Tax Prep Becomes a Disposable Luxury

The recession’s “do-it-yourself” economy has encouraged consumers to find ways to be more self-sufficient. They are brewing their own morning coffee and doing their own taxes. But that’s been hard on the nation’s largest tax preparer, H&R Block (HRB), which reported first-quarter earnings this morning. The company’s lost $133.6 million, or 40 cents a share, compared with a loss of $132.7 million or 41 cents a share, a year ago.

The firm has suffered from dwindling demand during the downturn. Its 13,000 retail offices across the country prepared 5.7% fewer tax returns in this year’s tax season, as more customers either filed themselves or just didn’t file because of unemployment. H&R Block’s online services and TaxCut software, which increased filed returns by 21%, mitigated those losses. The firm’s business services unit, which provides tax and accounting services to medium-sized businesses, also showed signs of improvement. The company’s chief executive, Russ Smyth, said first-quarter results met the firm’s expectations and that Block is now focused on improving “marketing effectiveness to improve client attraction, retention and satisfaction.”

The news isn’t as bad as it may seem. The bulk of the company’s profits come during the last two quarters of the firm’s fiscal year when taxes are filed, so losses are not unusual during its first and second quarters. The firm’s shares are also trading at an attractive price, some analysts say. And if the tax code changes in 2010, that could bring more consumers back to professional tax preparers.

Barrington Research analyst Alexander Paris Jr. said in a research note that, although H&R Block would endure a typical drop-off in profits in the first quarter, he’s maintaining his "market perform" rating.

And H&R Block is not alone. On Thursday, Rival Jackson Hewitt (JTX) reported a first-quarter loss of $21.8 million, a smaller drop than analysts had expected. The company’s new chief executive, a former head of H&R Block, eliminated 13% of its workforce and suspended its dividend this year to keep the struggling firm afloat.

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Finance ministers from the Group of 20 rich and developing countries hold their second day of meetings today. The leaders are expected to discuss changes to their stimulus plans, now that the economy is showing some signs of recovery.

Analysts say they expect officials to coordinate efforts to wind down their stimulus packages and discuss reforms to the financial system, such as increasing banks capital reserves. The officials are also expected to discuss executive pay. A letter issued yesterday by the leaders of Britain, France and Germany urged reform of bank bonuses.

The meeting also comes after the Obama administration released a proposal yesterday to increase international standards for banks’ capital reserves. The proposal aims to reach an international agreement by the end of 2010 and to implement the plan by the end of 2012.

Separately, the European Central Bank yesterday said that it would leave its benchmark lending rate unchanged at 1%. ECB president Jean-Claude Trichet said that, despite growing consumer and business sentiment and growth in euro zone countries, the economic recovery would be choppy.

The head of the International Monetary Fund added to the chorus of voices this week speculating that the economic recovery will be weaker and shakier than expected. Managing Director Dominique Strauss-Kahn gave his remarks at the annual Bundesbank lecture in Berlin. His statements came as the Group of 20 rich and developing countries prepared to meet today in London.

The former French finance minister said that the global economy would continue to suffer because banks remain under the stress of rising delinquencies and a weak commercial real estate sector. Consumers and financial institutions are also still winding down debt, said Strauss-Kahn, and unemployment is likely to continue rising next year. Central banks should not be overly concerned about their decisions to take on “enormous” levels of debt on their balance sheets, he said, because inflation won’t be an issue in the near-term. However, Strauss-Kahn said that reforms to the financial system -- on issues such as executive pay and bloated government programs like healthcare and pensions --were not happening fast enough.

"Global economies have spent their money bailing out their economies, and so they don’t have enough to spend on healthcare and education now," says Mark Williams, an international economist at Capital Economics in London. The world’s major economies will "have to rein in spending, but there will be some very difficult questions about how they’re going to do that," he says.

The IMF chief also discussed the U.S. dollar’s role as the international reserve currency, an issue the Chinese government has been vocal about changing. Despite recent criticism about the stability of the U.S. dollar, the currency “actually strengthened during the crisis,” said Strauss-Kahn, which, in his view “reflects the dollar’s status as an unrivaled safe haven asset.” However, over time, he said alternatives to the dollar would gain “in stature and international usage.” Chinese officials have been advocating replacing the dollar’s role with the IMF currency, the Special Drawing Right (SDR).

"There’s no reason why the world couldn’t go towards a system of super-national currency," Williams says. But the U.S. would only agree to that if China reduces its stash of U.S. dollars, he says. China’s currency reserves have built up over time because of its heavy exports to the U.S. and European countries. As a concession to the U.S., China could instead spend those dollars on buying U.S. goods, Williams says.

Strauss-Kahn’s comments came two days after the Chinese government announced its decision to buy $50 billion in IMF bonds, which the IMF began issuing in June. The bonds would be denominated in SDR, a unit based on a basket of several countries’ currencies that is currently worth about $1.56. Strauss-Kahn signed off on the agreement with China.

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