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Payroll Tax Hike: Killer Whale or Red Herring?

But when the weaker forecast was announced, Darden CEO Clarence Otis blamed the payroll tax hike, along with gas prices and winter weather. He said things had looked promising for the restaurant chain in late 2012 until these "difficult macroeconomic headwinds" blew in. Sales dropped because customers had less buying power, Otis said, despite the restaurants' price cuts and promotions.

"They aren't executing as well as their competitors," says Sara Senatore, an analyst at Sanford C. Bernstein who covers the industry.

Fast food diners, generally lower-end than Darden's casual dining clientele, cut spending quickly when taxes rose, said Steve Wiborg, North America president of Burger King Worldwide (BKW), on an earnings call last month.

Wal-Mart (WMT) offered a similar message when it announced earnings, saying its core customers, poor and middle-class Americans, were spending less because of the payroll tax hike, along with higher gas prices and delayed tax refund checks.

Yet Wal-Mart and other discount retailers saw potential benefits from the tax squeeze. Wal-Mart said it is "confident that our low prices will continue to resonate, as families adjust to a reduced paycheck." Dollar Tree Stores (DLTR) executives said last week that their store would provide a welcome alternative for Americans seeking to cut back.

"We're seeing the effect (of the payroll tax hike) on the consumer," said CEO Bob Sasser, "but we think we're part of the solution and a destination for a cash-strapped consumer who's trying to balance their budget."

Discount retailer stocks are rising. The TJX Cos. Inc. (TJX), operator of T.J. Maxx and Marshalls, is up 6% this year, Ross Stores Inc. (ROST) 7.5% and Stein Mart Inc. (SMRT) 16.6%. Wal-Mart is up nearly 4% since its earnings announcement on Feb. 21, while Burger King has gained more than 9% since it unveiled results on Feb. 15.

Like the midrange retailers and restaurants that can blame their woes on tax policy, lower-end stores may be trumpeting its benefits to them too hastily, says Joesph LaVorgna, chief U.S. economist at Deutsche Bank Securities.

"We don't know much about the first quarter," he said, and retail sales data for recent months have been revised upwards. The tax hike will inevitably hurt consumers in the first quarter, he said, "but that doesn't mean consumer spending is necessarily going to be weak."

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