The retail industry emerged from a relatively unscathed first quarter, but higher-than-usual tax refunds and an increase in buy-now, pay-later spending could help boost spending.
As Wall Street looks ahead to the second quarter, time may provide a clearer picture of consumer health and how high fuel prices and persistent inflation have disrupted the economy and strained already strained household budgets.
“When you’re done in April and May, you don’t see the impact of the tax refund, and those months were very difficult, so there are a lot of moving pieces that may keep the consumer going longer than we expected,” said Janine Stichter, retail analyst and managing director at BTIG.
“As you pull back these tax returns, you may start to see some of the weaknesses that are there … the consumer hasn’t completely fallen off and that’s why I think people are looking at Q2 to say, ‘Okay, what does the consumer’s life actually look like?'”
The period between February and May – which includes the first quarter financial results of many retailers – brought a new wave of concerns about housing consumption. President Donald Trump has started a new conflict in the Middle East, which has led to higher gas prices, lower consumer confidence and renewed concerns about the health of the US economy.
But when retailers reported their first-quarter results a few weeks ago, few cracks were found as sales rose, profits grew and outlooks remained unchanged for most major US companies.
“It was an incredibly strong quarter,” said Neil Saunders, retail analyst and managing director at GlobalData. “Despite the increase in gas prices, I think despite the concern about consumer sentiment, I think despite the uncertainty about the economy and everything else going on in the world, consumers are still showing up and opening their wallets and spending.”
However, at the same time as conflict began in the Middle East, tax refunds began to trickle in. The number of people who received them, and the prices they received, were higher than last year, which gave captive buyers more money to shop.
“That’s been a big help in terms of spending. I think without them there would have been more growth, but they really put the icing on the cake,” Saunders said.
Take it The targetsaid same-store sales jumped 5.6% during the fiscal first quarter, its first positive same-store sales number in five strong areas across its six main categories. But the momentum wasn’t just due to Target’s turnaround efforts, with chief financial officer James Lee admitting that higher tax refunds helped boost spending.
“That benefit will end for the whole year,” Lee said last week. “While consumers have proven resilient so far, sentiment has been subdued recently and we are looking closely at how they spend their money.”
Similar trends were observed Best Buy, Burlington Shops, Ross again Wayfair. At Best Buy, comparable sales rose 2%, and management acknowledged part of that growth came from higher tax returns. Considering the overall electronics market grew about 3.6% in the first quarter, Best Buy is still underperforming and losing market share, even with more momentum in the economy, Saunders said in an email last week.
The impact has been worst in the non-price sector. Burlington estimated the higher tax revenue to be between 1.5 percent and 2 percent of comparable sales growth, which was 6 percent during the quarter. Rival Ross saw comparable sales jump an impressive 17%, beating expectations by 9%, and also attributed some of its growth to more than just added stimulus.
During a call with analysts in mid-May, Wayfair’s chief financial officer, Kate Gulliver, said that the tax refund helped to “amplify” the impact of higher gas prices.
“The buyer was able to stay a little longer because of the convenience,” he said.
Meanwhile, there was also an increase in purchases, to pay for consumption later in the quarter, which could also help fuel consumption, said Stichter. In the first quarter, buy-now, late-paying reached new highs across all income groups, with an estimated 15% to 17% of those up to $150,000 using services, Stichter said in a May research note, citing transaction data from Consumer Edge. Among consumers making more than $150,000, adoption rose to less than 13%.
“There’s probably some level of real stress or some kind of emotional pullback across all revenue pools at some level, we just haven’t seen it in the revenue results yet,” he said. “Maybe they are withdrawing from other areas, maybe they are finding other ways to pay.”
That may begin to change in the current quarter, as many retailers have provided firm guidance suggesting that consumers may not be able to withstand higher gas prices as they did earlier in the year.
“Ross had an incredibly good quarter, I mean, almost unprecedented in terms of growth,” Saunders said. “I said that to the bank in the first quarter, their opinion when it comes to the second quarter and the end of the year is that things will still go well for them, but they will get used to it.”
Walmart is another example. The big retailer saw sales rise 7% during the first fiscal quarter, but only affirmed its full-year outlook, and issued weaker guidance for the second quarter than Wall Street had expected.
Walmart Chief Financial Officer John David Rainey told CNBC that the company’s outlook is strong given everything that’s going on in the economy, but he said consumers may feel more depressed as the effect of the tax refund ends in the second quarter.
“I think the tax increase alleviates some of the pressure associated with the increase in fuel prices,” said Rainey. “Since we’re in a period where those tax refunds aren’t coming in, I think consumers are going to feel a lot of that pressure from higher gas prices.”
The TJX Companies it also had a strong quarter — posting its biggest profit per beat since August 2021 as same-store sales jumped 6%, about 2 percentage points above Wall Street expectations. However, its guidance for the second quarter of earnings per share and same-store sales came up short of estimates.
Currently, Elf and Beauty it delivered big beats on the top and bottom lines but still delivered a weaker impression than expected. CEO Tarang Amin told CNBC that “the consumer is suffering” and said the company plans to roll back the price hikes that were prompted as a result.
While retailers may sometimes be “more cautious in their guidance than might be suggested,” executives and analysts generally agree that they can see a more problematic buyer for the current quarter and for the rest of the year, Saunders said.
“[That] it tells you that traders are seeing signs that some of this car around the growth rate is not going to continue for the rest of this year,” Saunders said. “Not that it’s going to be too bad, but just the heat is going to come out of some of that momentum, and I think that has to do with the waning effect of the tax. [refunds] and the inflation picture is likely to increase this year.”
