Tax refund shopping spike

March 15, 2013, 08:00 am ET, BY Jolene W.- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

For many Americans, the first quarter of the year is a time when Uncle Sam knocks on their doors to collect taxes.  For those who owe the government, tax season is no fun.  However, for many Americans tax season is a time of shopping and retailers intend on cashing in on the shopping frenzy. 

It is estimated that over $230 billion of tax refunds will be issued to taxpayers this year.  Last year the average federal tax refund was about $2,700 which was more than 75% of Americans’ monthly income!  Even though many taxpayers vow every year to save their tax refunds, historical retail sales indicate that most spend their refunds. 

In the past few years, retail sales during the tax season have consistently grown.  There was an increase of 14% in retail sales in 2007 from the previous year.  In 2008, it was up 9%, 2009, 6%, 2010, 15%, 2011, 16% and 2012, 17%.  As the economy continues to gain strength, it is likely that the increase in sales for this season will be higher this year. 

Retail spending during the tax refund season is largely driven by demographics.  According to a recent survey, 22% of taxpayers making over $75,000 plan to save or invest their refunds while 17% plan on spending them.  20% of men plan on saving or investing their refunds whereas only 10% of women plan on doing the same.  More importantly, the majority of taxpayers making less than $35,000 plan on spending all of their refunds.

So how do taxpayers plan on spending their refunds this year?  History shows that there are two kinds of expenses that most people spend their refunds on - large ticket necessities and discretionary items.

With some refunds ranging to over $10,000 after earned income and child tax credits, people have used their tax refunds for a down payment for a car, pay off large bills and fix their homes.  These are expensive needs that consumers have postponed due to insufficient funds or lack of income. 

It is reported that car sales for February showed strong growth.  Preliminary results indicated sales is at an annual rate above 15 million for the month of February.  General Motors Company (NYSE:GM) achieved the highest unit sold with 224,314 vehicles sold, up 7% from prior year.  Ford Motor Company (NYSE:F) came in second with 195,822, up 9%, then Toyota Motor Corporation (ADR) (NYSE:TM), 166,377, up 4%; and Chrysler, 139,015, also up 4%.

Big box retailers such as Wal-Mart Stores, Inc. (NYSE:WMT), Target Corporation (NYSE:TGT) and Costco Wholesale Corporation (NASDAQ:COST) expected higher sales during tax refund season and this year is no different.  However, Wal-Mart’s sales came short of estimates this year.  According to company officials, the delay in tax refund payments has affected customer spending and was below projected sales for the month of February.  At this point, the retailer had only cashed $2.7 billion of refund checks, down from $4 billion same period last year.  As a result, the company experienced flat sales results compared to last year.  Target experienced similar flat sales results. 

Costco, on the other hand, saw its sales rise.  Revenues increased by 8% to $24 billion while net income increased by 39% to $547 million.  The company’s performance has exceeded Wall Street’s expectations thus far as it welcomed over 15% increase in memberships despite an increase of 10% in membership fees.  Its there-is-something-for-everyone strategy is drawing customers ranging from small business owners to budget conscious individuals.  

As for the discretionary refund check spenders, there are plenty of shopping choices to choose from.  And the larger their refund checks, the more they can buy.  Retailers including Sears Holdings Corporation (NASDAQ:SHLD) and Best Buy Co., Inc. (NYSE:BBY) have ramped up their inventory levels to prepare for this season of shopping.  In the past, shoppers buy large items such as televisions and computers during this time of the year.  For shoppers who do not like waiting in lines and are computer savvy, they usually opt for shopping on the internet.  E-retailers including Amazon.com, Inc. (NASDAQ:AMZN) and eBay Inc (NASDAQ:EBAY) stand to profit from this new wave of internet shoppers.

Not surprisingly, lower income shoppers receive larger tax refund checks due to tax credits that higher income individuals are not eligible for.  Due to the delay in refund checks this year, we will likely see this season of shopping extend well past the April 15 deadline.  For more information on companies in the retail industry, consult our real time trading reports.   

Support and Resistance Plot Chart for

Real Time Updates for Repeat Institutional Readers:

Factset: Request User/Pass

Bloomberg, Reuters, Refinitiv, Zacks, or IB users: Access Here.