Q1 2026 retail earnings fueled by tax refunds and BNPL

The retail industry emerged relatively unscathed from a volatile first quarter, but higher-than-usual rebates and a rise in buy now, pay later use likely helped boost spending.

As Wall Street looks ahead to the second quarter, that period could offer a clearer view of consumer health and how much higher gas prices and stubborn inflation are disrupting the economy and putting pressure on already strained household budgets.

“Once you get past April and May you don’t really see the impact of the rebates anymore, and those months were a little bit more volatile, so there are a lot of moving parts that are keeping the consumer afloat longer than we expected,” said Janine Stichter, retail analyst and managing director at BTIG.

“When you look back at these tax refunds, you can start to see some underlying weaknesses… The consumer hasn’t completely dispersed yet, and so people are really asking, ‘Okay, well, what does the health of the consumer actually look like?’ “I think you’re looking at the second quarter to say.”

The period between February and May, which covers the first quarter financial results of many retailers, brought a new wave of concern about household spending. President Donald Trump has unleashed a new conflict in the Middle East that has led to soaring gas prices, falling consumer confidence and renewed concerns about the health of the U.S. economy.

But as retailers reported first-quarter results over the past few weeks, there were few cracks as sales rose, profits rose and outlooks remained consistent at most of the largest U.S. companies.

“It was a surprisingly strong quarter,” said Neil Saunders, retail analyst and managing director at GlobalData. “Despite rising gas prices, I think despite the variability in consumer sentiment, despite the uncertainty in the economy and everything going on in the world, consumers still came in, opened their wallets, and spent.”

However, around the time the conflicts in the Middle East began, tax refunds began to arrive. The number of people receiving tax refunds and the amounts they received were higher than last year, giving cash-strapped consumers extra pocket money for shopping.

“It was a very beneficial balance in terms of spending. I think there would have been growth without them, but they really provided the icing on the cake,” Saunders said.

To take AimSame-store sales increased 5.6% in the first quarter of the fiscal year, gaining strength in all six core retail categories for the first positive same-store sales figure in five quarters, it said. But that strength wasn’t just due to Target’s turnaround efforts, as finance chief James Lee acknowledged that higher tax rebates helped boost spending.

“That benefit will diminish for the rest of the year,” Lee said last week. “While consumers have proven resilient so far, sentiment has been waning recently and we are monitoring their spending behavior closely.”

Similar trends were seen at: Best Buy, Burlington Stores, Ross And wayfair. Comparable sales at Best Buy rose 2%, and executives acknowledged some of that growth came from higher tax rebates. Given that the overall electronics market grew by about 3.6% in the first quarter, Best Buy was still underperforming and losing market share despite the extra stimulus in the economy, Saunders said in an emailed note last week.

The impact was particularly severe in the non-price sector. Burlington estimated the higher tax rebates were worth 1.5 to 2 percentage points of comparable sales growth, which was 6% during the quarter. Rival Ross saw comparable sales rise a staggering 17%, beating expectations of 9%, and attributed some of the overgrowth to extra incentives.

Wayfair finance chief Kate Gulliver said on a call with analysts in mid-May that tax rebates helped “support” the impact of higher gas prices.

“The consumer has been able to hang on there a little bit because of some incentive kind of help,” he said.

Meanwhile, Stichter said there was also an increase in buy now, pay later usage during the quarter, which could help with fuel expenses. In the first quarter, the buy now, pay later app hit new highs across income groups, with an estimated 15 percent to 17 percent earning up to $150,000 using the services, Stichter said in a May research note, citing transaction data from Consumer Edge. Among shoppers making over $150,000, the adoption rate rose to just under 13%.

“There’s probably some level of real stress or some kind of emotional setback across all income brackets, but we’re not seeing that in the earnings results yet,” he said. “Maybe they’re pulling back in other areas, maybe they’re finding other ways to pay.”

That may begin to change in the current quarter, as a number of retailers issue cautious guidance suggesting consumers won’t be able to weather high gas prices as they did at the beginning of the year.

“Ross had a ridiculously good quarter, so it’s almost unprecedented in terms of the level of growth,” Saunders said. “Despite this situation at the bank in the first quarter, their view for the second quarter and the rest of the year is that things will still be good for them, but they will normalize.”

Walmart is another example. The mega-retailer saw its sales rise 7% in the first quarter of its fiscal year, but only reaffirmed its full-year outlook and issued a weaker forecast for the second quarter than Wall Street expected.

Walmart finance chief John David Rainey told CNBC that the company’s outlook is strong given what’s going on in the economy, but consumers may feel more pressure as the impact of rebates wanes in the second quarter.

“I think the higher tax returns alleviate some of the pressure associated with higher fuel prices,” Rainey said. “I think consumers will feel more pressure from higher fuel prices as we are currently in a period where tax refunds are largely non-refundable.”

TJX Companies It had a strong quarter, posting its biggest gain per share since August 2021, as same-store sales rose 6%, nearly 2 percentage points above Wall Street expectations. Still, the second-quarter forecast for earnings per share and same-store sales fell short of estimates.

Meanwhile, Elf Beauty It made significant improvements at the top and bottom lines, but still showed a weaker performance than expected. CEO Tarang Amin told CNBC that “consumers are suffering” and said the company plans to roll back some tariff-induced price increases as a result.

While retailers may at times be “more cautious in their guidance than reality suggests,” Saunders said executives and analysts generally agree they could see a more nervous consumer this quarter and the rest of the year.

“[That] “Retailers are saying they are seeing signs that some of this trough in the growth rate may not last through the balance of this year,” Saunders said. “Not that it’s going to be terrible, but there’s just going to be warmth coming from some of this momentum, and I think that has to do with the diminishing impact of the tax.” [refunds] and the inflation picture will probably recover in the balance of this year.”