Tax Rebate Likely Won't Float Retail's Boat

Retailers probably will see only a small bump from the $13 billion in tax credit checks being sent out.
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Rebate checks will soon go out to millions of taxpayers, but the extra cash in consumers' pockets may mean little for struggling retailers.

The money being handed out to taxpayers represents only a fraction of what consumers spend in any given month. Meanwhile, consumers are likely to be choosy in how they spend their rebates, meaning that the extra cash may benefit only a small number of retail outlets, analysts say.

"The cut is so small that it probably is not going to have much of an impact on retail sales in general," said Jay McIntosh, who heads the retail industry group at Ernst & Young. "There will be a lift. It just won't be a measurable lift because of the small size of the numbers."

As part of the tax-cut package signed by President Bush earlier this year, Congress raised the per-child tax credit from $600 to $1,000. As part of the tax bill, the Internal Revenue Service is sending out advanced payment of the $400 credit difference.

The IRS estimates that 25 million taxpayers will receive checks totaling more than $13 billion.

While that may seem like a good chunk of change, it's equivalent to a small portion of overall consumer spending. Last year, consumers spent about $3.6 trillion at retailers, restaurants and automobile dealers. Excluding spending at restaurants and on cars and car parts, consumers spent nearly $205 billion in May alone.

Still, the checks come as many retailers have struggled to boost sales. After a

slow holiday season, many retail chains reported disappointing first-quarter results. Although some have reported a pickup in sales in recent weeks and months, some analysts have attributed the rebound to widespread promotions that are likely affecting retailers' bottom lines.

Some believe the rebates may have a short-term impact on consumer spending. Tax rebates typically boost sales incrementally, said Richard Hastings, a retail analyst with credit agency Bernard Sands. But in the longer term, such an effect may not counterbalance the various weights that are dragging down the economy in general, and retail sales in particular, Hastings said.

Unemployment is too high, Hastings said. Meanwhile, the country is awash in low-cost goods, particularly from China, he said. This production is outpacing demand, leading to the promotions that have cut into retailers' revenues, he said.

"These are some of many issues that haven't been fixed," Hastings said, adding that "the jury is still out" on how much of an impact the tax package will have.

Even those that see the economy improving don't see the tax rebates having a particularly large effect. Michael Niemira, a retail analyst and vice president at the Bank of Tokyo-Mitsubishi, expects the economy and retail sales to pick up in the second half of the year.

Manufacturing is already starting to improve, he said. Another hopeful sign is that while the unemployment rate has continued to rise, the number of newly unemployed people has begun to fall, he said. But those effects have begun to happen without the tax rebates.

The Bucks Stop Here

In addition to the child tax credits, Congress also lowered tax rates. Many taxpayers have begun to see slightly larger paychecks as a result as employers adjust their withholding rates.

But even combining these two factors, consumers are likely to spend only about a third of their windfall, said Niemira, drawing on data from the 2001 tax cuts. And most of that spending will come over time, not right away, he said.

"I don't think anyone expects it to be a big boost," Niemira said. "It will be a modest positive and probably become increasingly more positive as time goes by."

But retailers can't expect that they automatically will benefit, noted Niemira and other analysts. Consumers still will have an incentive to limit discretionary purchases, meaning that retailers will have to find ways to entice customers to shop, Niemira said. Meanwhile, consumers have other needs and desires that will be competing for dollars, including restaurants, travel destinations, medical bills -- and paying down debt, said McIntosh.

"There's a lot of ways they can spend that aren't retail," he said.

The Lucky Few

The distribution of the rebate checks also may have an effect on how much is actual spent and what companies benefit. One of the criticisms lodged against the tax package was that lower-income taxpayers won't be receiving the rebates.

"It should be a help, but it's not going be as big a help as

the tax cut two years ago," said a fund manager, who asked not to be named. "It's targeted to people that are not as likely to spend. The more affluent

consumers don't necessarily need to go out and spend right away."

Stores that focus on more affluent consumers, such as

Target

(TGT) - Get Report

and

Kohl's

(KSS) - Get Report

, should be the primary beneficiaries of the rebate checks, the fund manager said.

Hastings sees the main retail beneficiaries of the tax rebate as electronics retailers and home-improvement chains. Home-improvement stores have been riding the housing boom, and consumers have been spending to fix up their older homes or their newly acquired ones.

Meanwhile, "home entertainment

and electronics is where people like to spend money if they have it," he said.

Regardless of which sectors might see a boon, the individual companies that will benefit likely will be those that already are doing well, said a buy-side analyst, who asked to remain anonymous.

"The trend really is the friend," the analyst said. "Stores that have been doing well will get the benefit. Consumers are not going to go to stores that they haven't been visiting."

But even if some companies see sales surge due to the rebates, it likely won't be enough to make even their quarter, the analyst said.

"I don't think it's going to be something that tips the needle in any direction," the analyst said.