The firm now expects “solid household finances” to lead to more stability in the sector, although rising energy costs and geopolitical risks are still a factor.

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.

Source link