PARSIPPANY, N.J. (
) -- Reporting a net loss seems less important than mentioning
as a growing partner in an earnings release.
That seems to be one takeaway message from
Jackson Hewitt Tax Service
earnings, with the shares gaining 18 % by the close Wednesday after the company reported a net loss of $19.5 million, or $0.68 per basic and diluted share, for the second quarter fiscal 2010. The latest loss was compared to a net loss of $22.2 million, or $0.78 per basic and diluted share, in the same quarter 2009.
Jackson Hewitt's shares opened up 4%, or 17 cents to $4.30 on Wednesday and the post-earnings action quickly heated up. By the afternoon, more than 3 million shares had been traded, a huge spike over Jackson Hewitt's normal average of 563,000 shares.
Analysts don't expect non-tax season earnings announcements from companies like Jackson Hewitt to really move the stocks in a noticeable way, so why was Jackson up 18% on Wednesday after its earnings announcement, in addition to being one of the most popular financial search terms on Google for the day? Was the rally of 75 cents justified?
Jackson itself noted in explaining the loss that it historically generates roughly 2% of its total annual revenues in each of the first two fiscal quarters due to the seasonal nature of the tax return-preparation business, and therefore the company typically incurs a net loss during the first and second fiscal quarters.
Reported consolidated total revenues in the 2010 second quarter were $4 million, versus $5.1 million in the 2009 second quarter.
Jackson Hewitt's CEO Harry Buckley sought to focus investors' attention on the upcoming tax season and its financing in light of the quarterly loss. Buckley said Jackson Hewitt has reached amended agreements with lenders. Still, the news about the lending agreements was not new, having been announced by Jackson Hewitt a few weeks ago, so it should not have moved the markets today. Jackson Hewitt also focused on gains made in its Wal-Mart business strategy.
Jackson Hewitt said it would be operating in more than 1,800 Wal-Mart stores for the 2010 tax season. "This is an excellent incremental growth opportunity of which we plan to take full advantage," Buckley said.
The current range for Wal-Mart stores that Jackson Hewitt plans to operate in is above the high end of the previously communicated range of 1,500 to 1,750 Wal-Mart stores.
Still, David Burtzlaff, an analyst at Stephens, said the net number of stores operated by Jackson is not going to change, with some big closings at the same time as the Wal-Mart additions. While Burtzlaff said he believes the Wal-mart business could be a positive for Jackson Hewitt, there are much more important questions that remain about the tax preparer's business and that make it difficult to understand an 18% spike on Wednesday.
The most compelling argument in favor of the Jackson Hewitt surge is that the shares had been beaten down so much already this year. Jackson Hewitt's shares had all the attraction of an IRS audit in February and March, when it sank from a 52-week high of $16.70 to just under $3. Today, even with the 18% gain, Jackson Hewitt closed at $4.88.
Burtzlaff said Jackson Hewitt, if it executes on its business strategy, should see its stock rise in value; he maintains a $6 price target on the sharees.
Still, Burtzlaff has concerns about the company stemming from two of its partners on tax products that feature popular refund-delivery methods --
Santa Barbara Bank & Trust
. Republic Bank is signing new contracts with tax-product providers that eliminated any revenue sharing and cut customer fees in half. While it doesn't affect the existing Jackson Hewitt contract, it means that, come tax timem, if individuals begin price shopping, Jackson may seem very expensive. Santa Barbara Bank & Trust, on the other hand, is still under considerable financial strain Burtzlaff said.
Pricing more generally is Burtzlaff's biggest concern. He said Jackson Hewitt has given very little indication of how it will price its offerings for the upcoming tax season. Today's conference call offered little insight, with management indicating only that it had provided franchisees with historical pricing guidance and related customer retention statistics. P/>Whether Jackson will raise prices again and risk losing customers -- not to mention whether revenue from any price increases could outstrip the loss of price-sensitive customers -- remain open questions.
Ultimately, the Stephens analyst said, Jackson Hewitt's earnings did not merit the rage in trading in its shares on Wednesday, and the next time the market receives any relevant data from the company as to whether it's executing on its potential won't be until halfway through the tax season. "And by then, it's too late for investors," Burtzlaff said.
Jackson Hewitt's loss came one day after
, reported a loss and suffered the market consequences, down all day on Tuesday to a close of $19.88, or a drop of more than 60 cents on the day.
H&R Block's pre-market earnings report included a net loss, albeit a smaller net loss than the year earlier period -- $0.38 versus $0.40 a year ago. The results beat a Street estimate that was equal to last year's second quarter loss of 40 cents.
H&R Block had been on a fairly steady share price incline since May, when it reached a 52-week low, gaining approximately $6 since a May low of $13.94. On Wednesday, H&R Block shares were trading slightly negative on higher than normal volume.
The economic downturn has seriously impacted the niche tax preparation sector, where H&R Block is the bellwether stock.
-- Reported by Eric Rosenbaum in New York.
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