Will Tax Returns Turn Around Sad Spring Comps?


Philip Taylor

A whole herd of scapegoats seems to run free around earnings season. If it’s not political vitriol it’s a holiday shift or some bad weather to blame for bad comps.  

The comps this year have been pretty ugly. Knapp Track showed a -3.4% SSS decline and TDn2K’s Black Box Intelligence showed a -3.7% SSS decline in February. According to TDn2K, it’s the weakest results in the past four years. One thing keeps coming up during earnings calls:  the delay of tax refunds.

Could slow tax returns really be that damaging? According to BTIG analyst Peter Saleh, yes.

“I think people said it was more of a scapegoat and companies were spooked more so by the numbers,” said Saleh. “But we believe it to be true and the underlying trend is not as bad as people think.”

Slowness caused by new tax rules held back billions of dollars in the name of preventing tax fraud. Any tax return that claimed either the Earned Income Tax Credit or the Additional Child Tax Credit was held until at least February 15.

Jack in the Box, Del Taco, Darden, Sonic and a handful of other companies blamed the sales slowness on tax returns, but said typical tax spending has been helping since mid-February.

The skeptical, however, are going to need some more evidence. Saleh issued a report dubbed "Spending Found Money," which explored refund time around another notable “found-money” event: 2008 stimulus checks.

Saleh looked at dismal numbers from 2007-2008 that showed the bumpy decline going into the Great Recession.

“We looked back into 2008 and what happens when consumers get some what we call ‘found money,’” said Saleh. “In 2008 we were heading into a recession, basically from September of 2007 we had negative comps for eight months. At the end of April beginning of May, the government issued those stimulus checks to 100 million families across the country. And in May we had the first positive comp for eight months, Knapp was up 60 basis points and you can see it in the McDonald’s numbers, Olive Garden’s, Red Lobster’s.”

In short, it showed that when consumers get a little windfall, “they tend to spend it,” said Saleh.

Stimulus payments, as many remember, were $300 to $600, and $600 to $1,200 for joint filing households plus more for each additional child. Payments were targeted toward lower- and middle-income households.

In all, the stimulus added up to $96 billion, but the bulk of that ($47.8 billion) came in May 2008. And in May, there is a big spike in comps. According to Knapp Track, same-store sales bumped up .6% in May after eight months of declines. It also showed a 260 basis point and 120 basis point of improvement on a one- and two-year basis respectively, according to Saleh. Olive Garden posted an 11% SSS bump, Red Lobster saw a 2.5% bump, McDonald’s U.S. operations saw a 4.3% increase in May 2008.

As for the current backlog of refunds, as of February 10, there was $65.1 billion held up by the new rules, a 69.2% difference between that same date in 2015. And the average refund was higher than those stimulus checks. According to BTIG and the IRS, average rebates came in at $2,897 as of March 24, 1.1% ahead of the average 2015 refund.

Saleh said he thinks it will mean this ugly trend downward will bounce back—at least somewhat—when the final March numbers come in.

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