The retail industry emerged from a choppy first quarter relatively unscathed, with sales rising and profits growing at many of the largest U.S. companies. But analysts warn that higher-than-usual tax refunds likely provided an artificial boost that is now fading, setting up a tougher test for consumers in the second quarter and beyond.

Market Context

The period between February and May brought fresh concerns about household spending as President Donald Trump initiated a new conflict in the Middle East, driving gas prices higher and weighing on consumer confidence. Despite these headwinds, retailers reporting their fiscal first-quarter results over recent weeks showed few cracks—sales rose, profits grew, and outlooks remained consistent at many major chains.

Analysis

"It was a surprisingly robust quarter," said Neil Saunders, retail analyst and managing director at GlobalData. "Despite the rising gas prices, I think despite the choppiness in consumer sentiment, I think despite the uncertainty over the economy and everything else that's going on in the world, consumers still showed up and they opened their wallets and they spent."

However, analysts attribute much of that resilience to elevated tax refunds. The number of recipients and refund amounts both exceeded year-ago levels, giving cash-strapped consumers extra purchasing power during a vulnerable period.

"That was a very helpful offset in terms of spending. I think without them there would have still been growth, but they really did provide the icing on the cake," Saunders said.

Janine Stichter, retail analyst and managing director at BTIG, noted that buy now, pay later adoption also hit new highs during the quarter. Approximately 15% to 17% of shoppers making up to $150,000 used BNPL services, while adoption among those earning over $150,000 rose to just under 13%, according to transaction data from Consumer Edge cited in a May research note.

"There probably is some level of either actual stress or kind of emotional pullback across all income cohorts on some level, we're just not really seeing it in the earnings results yet," Stichter said. "Maybe it's that they're pulling back in other areas, maybe that they're finding other ways to make payments."

Key Numbers

- Target reported same-store sales jumped 5.6% during fiscal Q1—its first positive comp in five quarters—with strength across all six core merchandising categories

- Ross Stores posted a 17% comparable sales increase, crushing expectations of 9%, and attributed part of the outperformance to extra tax-related stimulus

- Burlington estimated higher tax refunds contributed 1.5 to 2 percentage points to its comparable sales growth of 6%

- Walmart saw sales rise 7% during fiscal Q1 but issued weaker-than-expected guidance for the current quarter

- TJX Companies reported same-store sales jumped 6%, almost 2 percentage points above Wall Street forecasts, posting its biggest EPS beat since August 2021

- Best Buy's comparable sales rose 2%—below the overall electronics market growth of approximately 3.6% during the quarter

What to Watch

As tax refund tailwinds fade, retailers are already signaling caution. Target finance chief James Lee acknowledged that the tax refund benefit "will be fading over the rest of the year" while noting consumers have proven resilient but sentiment has been declining.

Walmart finance chief John David Rainey told CNBC that higher tax returns muted some pressure from elevated fuel prices during Q1, but warned: "As we're in a period of time right now where those tax refunds are largely not coming in, I think consumers are going to feel more of that pressure from higher fuel prices."

TJX Companies' second-quarter guidance for EPS and same-store sales came in below estimates despite its strong Q1 beat. Meanwhile, E.l.f. Beauty CEO Tarang Amin told CNBC the "consumer is suffering" as the company plans to roll back tariff-fueled price increases.

"Once you got through April and May, you're really not seeing the impact of tax refunds anymore, and those months were a little bit choppier," BTIG's Stichter said. "As you peel back these tax refunds, you might start to see some of the underlying weakness."

Ross had what Saunders called a "ridiculously good quarter" with near-unprecedented growth, yet management expects conditions to normalize in Q2 and beyond—not that it will be terrible, but momentum will cool as inflation pressures likely pick up through the rest of 2026.