U.S. Markets

H&R Block's heavy investments to weigh on future profits, shares sink

(Reuters) - Shares of H&R Block Inc HRB.N fell as much as 21 percent on Wednesday, after the tax preparer said it expected profit margins to shrink as it invests heavily in technology to lure clients who do their own taxes.

FILE PHOTO - A pedestrian walks past a H&R Block tax office in Los Angeles, California, U.S., April 26, 2017. REUTERS/Mike Blake

H&R, which helps corporations and individuals prepare their tax filings, might also see fewer clients using its services because the recent tax overhaul has made it simpler for people to file their taxes.

The company is investing heavily in technology, changing pricing plans and will consolidate 400 offices to cut costs.

Analysts believed it would take several years for those initiatives to take hold.

“H&R’s spend could be multi-year and visibility into payback metrics on the initiatives appears low currently,” said Hamzah Mazari, an analyst with Macquarie in a note entitled ‘The good, the bad and the outlook’.

On a post-earnings conference call on Tuesday, the company said it expects full-year 2019 EBITDA margin to be between 24 percent and 26 percent, down from 29.8 percent in 2018.

The company also sees revenue of between $3.05 billion and $3.1 billion in 2019, down from $3.16 billion it earned in 2018.

The outlook overshadowed the company’s better-than-expected fourth-quarter profit, typically the busiest period for tax preparers due to the U.S. tax filing deadline.

“Given a volatile track record of results and lack of visibility into if management’s initiatives will pay off, our expectations come down,” Morgan Stanley’s Thomas Allen said in a note.

Shares of the company were down 19 percent at $23.93 in morning trading.

Reporting By Aparajita Saxena in Bengaluru; Editing by Shailesh Kuber