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News > Economy
Rebates boost retailers
August 2, 2001: 2:42 p.m. ET

Consumers are spending tax rebates, but is it enough to save the economy?
By Staff Writer John Chartier
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NEW YORK (CNNfn) - Many retailers are likely to get a lift as Americans go shopping with their tax rebate checks, boosting sales and in some cases adding to the bottom line, analysts said.

About $40 billion in rebate checks began arriving in mailboxes this week as part of President Bush's $1.35 trillion tax relief plan, and some analysts predict half to three-quarters of that will be spent on Main Street.

Discount chains such as Wal-Mart Stores Inc. (WMT: up $0.87 to $55.88, Research, Estimates), Target Corp. (TGT: up $0.39 to $38.09, Research, Estimates), B.J.'s Wholesale Club Inc. (BJ: up $0.64 to $55.88, Research, Estimates) and Kohl's Corp. (KSS: up $1.01 to $58.07, Research, Estimates) stand to reap the most gains since bargain-hunting consumers have shifted away from department stores and high-end specialty shops amid the slowing economy. Home improvement retailers such as Home Depot also are likely to benefit.

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Analysts estimate consumers will spend 50%-75% of their rebate checks on Main Street (CNN/FILE)
"Discount stores have really become an increasing portion of consumers' expenditures. Now there's talk of fluctuating energy prices, job layoffs, and people are looking for the best value possible," Robertson Stephens analyst Bill Dreher said. "So we believe the discount stores are going to benefit disproportionately from the tax rebate. We expect Wal-Mart will be the leader in July."

Wal-Mart, the nation's biggest retailer, is cashing rebate checks free. The Bentonville, Ark.-based discount chain said those who are bringing their checks in this week are spending roughly 25-30 percent in the store. At least one analyst believes the boost could add 7 cents a share to the company's second-half earnings.

Televisions, computers, video game consoles, DVD players and air conditioners were the top sellers, the chain said in its weekly sales summary. Consumers also spent their checks on cameras, mobile phones, camcorders and bicycles.

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However, that estimate includes only those who cash their checks and then enter the store. Dreher points out that merchants have no reliable way of tracking people who cash their checks elsewhere, then come to the store, or even those who cash them at the store but return another day to spend the cash.

That means sales directly related to rebate checks could actually be higher than what retailers are tracking.

Dreher raised his second half outlook for Wal-Mart last month noting that the company has been able to keep operating and inventory costs stable during the slowdown, which means any benefits from the rebate checks are likely to go straight to the bottom line.

"We've been really pushing very hard at being in stock. In retail, execution is the trick," Wal-Mart spokesman Tom Williams said.

Atlanta-based Home Depot Inc. (HD: down $0.21 to $49.57, Research, Estimates), the nation's largest home improvement retailer and which is also offering to cash checks, said it is too early yet to gauge whether people are bringing them into the stores. But the company said 30 percent of consumers it surveyed said they plan to spend their rebate checks on home improvement projects.

"Consumer spending is heavily devoted to hard goods. That implies for the most part that home-oriented things have been doing well for some time," said Kurt Barnard, president of Barnard's Retail Trend Report in Upper Montclair, N.J. "Home sales have been skyrocketing. Every time a home changes hands, tens of thousands of dollars are spent on decorating, furnishings, adding new kitchens and bathrooms."

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Home Depot not only is offering to cash the checks, but also is encouraging consumers to come in and spend the money before they even have the rebate in hand. The company is urging consumers to buy products that improve energy efficiency such as programmable thermostats, insulation, weather stripping and fluorescent light fixtures.

"Home Depot hopes that consumers not only will come to our stores, but will specifically spend that money on energy savings to carry them through the winter season," spokeswoman Shelley Schumaker said.

Consumers also are expected to use their checks to supplement back-to-school shopping, which is just getting into gear. And school-related purchases typically command higher margins than other periods, analysts said.

"It's way too early to actually tell its impact. Such a small fraction of consumers have gotten them. People will use them to supplement back-to-school shopping budgets and home improvement projects people have been putting off," said Scott Krugman, a spokesman for the National Retail Federation.

Despite the third-quarter shot in the arm, many worry the checks represent a one-time deal, and that once they're spent retailers and the economy will continue to sputter.

"It's going to be a one-time pop, and it's not going to be much of a pop, either," said Barnard.

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  It's going to be a one-time pop, and it's not going to be much of a pop, either  
     
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  Kurt Barnard
President
Barnard's Retail Trend Report
 
Retailers are upbeat about the boost checks will give to July sales, which most are set to report Aug. 9, but without consumers treating themselves or buying necessary items, sales are expected to be relatively weak.

"July sales numbers are not going to be very good, maybe a tad better than they would have been without the checks," Barnard said.

Though consumers, whose spending makes up two-thirds of the economy, have been the lone holdout amid this latest slowdown, signs that their confidence has begun to waver came in the latest gauge of consumer sentiment from the government. Additionally, the manufacturing sector, which has been hardest hit by the downturn, continues to decline.

Home sales have remained robust and people are spending money on durable goods and big-ticket items such as automobiles and appliances, as well as everyday items like toothpaste.

Click here for a look at retail stocks

Purchasing agents reported this week that manufacturing declined in July and the government said factory orders fell in June, pointing to more sluggish demand for products and manufacturer's efforts to draw down inventory and cut costs.

However, jobless claims fell slightly, giving investors some hope that the economy is bottoming out and a solid recovery is around the corner. graphic

  RELATED STORIES

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