A perfect storm of food-stamp cuts and low tax refunds is looming — and discount chains like Dollar General and Big Lots could feel the pain

• Off-price retailers are worried that cuts to food stamps and smaller tax refunds will hurt sales. 
• Enhanced SNAP benefits ended in the remaining 32 states this month after three years. 
• Tax refunds are also likely to be smaller because of the wind-down of some expanded tax credits.

Discount chains like Dollar General and Big Lots are warning that cuts to food stamps and lower-than-usual tax refunds this year could start hurting sales. 

This month, 32 states ended the federal increase to food stamps, known as SNAP benefits, that began during the early weeks of the pandemic. At the same time, certain beefed-up tax credits are no longer available, which means many taxpayers are preparing for smaller tax refunds this year. 

Both changes are the result of a wind-down of pandemic-era policies, and it's the combination of factors that has retailers worried — they're coming at a time when inflation has kept prices for everyday goods unusually high, straining the budgets of lower-income consumers in particular. 

Now, the retailers that serve those consumers are preparing for a possible slowdown in spending. 

"In particular, we remain concerned about the lower-income customer, our core customer," Michael O'Sullivan, CEO of off-price department store Burlington, said during a call with investors this month. "In 2022, this customer group bore the brunt of the impact of inflation on real household incomes. We think the impact of inflation will moderate this year, but there are other factors that could hurt this customer, such as a rise in unemployment and the ending of expanded SNAP benefits." 

At value chain Big Lots, where nearly 80% of shoppers have a household income under $100,000, "customers are pinched," CEO Bruce Thorn said during a recent investor call.

"At this point, 30% of that lower household income customer, their expenses today are greater than their income coming in. And 70% of them have curbed spending as a result of that," he said. 

Thorn estimated that the tax refunds, though arriving earlier this year, are about 10% to 15% lower than last year, and when combined with the reduced SNAP benefits, it "further deteriorates lower household income spend." Those shoppers, he said, are "going through a tough time right now." 

It's a similar story at Dollar General. Most of its stores are located in rural communities where customers are "increasingly economically strained," John Garratt, the company's president and chief financial officer, said during a call with investors on Thursday.

"It's possible that this could further pressure the low-income customer somewhat in the near-term," he said. "We didn't see an impact last year. Some rolled off. But the customer is in a different place now." 

Some households will have $258 less to spend per month

These shifts in spending power are the result of several pandemic-era benefits coming to an end. 

The 32 states that will wind down SNAP benefits this month join the 18 states that cut those benefits last year. SNAP was originally expanded in March 2020 to allow households to receive the maximum benefit rather than receiving aid based on their income, meaning that a household of one went from receiving $23 each month to getting $281, Gina Plata-Nino, deputy director for SNAP at the Food Research & Action Center, recently told Insider. 

Which means that some households will have $258 less per month to spend on groceries. 

Then there are this year's tax refunds, which will likely shrink for some lower-income taxpayers, as well as for parents, as two enhanced credits will no longer be available this tax season: the enhanced Child Tax Credit, or CTC, and the Earned Income Tax Credit, both of which were expanded as part of President Joe Biden's first stimulus package.

The CTC meant some families received up to $3,600 per child in 2021 — this year, those same parents would be eligible for $2,000. The EITC, intended to provide relief for middle- and low-earners, was permanently expanded in 2021, but taxpayers are likely to see smaller amounts this year: eligible filers without children go about $1,500 in 2021; this year, they're likely to get $500.