Restaurant sales rise as tax refunds catch up

With the federal government beginning to catch up on delayed income tax refunds, consumers are likely loosening the purse strings that have choked restaurant sales in January and February, research analysts say.

Piper Jaffray analysts issued an industry note this week citing that tax refund activity through March 15 was higher than comparable weeks in the prior year.

“We believe retailers serving lower- to middle-income consumers that were weighed down by delayed federal income tax refunds in late January and the first half of February have likely seen an improvement in sales trends in recent weeks,” the report said. Restaurant companies that have cited tax refunds as sales drivers in the past, Piper Jaffray said, include Darden Restaurants Inc., with its Red Lobster, Olive Garden and LongHorn Steakhouse brands, and Brinker International Inc., with its Chili’s Grill & Bar and Maggiano’s Little Italy concepts.

Individual income tax refunds through March 15 had totaled $161 billion, which is about $18 billion less than season-to-date in 2012, according to Treasury Department data.

While the Piper Jaffray report noted that the shortfall has been significant to date, it also pointed out that more than 38 percent of refunds from January though April, about $260 billion, are still to come — and that they're already starting to catch up.

“There has been noticeable catch-up recently, with the last three weeks all seeing increased refund activity versus the comparable weeks from last year,” the Piper Jaffray note said. “We expect total refund dollars for 2013 to be similar to 2012 and, as such, expect further catch-up to continue into late April.”

While several foodservice companies such as Krispy Kreme and Fiesta Restaurant Group have noted in sales and earnings releases this month that the impact has been negligible, several others such as McDonald’s, Luby’s Inc. and Ignite Restaurant group have noted sales dips in the January-February period.

Piper Jaffray analysts said they believe the latter part of the first quarter is trending better than many earlier company earnings calls implied.

“With tax refunds by week now increasing year-over-year, we expect many of these retailers are seeing an improving sales trend,” the Piper Jaffray note said. “Certainly, headwinds from higher payroll taxes, gas prices and difficult weather comparisons remain in place, but tax-refund-related spending should have seen a noticeable pick-up in recent weeks and could leave management teams slightly more optimistic.”

The analysts said they would expect refunds for returns filed on time to be received by the end of April, “suggesting a positive impact for companies with an April quarter end.”