its revenue jumped 57%, to $120.2 million.
The Instant Money Advance Loan - which H&R Block introduced in December to compete with "preseason" refund anticipation loans offered by rivals - found a million takers, all of whom came back to the company during tax season. A year earlier it lost 250,000 tax clients to competitors offering "prefile" loans it considered inappropriate.
"It is clear we have found a way to better serve our clients while establishing a platform for future growth and new product offerings," Mark Ernst, H&R Block's president and chief executive, said Thursday during an earnings call with investors.
Mr. Ernst expressed optimism about his company's one-year-old bank, which set up 2 million prepaid debit card accounts by storing the proceeds from refund anticipation loans and refund checks. "We expect our consumer financial services profitability to more than double as the bank continues to build on its success of this past year," he said. The cards "can potentially have retentive effects that we weren't able to generate when we didn't have that kind of bank account relationship."
In an interview last month, Kathy Barney, the president of H&R Block's bank, said customers had reloaded $211 million on to Emerald cards after getting them.
(The Retail Delivery special report in the June 26 paper will have more on the evolution of H&R Block's financial services strategy.)
Brian Horey, an analyst with Aurelian Management LLC in New York, said the consumer finance unit's results were "good from the standpoint that they have another business that's growing to offset the obvious problems" at its Option One Mortgage Corp.
Excluding that unit, H&R Block's net income climbed 9%, to $591.2 million, or $1.81 a share. The increase "seems like a pretty decent rate of growth, given that it's a fairly mature business," Mr. Horey said. "It sounds like they are doing at least a few things right."
Still, it was hard to ignore the $676.8 million fourth-quarter loss from H&R Block's discontinued operations, including Option One. That loss drove the company to a net loss of $85.6 million, or 26 cents a share, for the quarter.
As a result of losses at Option One, since January, H&R Block has been in violation of a capital requirement set by the Office of Thrift Supervision, the regulator for its bank. Bill Trubeck, its chief financial officer, said the company is "working constructively with the OTS to develop a plan designed to regain compliance by April 30, 2008."
Not unexpectedly, Wall Street was concerned that Option One's continued poor performance would affect how much Cerberus Capital Management LP, the private-equity firm that agreed to buy Option One two months ago, would end up paying.
In a research note, Kelly Flynn, an analyst with UBS AG, called the quarter "so-so" and estimated that Option One would be sold at the "low end" of her price range of $400 million to $800 million. (H&R Block agreed to sell the unit to Cerberus at a $300 million discount to its net asset value, which H&R Block said was $1.1 billion at the end of April.) The company affirmed that the sale would close by Oct. 31.
