Thursday, March 11, 2010

A rough tax season for Jackson Hewitt (JTX)



As expected, this has turned out to be a rough period for tax preparer Jackson Hewitt (JTX). On Christmas Eve, they announced that Santa Barbara Bank & Trust had backed out as their partner in financing Revenue Anticipation Loans (RAL's).

Today, the company reported earnings for their fiscal 3rd quarter ended January (as a tax preparer, it makes sense for their fiscal year to end in April) that missed analyst expectations by 2cents. Looking at the results, it could have been worse.




The impact and importance of financial products like RAL's is massive. Tax returns in offices where RAL's remained available were down 11% from 2009 levels, versus down 31% in markets where RAL's were unavailable. It's a big knock on the company that their core product is so dependent on the foot traffic brought in by "extras" such as RAL's.

In Jackson Hewitt markets where the RAL product was available, total returns prepared in tax season were down 11% in the 2010 tax season on a comparable day-over-day basis, and customer retention improved by approximately 6 percentage points to over 62%. Jackson Hewitt believes that the paid preparer market was down versus the prior year at this same time on a comparable basis. Correspondingly, in Jackson Hewittmarkets where the RAL product was unavailable, total returns prepared in tax season were down 31% in the 2010 tax season on a comparable day-over-day basis, and customer retention declined by over 6 percentage points to approximately 51%, reflecting the uneven competitive landscape with respect to RALs.


One thing that impressed me is the "revenues per tax return prepared," which stayed remarkably intact as the company is able to successfully justify its margins to customers.




The stock is off 6% mostly due to the season-to-date figures for prepared tax returns, which are down about 18%. Even after adding back the positive effect from revenue per return growth, this would imply revenues for the coming quarter a touch below what Wall Street is expecting. I would say that this stock has priced in a LOT of bad news, and is a ship that can be righted if management can get its act together.
Subsequent to the end of the 2010 third quarter, year-to-date through the end of February, Jackson Hewitt and its franchisees had prepared 1.830 million tax returns, reflecting a decrease of 18%, versus the 2.218 million tax returns prepared during the same month-end period last year. Year-to-date through February 28, average revenue per return grew by approximately 2%.

Copyright 2010 AlphaNinja

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