The retail industry emerged from a choppy first quarter relatively unscathed, but higher than usual tax refunds and an uptick in buy now, pay later use likely helped to buoy spending.

As Wall Street looks ahead to the second quarter, the period could offer a clearer view on consumer health and just how much high gas prices and persistent inflation have disrupted the economy and pressured already-strained household budgets. 

“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, so there’s a lot of moving pieces that maybe kept the consumer going for longer than we would have expected,” said Janine Stichter, a retail analyst and managing director at BTIG.

“As you peel back these tax refunds, you might start to see some of the underlying weakness … the consumer has not yet fully fallen apart and that’s why I think people are really looking to Q2 to say, ‘All right, well, what does the health of the consumer actually look like?'”

The period between February and May — which encompasses many retailers’ fiscal first-quarter results — brought a fresh wave of concerns about household spending. President Donald Trump started a new conflict in the Middle East, which led to surging gas prices, plummeting consumer confidence and renewed concerns about the health of the U.S. economy. 

But when retailers reported their first-quarter results over the last few weeks, there were few cracks to be found as sales rose, profits grew and outlooks stayed consistent at many of the largest U.S. companies.

“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, right around the same time the conflict in the Middle East began, tax refunds started trickling in. The number of people who received them, and the amounts they got, were higher than last year, which gave cash-strapped consumers some extra pocket money to go shopping. 

“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,” said Saunders.

Take Target, which said same-store sales jumped 5.6% during its fiscal first quarter, its first positive same-store sales number in five quarters with strength across all six of its core merchandising categories. But the strength wasn’t just because of Target’s turnaround efforts, as finance chief James Lee acknowledged higher tax refunds helped to fuel spending.

“That benefit will be fading over the rest of the year,” Lee said last week. “While consumers have proven to be resilient so far, sentiment has been declining recently and we’re keeping a close eye on their spending behavior.” 

Similar trends were spotted at Best Buy, Burlington Stores, Ross and Wayfair. At Best Buy, comparable sales rose 2%, and executives acknowledged part of that growth came from higher tax refunds. Considering the overall electronics market grew by about 3.6% during the first quarter, Best Buy still underperformed and lost market share, even with extra stimulus in the economy, Saunders said in an emailed note last week. 

The impact was particularly acute in the off-price sector. Burlington estimated higher tax refunds were worth between 1.5 to 2 percentage points of its comparable sales growth, which was 6% during the quarter. Competitor Ross saw comparable sales jump a staggering 17%, beating expectations of 9%, and also attributed some of its outsize growth to extra stimulus. 

During a call with analysts in mid-May, Wayfair finance chief Kate Gulliver said tax refunds had helped “buttress” the impact of higher gas prices. 

“The consumer’s been able to hang in there a little bit because of stimulus sort of helping,” she said. 

Meanwhile, there was also an uptick in buy now, pay later use during the quarter, which could’ve helped fuel spending as well, said Stichter. During the first quarter, buy now, pay later adoption hit new highs across income cohorts, with an estimated 15% to 17% of those making 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, adoption rose to just under 13%.

“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,” she said. “Maybe it’s that they’re pulling back in other areas, maybe that they’re finding other ways to make payments.” 

That could start to change in the current quarter, as a range of retailers gave conservative guidance that suggested consumers may not be able to weather high gas prices as well as they did earlier in the year.

“Ross had a ridiculously good quarter, I mean, almost unprecedented in terms of the level of growth,” said Saunders. “Even with that in the bank for the first quarter, their view going into 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 sales rise 7% during its fiscal first quarter, but only reaffirmed its full-year outlook, and issued weaker guidance for the second quarter than Wall Street expected.

Walmart finance chief John David Rainey told CNBC the company’s outlook was strong given everything happening in the economy, but said consumers may feel more strain as the effect of tax refunds fades in the second quarter.

“I think higher tax returns muted some of the pressure related to higher fuel prices,” said Rainey. “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 also had a strong quarter – posting its biggest earnings per share beat since August 2021 as same-store sales jumped 6%, almost 2 percentage points above Wall Street expectations. Still, its second-quarter guidance for earnings per share and same-store sales came in short of estimates.

Meanwhile, E.l.f. Beauty delivered sizable beats on the top and bottom lines but still issued a weaker-than-expected outlook. CEO Tarang Amin told CNBC the “consumer is suffering” and said the company plans to roll back some tariff-fueled price increases as a result. 

While retailers can at times be “more cautious in their guidance than the reality might suggest,” executives and analysts generally agree they could see a more strained consumer in the current quarter and the rest of the year, said Saunders. 

“[That] tells you that retailers are kind of seeing the signs that some of this trough around the growth rate won’t persist across the balance of this year,” said Saunders. “Not that it will be terrible, but just the heat will come out of some of that momentum, and I think that is related to the fading impact of tax [refunds] and the picture of inflation that will probably pick up across the balance of this year.”