As indicated by the typical company data, the declining trend in comparable sales of companies in this sector, probably as a result of competition, in the past several years may make a turn as increasing small companies exist from competition.   

Sector’s Current, Trend, Causes behind trend, and Future

Current and Trend

1. Generally, demand for income tax return preparation seems to be weak and be declining in the past several years while it seems that the demand is coming back as indicated by comparable returns prepared by some of typical companies since 2017.

2. Sluggish growth in demand and the increasing occupancy and labor costs have put huge pressure on companies in this sector. As a response to the unfavourable situation, companies have tried to improve profitability by reducing spending and expanding to grab more market shares.

3. It is obvious that company owned offices will be able better to take advantage of the current situation in terms of cutting costs and consolidating smaller offices than franchised companies.

Causes behind the trend

1. Intensive competition may be the major reason for the sluggish growth in demand for service and products of typical companies.

2. More small companies existing from competition may be major reason why we have seen increasing business in big companies with scale advantage in 2017.

3. The macroeconomic factors including rising interest rate and inflation may be all behind the increasing operation costs of companies in this sector, which is actually considered as a reason of increasing consolidation activities.

Industry Future

1. Under the pressure of the unfavourable factors in this sector, those companies who can be more flexible in saving costs and improving efficiency and those who can successfully expand the scale of their owned offices will probably perform well.

General Financial Performance of Companies In the Sector

It seems that demand for income tax return preparation products and service of companies in this sector, according to the typical company data, has been weak and declining as indicated by the continuingly decreased comparable returns (per office) prepared by those companies or their franchise offices. However, it seems that returns started going up since 2017 by the data of some of companies that the increase in returns prepared seems to be faster than the increase in office expansion of those companies.

It seems companies in this sector has faced increasing expenses including occupancy and labor costs, which, working together with slowing growth in demand, put huge pressure on fees rate and thus profitability of companies, especially their franchised offices.

While companies have been trying to save costs by spending less or acquiring and opening more offices, their margins seem to be decreasing. The current typical gross margin is about 49% in 2017 with a higher SG&A as percentage of sales of about 30% and lower operating margin of about 19%.

The typical average stock Price/cash flow ratio is: 13. (interest/EBI ratio of 17%).

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