Jackson Hewitt – To Be or Not to Be?

The certainty that we have to file a tax return every year, that the number of tax returns is rising, tax preparation is getting more complex and thus despite availability of tax preparation software more and more people outsource their tax preparation peaked my interest in Jackson Hewitt.

Jackson Hewitt – To Be or Not to Be

DENVER (MarketWatch) — The certainty that we have to file a tax return every year, that the number of tax returns is rising, tax preparation is getting more complex and thus despite availability of tax preparation software more and more people outsource their tax preparation peaked my interest in Jackson Hewitt.

Well, of course, if flat-tax Ron Paul becomes president he’d pull a rug out from under the tax preparation industry. But let’s be real, a complex tax system is here to stay as it brings too many carrots and sticks which politicians will not part in a million years.

However, when Jackson Hewitt (JTX) reported its quarterly results in March the certainty was not certain anymore. Jackson Hewitt’s revenues were down 15%, street expectations were missed, and the stock took a dive. How could this happen?

Several factors were responsible for this dismal performance:

Late filers
Number one and the most important one, there was a shift of filing taxes towards the later part of the season.  Remember the third quarter (JTX has an April fiscal year) covers only one month of the tax season — January. According to IRS’s website that tracks returns filed by ‘Home Computers’ and ‘Practitioners,’ returns that were filed in the first four weeks of the tax season were down in double digits over last year.

Only in the week ending February 23, 2008 did the number of returns start to rise. What does this mean? People are filing their taxes later. Due to population growth more people will file taxes with IRS by April 15th than did last year, but a greater portion will procrastinate till a later date.
Not surprisingly, according to Jackson Hewitt management they saw much improved trends in February. Trends are likely to improve in March and April. If late filing was the only problem than we’d be home free.

Early season woes
In 2005 Jackson Hewitt introduced a first in the industry a holiday season loan. In late December early January customers were able to borrow several hundred dollars till they got a refund in late January early February. This financial product written by Jackson Hewitt’s partners never really made much money for Jackson Hewitt but it was a great marketing, client retention tool and resulted in great sales growth in 2006. The following year competition came up with a similar product, holidays loans became a staple across industry.

In 2008, banks stopped offering holiday loans, major competitors followed and so did Jackson Hewitt. H&R Block (HRB) had a small preseason product available. This is why it has fared better, though still had decline in traffic. In early January, customers who wanted to get their money sooner who used to use holiday loans went to mom and pop tax preparers and filed their tax returns electronically with paystubs instead of a legally required W2 form. Unfortunately, these customers are lost to Jackson Hewitt, at least this year. On the conference call, Jackson Hewitt’s management said that they’ll have a preseason product next year.
 
Bad PR
Last year offices of Jackson Hewitt’s franchisees were raided by the Justice Department. Jackson Hewitt’s franchisees were accused of falsifying tax forms. Jackson Hewitt settled with the Justice Department, bought out a franchisee and moved on. The impact on the brand should have been limited and had been, it has not really spread beyond local markets.

Management conducted a survey this summer and found that very few (especially outside of those states where the investigations took place) remembered the incident. However, a slow news cycle in January 2008 (almost nine months later) brought the incident back into the spotlight, shaving a couple percentage points of growth for Jackson Hewitt in 2008.

Is the JTX growth story over? The preseason product issue is less likely be an issue next year, the company is unlikely to make the same mistake twice. Price per tax return is still rising in mid single digits, 4-6% a year. The company, dissatisfied with the pace of growth in new territories, announced that it will take an initiative on itself to open more new offices, though it may sell them off to franchisees later.

Fortunately, it doesn’t cost much to open an office, about $25,000 to $35,000. Even if Jackson Hewitt decided to open 500 company-owned offices, for instance, it would run a company about $12-17 million, leaving still plenty of cash for share buybacks, especially at today’s prices — it bought 10% of its shares in 2007 — and dividends (current yield is 5%).

I put little faith in same-store sales rising at this point as I have not seen positive same store sales for a second year in a row. Margin expansion though is still not off the table but since it is to be driven by operational leverage, will depend on the level of sales growth.

Sales will be flat or slightly negative for the year. Instead of earning $2.08 this year as the street expected, earnings will be around $1.50 to $1.60. This year is not showing the true earnings power of the company, its earnings power is north of $2 once profit margins are normalized. I am not sure that Jackson Hewitt is worth as much as I expected it to be worth awhile back, I’ll cross that bridge when I get there. But in my estimates the stock is still worth at least $30.

Please read the following important disclosure here.

Related Articles

Next Year in Omaha (2024 Edition)

It is time to plan for my annual pilgrimage to Omaha! I am very sad because, for the first time, Warren Buffett will not be joined onstage by Charlie Munger, who passed away in November.
Putting a Charge Back into the EV Market

Putting a Charge Back into the EV Market

Over the last few months, electric car sales seem to have gone from hot to cold. Are electric cars a fad, like beanie babies, pet rocks, or fidget spinners?
My thoughts on AI

My thoughts on AI

Innovation disrupts, but it also creates new jobs and improves the standard of living of society. AI will displace many jobs, but it will also empower people with new productivity tools.

Tax Loss Harvesting

I wrote the following to clients on tax loss harvesting, which is something many investors are either contemplating or ... Read more

Leave a Comment