By Sabrina Escobar
If you got a pleasant surprise when filing your taxes, you aren't alone. Many Americans are seeing plumper tax refunds this year -- a potential relief to retailers, who started the year on shaky footing as consumer spending has slowed down.
Tax refunds are nearly 5% higher, on average, this year than in 2023, according to the latest data from the Internal Revenue Service. The average refund amount is $3,050, up 4.8% from $2,910 a year ago.
There are a few factors bumping up refunds this year. For one, the IRS raised tax-bracket thresholds and boosted the standard deduction by close to 7% to account for inflation.
It also helps that last year's refunds were some of the lowest in years. The total amount of taxes refunded was about 8% less than for 2021 because a series of pandemic-era tax credits and stimulus payments expired.
Whatever the reason for the higher figure, analysts are cheering the outcome. While a good chunk of consumers are planning to use the funds to pay down debt or pad savings accounts, just under a third of respondents intend to spend it, according to a Bankrate survey.
"This should help overall retail sales in the first calendar quarter, and perhaps early 2Q," wrote D.A. Davidson analyst Michael Baker in a Monday note to clients.
Retailers catering to people with less money will likely benefit more from the refunds, analysts say. Low-income households have been especially hard hit as inflation and higher interest rates have crimped budgets across the board. The refunds may give families some extra breathing room for the next couple of months.
"A better pace of tax refund flows lately represents a needed positive for the lower-end consumer still fighting through the compounding effects of inflation," wrote David Bellinger, an analyst at Mizuho Securities.
That bodes well for companies such as Five Below, CarMax, and AutoZone, Bellinger said, as a significant percentage of their core customers are at the low end of the income spectrum. Walmart and Grocery Outlet also stand to benefit, D.A. Davidson's Baker said, as well as discount stores such as Dollar Tree and Dollar General.
"A lot more liquidity for our customers and their wallets is good for business, good for all retailers," said Robert Helm, chief financial officer of Ollie's Bargain Outlet, in a March call with investors.
Last year, a host of retailers, including Walmart, Foot Locker, and National Vision Holdings, called out lower refunds as one of factors dragging on top-line growth in their fiscal first quarters. Earlier this year, it looked such as refunds could again be a problem, given that tax season started later and the IRS has processed fewer refunds now than it did a year ago. Five Below, Burlington Stores, and Ollie's Bargain Outlet all noted that their first-quarter sales were getting off to a slow start because tax season started later than usual.
The IRS began accepting returns on Jan. 29, compared with Jan. 23, 2023, for 2022 filings. But as the agency works through the backlog, retailers expect the higher refunds to offset the late start to the season.
"Our core customer is just extremely sensitive to the timing of tax refunds, especially the timing of earned-income tax credit," said Burlington CEO Michael O'Sullivan in a March earnings call. "Now we're expecting the tax refunds will catch up over the next few weeks."
Write to Sabrina Escobar at sabrina.escobar@barrons.com
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April 09, 2024 02:00 ET (06:00 GMT)
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