Walmart, Dollar Tree, and auto and home retailers stand to benefit from higher tax refunds

This tax season, Americans are ending with a few extra dollars in their pockets to spend.

The average refund amount so far this year is $3,081, up 6% compared to last year. The extra cash may provide a slight boost to low income consumers, benefitting discount retailers like Walmart (WMT), Dollar General (DG) and Dollar Tree (DLTR), says CFRA analyst Arun Sundaram.

However, with rising household, credit card, and auto debt, there likely won’t be a material shift in overall spending, as some consumers put the money to other uses.

“Tax refunds have a greater impact on lower income families, so if these lower income families are getting more tax refunds this year versus last year, that should benefit discount stores,” Sundaram told Yahoo Finance over the phone.

“You could also potentially see a lift for specialty retailers like apparel or footwear stores … consumers are using a portion of that refund to splurge on those kinds of items,” Sundaram added.

Think Lululemon (LULU), which recently posted guidance that fell short of Wall Street’s expectations.

In a note to clients, JP Morgan analyst Christopher Horvers said that tax refunds, combined with the potential child tax credit, could lead to retailers’ ending the first quarter “on a high note.” He pointed to auto stores as one beneficiary, and others with higher exposure to low income shoppers.

Read more: Everything you need to know about the child tax credit

Companies he identified include AutoZone (AZO), O’Reilly Automotive (ORLY), Advanced Auto Parts (AAP), Academy Sports and Outdoors (ASO), and Dick’s Sporting Goods (DKS).

“Consumers will do one of two things with a large tax refund, they’ll get caught up on credit card bills, or they’ll go out and make a large durable goods purchase,” S&P Global Market Intelligence economist Michael Zdinak told Yahoo Finance .

The purchase of durable goods, like a dishwasher or refrigerator, could benefit home improvement stores like Home Depot (HD) or Lowe’s (LOW).

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“A lot of people use these tax refunds for home improvement projects as well,” Sundaram said.

As the tax filing period started a week later in 2024, more people are still waiting to get their refund. Year to date, the amount of tax refunds handed out is down 2%, or $3 billion.

And people have been in less of a rush to file for taxes since the pandemic, per Zdinak, thanks to stimulus checks and a strong US labor market.

Even though retailers could see a boost in Q1, Zdinak says the most spending will likely occur in April and May, as tax refunds become a lingering tailwind for retailers.

Companies that skew higher-income may not see an uptick, such as Costco (COST), which beat earnings last quarter. Its grocery rivals like Kroger (KR) probably won’t get much of a lift either, as people tend to go for goods on their wishlist instead of everyday essentials with the extra dough.

“Most of those food retailers don’t really sell much discretionary items, mostly just food and beverage and household products,” said Sundaram.

Read more: Expecting money back? Here are 5 smart ways to use your tax refund

Paying down debt, boosting savings

Some Americans are planning to stash this cash.

According to a client note from Michelle Weaver of Morgan Stanley, 47% of consumers who already received their tax fund or expect to get it will put “at least a portion” to savings. For filers making over $100,000, the figure rises to 62%.

Across all income groups, 37% intend to use the money to pay off debt. In Q4 of 2023, credit card debt was up $143 billion year over year, according to the Federal Reserve Bank of New York.

Mortgage debt was up $329 billion, auto debt was up $55 billion, and student loans were up $6 billion, resulting in a total US household debt increase of $604 billion.

Zdinak said he is keeping a watch for if “consumers [are] finally over leveraged.”

“As long as the labor market remains as tight as it is … people have jobs and wages are growing, those debt balances aren’t really at a level where historically they should be a problem,” he said.

Consumers may pay down debt in the second quarter though, then use what’s left to splurge on goods in the third quarter, he said.

Read more: Here are 7 free tax filing options

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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at [email protected].

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