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Block Revs Drop as Number of Tax Returns Fall

Russ SmythH&R Block got through the first weeks of tax season with a drop in business as it reported a 6.2 percent decline in revenue, but a 5 percent rise in net income for the third quarter ended January 31. The company said the revenue drop reflected a 7.1 percent decline in retail tax returns prepared and it had lost two percentage points in market share in selling digital products. Its business operations sector, RSM McGladrey, fared better with a 3.6 percent drop in revenue for the same quarter.

Third quarter revenue was $934.9 million, down from $993.4 million a year earlier. Net income rose to $50.6 million, up from $47.4 million in last year's corresponding quarter. McGladrey revenue dropped to $178.5 million, down from $185.2 million a year ago. Block also gained $12 million in its sale of company-owned stores to franchisees.

In a Webcast today, CEO Russ Smyth said the performance is not acceptable in a market that is growing in double digits. He said the company was redesigning its marketing and its Web site during this tax season, while not raising prices.
"We believe holding the line on price this year is the right strategy given the current economic situation," he said.

The company put greater effort to reach customers for tax preparation software and for online preparation. It renamed its TaxCut consumer software as H&R Block AtHome and launched a "Best of Both" product that combines desktop and Internet-based preparation. While the product received better reviews this year, it lost ground in the market, Smyth said.

Block worked to catch up by making free products available, an area in which it had lagged competitors.. But Smyth said the company's message "has not been crisp." He continued that, "When our marketing has been more effective in driving traffic to our Web site, we have not been successful in converting traffics to clients."

Major changes have occurred in the number of locations. It closed 100 company locations, another 100 at Sears and 1,000 in Wal-Mart, after it lost the Wal-Mart contact to rival Jackson Hewitt Tax Services. CFO Becky Shulman said when the company significantly expanded its store count in 2002, it had added "$300 million in expenses without increasing client count."

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