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Stock Strategist Industry Reports

A Stumbling H&R Block

DIY products take charge in retail tax prep, but don't count out industry giant.

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For decades,  H&R Block (HRB) dominated the tax-preparation market as by far the leader in the number of returns processed. However, this dynamic has changed. According to our estimates, TurboTax-maker  Intuit (INTU) is now clearly on top, processing approximately 17% of the returns in the retail tax-prep market. Intuit steadily has increased its market share and the pace of these gains has been impressive, in our opinion. This trend also highlights the changing preferences of the industry's customer base. Taxpayers are becoming increasingly comfortable with do-it-yourself products, given their ease of use.

However, Intuit's market share gains have not necessarily come totally at the expense of H&R Block, there has not been a corresponding one-for-one decrease in the number of tax returns processed by the traditional tax-prep firm. Instead, we believe DIY products may cause long-term growth to stagnate for both the number of returns processed and the price charged by the traditional tax-prep firms. The imminent death of legacy tax-prep products is therefore not in the cards, as a significant number of taxpayers always will find them appealing. Over the long term, however, we believe the price of legacy products will start to converge with the price of DIY products until the value proposition becomes more compelling to the average industry customer. This dynamic was hinted at during the last tax season, as H&R Block ran a program where it processed basic 1040-EZ returns for free at its branch offices. Including these free returns, the average price per legacy return decreased 3.3% to $182.96, according to our estimates. In addition, we estimate the price per DIY return fell 5.8% to $34.58 and the blended price of all returns was down 6.4% to $135.98.

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Vishnu Lekraj does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.