Dive Brief:
- Moody’s Ratings upgraded its outlook for the global retail and apparel sector to stable, reversing its previous negative forecast, on the basis of easing tariff costs and stable labor markets, according to an Oct. 7 report.
- The new forecast predicts sector revenue growth of between 2% and 4% alongside 0% to 2% adjusted EBIT growth over the next 12 to 18 months, reversing a 0.7% decline in adjusted EBIT in 2025 and a previous 2026 adjusted EBIT forecast of flat to down 2%.
- The company said tariff refunds could also “help offset higher energy and transportation costs,” while “solid household finances are supporting overall consumption.” However, the report cautioned, “uneven consumer demand, slower real wage growth, higher interest rates and geopolitical risks all pose hazards.”
Dive Insight:
Moody’s said consumer spending will be “resilient but increasingly bifurcated” in the months ahead, with consumption growth driven mainly by upper-income households. Meanwhile, lower- and middle-income households are stressed due to myriad economic challenges, including rising costs associated with housing, insurance, food and energy. These expenses mean that lower-income shoppers will continue to pursue value- and essentials-focused spending, and may rely more heavily on credit.
Amid this spending environment, discounters, off-price and dollar stores are expected to do well, including Walmart and Target in light of the approximately $4 billion in combined tariff refunds the two retailers “can use strategically to reinvest in pricing and strengthen their market positions.” Retailers including Levi’s and Macy’s have also been leveraging tariff refunds to bolster their respective turnaround efforts.
The off-price sector’s ‘treasure hunt’ appeal” should offer significant growth opportunities as price-conscious consumers turn to retailers including TJX and Ross Stores, as well as dollar stores such as Dollar General, Moody’s said.
By contrast, rising interest rates are constricting the housing market, which will likely impact sectors including home improvement and furnishings. Moody’s projected tepid growth for home-improvement companies such as Home Depot and Lowe’s, but said low fixed-rate mortgages in the U.S. may mean existing homeowners will want to “pursue smaller projects that do not require financing.”
Lower tariff rates and refunds have reduced costs, especially for import-dependent apparel and footwear retailers including Nike and Gap, and large discounters and general merchandise stores including Walmart and Target. However, Moody’s said the U.S. trade policy is still uncertain, particularly in relation to U.S. relations with Mexico and Canada, where trade agreements are “under review amid elevated tensions.”
In addition, an extended period of high energy prices amid continued geopolitical tensions may hurt discretionary consumer demand and input costs. These increased energy costs would also hurt retailers’ freight and transportation, and could “reignite pressure for companies to raise prices.”
Despite a largely positive outlook, Moody’s added that the forecast could shift to negative if EBIT declines due to “slowing consumer spending, higher energy, input or financing costs, weaker employment or renewed tariff escalation.”
Looking immediately ahead, the coming holiday season is expected to be promotion-driven as budget-conscious consumers shop carefully and plan ahead.
