UPDATE 2-H&R Block profit beats Street, sees higher margins

* Company prepared 5.8 percent fewer tax returns

* Promises higher margins; profit outlook impresses

* Shares rise 5.5 pct after-hours (Recasts; adds comments from conference call, byline)

By Jonathan Spicer

NEW YORK, June 29 (Reuters) - H&R Block Inc (HRB.N), the largest U.S. tax preparer, said on Monday profit rose 26 percent in the quarter that includes the main tax filing season, beating expectations as higher fees helped offset fewer returns.

The company, whose shares rose 5.5 percent in after-hours trade in response to the results, also promised higher margins and delivered a better-than-expected profit forecast in the coming fiscal year.

Overall retail tax returns fell 5.8 percent in fiscal 2009, while the net average retail fee per return prepared increased 7.2 percent, H&R Block said. There was a 45.2 percent rise in returns prepared online.

"Despite the growth in profits this fiscal year in a difficult economy, we're not satisfied with the results," said Russ Smyth, the company's chief executive, who stressed the need to change several business areas, including marketing and the retention of existing clients.

"We need to grow our client base," he said on a conference call with analysts, adding the company will rely less on fee increases in coming years.

Net income for the fiscal fourth quarter ended April 30 rose to $706.9 million, or $2.09 per share on a diluted basis, from $543.6 million, or $1.66, a year earlier. Revenue was down 2.7 percent at $2.47 billion.

Analysts on average had expected profit of $2.05 per share. H&R Block typically generates most, if not all, its annual profit and well over half its annual revenue in the fiscal fourth quarter.

Management noted on the call that fewer customers filed returns this year partly due to U.S. job losses, adding it believes "online is the key battleground of the future."

Smyth said there are "still considerable cost and efficiency opportunities," and that the Kansas City-based company can increase margins by 100 basis points over the next two fiscal years, from cost reductions and more clients.

The CEO said H&R Block will likely see client fees rise next year due to more complex filings and tax law changes.

The company expects earnings of $1.60 to $1.80 per share in fiscal 2010, compared with $1.64 expected by analysts polled by Reuters Estimates. It intends to hold its current dividend rate in fiscal 2010.

H&R Block shares have fallen 41 percent from their 52-week high of $26.75 set last Sept. 19, despite Chairman Richard Breeden's efforts to focus the company on tax preparation, shedding a money-losing subprime mortgage business and a securities brokerage.

Last month, H&R Block replaced Timothy Gokey, who had led its retail tax business for five years.

Jackson Hewitt Tax Service Inc JTX.N, H&R Block's main rival, last Thursday said quarterly profit fell 28 percent, while revenue declined 17 percent.

H&R Block shares rose to $16.53 after hours, after closing up 25 cents at $15.67 on the New York Stock Exchange. They began the year at $22.72. (Reporting by Jonathan Spicer; Additional reporting by Jonathan Stempel; Editing by Gary Hill and Richard Chang)