Jackson Hewitt posts narrower 1st-qtr loss on lower expenses, aims at new refund loan funding

Jackson Hewitt narrows 1Q loss as expenses fall

PARSIPPANY, N.J. — Jackson Hewitt Tax Service Inc. on Wednesday posted a narrower first-quarter loss as its expenses fell, beating Wall Street expectations, but its shares fell after it said it would seek new financing for its refund anticipation loan program.

For the three months that ended July 31, the nation’s second-largest tax preparer said its net loss narrowed to $19.2 million, or 67 cents per share, compared with a net loss of $21.8 million, or 76 per share, in the year-ago quarter.

The company typically posts a loss in its first quarter because its business is seasonal.

Adjusted for one-time gains and charges, the company said its loss was 65 cents per share.

Revenue fell 12 percent to $4.4 million, from $5 million last year.

Analysts polled by Thomson Reuters, on average, expected a loss of 75 cents per share, on revenue of $4.5 million.

Expenses fell 18 percent to $31 million, from $37.6 million a year ago, with selling, general and administrative expenses down 43 percent to $9.5 million, and marketing and advertising costs reduced by 21 percent to $2.4 million.

President and CEO Harry Buckley said the company’s top priority is to restore funding for its refund anticipation loan business, after that business fell off sharply for the 2010 tax season when it was unable secure about half its usual funding.

Buckley noted during a conference call to discuss results that the Internal Revenue Service will no longer let tax preparers know if an individual has outstanding liens, back taxes or other issues that could reduce their refunds. The elimination of the code the IRS has used in past years, called a “debt indicator,” will make the refund anticipation loan, or RAL, business more difficult. A RAL is a short-term loan backed by an individual’s tax refund, and without the debt indicator from the IRS, lenders will not know if the full refund to pay back the loan will be issued.

“At this time, bank providers are in the process of reassessing their RAL products for the coming tax season in view of the elimination of the debt indicator, which was clearly a key component in RAL underwriting decisions,” Buckley said. “There is some history to draw on here, as the industry was without a debt indicator for most of the second half of the 1990s. And history tells us there’ll still be strong demand for RALs and there still will be RALs, but bank approvals may be fewer, the average RAL size may be smaller, and the cost to the client will likely be higher.”

Jackson Hewitt has continued to talk with various parties about funding the loan program, and it has an agreement in place with Republic Bank for the upcoming tax season that will cover roughly 50 percent of Jackson Hewitt’s business, although it will likely be modified.

“We’re awaiting the results from the underwriting banks as they develop economic models for their RAL programs for the upcoming tax season without the debt indicator, as the completion of this activity will be important to funding parties interested in providing the additional roughly 50 percent RAL program coverage we’re seeking,” he said.

Chief Financial Officer Dan O’Brien said the company has until Sept. 15 to provide its own lenders with an outline of how it will fund its RAL program under its credit agreement. Jackson Hewitt may need an extension on that deadline because the IRS did not announce the elimination of the debt indicator until mid-August.

The elimination of the debt indicator will likely drive down the number of loans, and therefore reduce the company’s need for funding, O’Brien noted, but it also changes the nature of the business.

Jackson Hewitt is also aiming to increase marketing for its online tax preparation products, a growing part of the industry. And it said it is working on a new franchisee agreement, but made few details available.

In afternoon trading, Jackson Hewitt shares fell 10 cents, or 11.2 percent, to 81 cents. The stock has moved between 75 cents and $5.91 in the past 52 weeks.