FIVE, WOOF Steer Tariff Refunds Into Stores and Merchandise

On September 2, 2026, Five Below (FIVE) and Petco (WOOF) each used their second-quarter earnings calls to explain what they are doing with the one-time tariff refunds now sitting on their balance sheets. The amounts differ by more than twentyfold — $170 million pre-tax at Five Below [1] against a net $6.8 million at Petco [2] — but both companies pointed the money in the same direction: back into stores, digital platforms and merchandise.

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Cash nobody had put in guidance suddenly needs a use

The refunds trace back to import duties the United States levied under the International Emergency Economic Powers Act (IEEPA, rendered as "IEPA" in some call transcripts). After the Supreme Court found those duties unlawful, Customs began returning to each importer the amounts it had already paid [3]. Retailers are the importer of record for their own-brand goods, so they paid the duties and they receive the refunds, arriving as a lump sum in the fiscal quarters that ended in July and August.

What makes this cash unusual is that nobody knew how much would come back or when. On its June 3 first-quarter call, Five Below stated that guidance included no IEEPA refund benefit and that the timing and magnitude of any refund remained undefined [4]. By the time the money landed, it counted neither as operating improvement nor as something guidance had already claimed, which left management with fully discretionary cash and at least four uses: invest in growth, hand it to customers as lower prices, buy back stock, or do nothing and let it sit in the gross margin. Import-heavy retailers faced that same question in the same quarter and answered it differently.

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Two refunds of very different size point at the same kind of spending

Five Below received the largest refund and described its use most specifically. The company ended the second quarter with roughly $1.2 billion in cash, cash equivalents and investments, including $170 million of pre-tax IEEPA refunds, while its outlook excluded both the refunds and any future share repurchases [1]. Pressed by a Bank of America analyst on how to model the back half, CFO Dan Sullivan ranked the uses as in-store customer experience first, then the digital platform, then the product itself and the search for newness, and said the money should show up mainly in capital expenditure [5].

Petco received far less and went the same way. Own-brand imports account for only about 5% of the pet retailer's cost of sales; second-quarter gross margin rose 37 basis points year over year to 39.7%, including a $6.8 million net refund benefit, and was roughly flat without it [2]. Strip out the refund and the quarter shows no real margin improvement. The company still used part of the money to clear legacy inventory faster so new assortment could reach shelves sooner, and expects to exit the third quarter with more newness in its assortment than it carried in the second [6].

The same day also produced a company that put an identical refund straight into price. Discount retailer Ollie's Bargain Outlet (OLLI) told investors that its 70 basis points of price investment in the quarter probably would not have happened without these refunds funding promotions across the industry [7]. Together the three disclosures support a narrow conclusion: the cash is real and already received, but each company decides on its own which line of the income statement it lands in.

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Whether the refund goes to price or to capex determines when it becomes visible

The choice of use changes how soon outsiders can see the money. Refunds routed into price show up the same quarter in gross margin and promotional intensity; refunds routed into stores and merchandise wait several quarters while capital spending turns into traffic and a refreshed assortment. Companies choosing reinvestment therefore face two to four quarters of price competition funded by the same one-time cash while their own spending has yet to reach sales. Scale magnifies the effect: Walmart (WMT) received roughly $2.9 billion in refunds and applied them to lower prices [8], an amount large enough to change promotional intensity across the low-price segment.

Two limits sit on this reading. The refunds are one-time, so price investment funded by them cannot repeat year after year — the 70 basis points Ollie's described is that kind of spending. The reinvestment side is not locked in either: on the same call, Five Below's board approved a new $600 million repurchase authorization, which management called an attractive alternative for deploying excess liquidity [1]. The checkable indicators are specific — whether Five Below's actual capital expenditure rises, whether Petco's assortment newness and comparable sales follow after the third quarter, and whether promotional intensity on the price side falls back once the refunds are spent.

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Which companies this change affects:

• Burlington Stores (BURL): An off-price apparel retailer built on imported goods and an importer of record for the same duties, facing the same question about what to do with a refund once it arrives; this research contains no direct disclosure from its own call, so the exposure remains unverified.
• The TJX Companies (TJX): Operator of T.J. Maxx and Marshalls, whose sourcing model and merchandise mix overlap heavily with the retailers above, so how the industry splits refunds between price and product directly changes the promotional environment it faces; this research likewise contains no direct disclosure from the company.

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Sources

[1] Drillr · Five Below (FIVE) · 2026-09-02 · Q2 FY2026 earnings call, CFO prepared remarks

[2] Drillr · Petco (WOOF) · 2026-09-02 · Q2 FY2026 earnings call, CFO prepared remarks

[3] BBC · Target (TGT) tariff refund report · 2026-08-19 · News report · https://www.bbc.co.uk/news/articles/c78gp4y8d3eo

[4] Drillr · Five Below (FIVE) · 2026-06-03 · Q1 FY2026 earnings call, risks section

[5] Drillr · Five Below (FIVE) · 2026-09-02 · Q2 FY2026 earnings call, Q&A

"And so I think as you put all three of those together, I would expect that it will disproportionately be seen in CapEx, and it will be seen over time."

[6] Drillr · Petco (WOOF) · 2026-09-02 · Q2 FY2026 earnings call, CEO prepared remarks

[7] Drillr · Ollie's Bargain Outlet (OLLI) · 2026-09-02 · Q2 FY2026 earnings call, Q&A

[8] Business Insider · Walmart (WMT) tariff refunds used for price cuts · 2026-08-20 · News report · https://www.businessinsider.com/walmart-using-tariff-refund-price-cuts-customer-experience-sales-2026-8

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