Moody’s Ratings has upgraded its outlook for the global retail and apparel sector to stable, reversing a previous negative forecast. The change, announced in an October 7 report, cites easing tariff costs and stable labor markets as key factors.
Revenue Growth Expected, But Challenges Remain
The report predicts sector revenue growth of 2% to 4% and adjusted EBIT growth of 0% to 2% over the next 12 to 18 months. This marks a turnaround from a 0.7% decline in adjusted EBIT forecast for 2025 and a flat to down 2% prediction for 2026.
Moody’s highlights tariff refunds as a potential buffer against higher energy and transportation costs. However, it also warns of uneven consumer demand, slower wage growth, higher interest rates, and geopolitical risks.
Diverging Consumer Spending Patterns
Consumer spending is expected to remain resilient but bifurcated. Upper-income households are likely to drive consumption growth, while lower- and middle-income households face economic pressures from rising costs in housing, insurance, food, and energy.
This disparity favors discounters, off-price retailers, and dollar stores. Companies like Walmart and Target are positioned to leverage $4 billion in combined tariff refunds to strengthen their market positions. Similarly, Levi’s and Macy’s are using refunds to support their turnaround efforts.
The off-price sector’s ‘treasure hunt’ appeal is expected to draw price-conscious consumers to retailers like TJX, Ross Stores, and Dollar General.
Mixed Outlook for Other Sectors
Rising interest rates are affecting the housing market, which could slow growth in home improvement and furnishings. Moody’s forecasts modest growth for companies like Home Depot and Lowe’s, though existing homeowners with low fixed-rate mortgages may undertake smaller projects.
Lower tariffs have benefited import-dependent retailers such as Nike and Gap, as well as large discounters and general merchandise stores. However, U.S. trade policy uncertainty, particularly with Mexico and Canada, remains a concern.
Persistent high energy prices and geopolitical tensions could further strain consumer demand and input costs, potentially forcing retailers to raise prices.
Despite the positive outlook, Moody’s cautions that the forecast could shift to negative if EBIT declines due to slowing consumer spending, higher costs, weaker employment, or renewed tariff escalation.
