In an earnings call this morning, the chain's CEO Harry Buckley said that markets in which RALS weren't available saw a 30-percent drop in returns prepared while those that had loans saw an 11-percent decline. The company reported revenue of $79.1 million, down 19.1 percent from $97.8 million for the third quarter ended January 31. The loss for the quarter was $279 million compared to net income of $20.9 million a year ago. The loss was largely caused by a $274.2 million charge for goodwill impairment which reflected the company's assessment of the decline in value of its company-owned stores and franchised operations.
The economy, combined with the loss of RAL funding, took their toll in a couple of ways, according to company studies. "In some of the survey work we’ve done, we have seen where people have gone to digital [preparation]. In areas where we were not offering RALs we saw where they were going to competitors," Buckley said. He also said that substantial growth in the number of independent preparers probably has had an impact.
While Jackson Hewitt did not violate financial ratios required by agreements with its lenders, it expect it will exceed the allowable ratios when the fourth quarter ends on April 30. "We will seek relief in connection with these financial covenants," said CFO Dan O'Brien. Jackson Hewitt does not expect to miss any debt payments. O’Brien said the company is looking its capital structure, but declined to discuss what actions might be considered. O'Brien is holding weekly meetings with lenders.
Meanwhile, the company shrank its location base as it closed more than 800 locations outside of Wal-Mart where it had expanded the number of locations. Franchisees closed 650 non-Wal-Mart locations with total locations down by 3 percent from the 2009 tax season.
The RAL difficulties stemmed from December's announcement by Santa Barbara Bank & Trust that the Office of the Comptroller of the Currency that the bank would not be allowed to offer a RAL program. Jackson Hewitt was able to secure funding from Republic Bank for half of its loan program.
Buckley said the RAL problem resulted in the company's halting the development of a new franchisee agreement in December but that it would proceed to work to complete a new agreement. About 25 percent of franchisee agreements are expected to expire before the end of calendar 2010.
The OCC had requested a meeting with Republic Bank and information from what executives termed a very small bank. However, Buckley said his original pessimism about the survival of RALs had improved as the OCC and the Federal Deposit Insurance Corp. appear to have changed their initial approach.