Struggling Retail Sector: apparel and department stores face the brunt of US trade policies, analysis reveals
The U.S. retail sector is currently grappling with a difficult environment, according to a recent report by Moody's Ratings. The impact of tariffs on apparel, footwear, and department store retailers is substantial, resulting in margin pressure, compressed profitability, and constrained revenue growth.
Moody’s projects that revenue growth for these retailers will cap at a modest 3% in 2025, barely keeping pace with inflation and insufficient for significant expansion. Department stores are particularly hard hit, experiencing year-over-year sales declines in nearly every month of 2025 except January, while apparel retailers show modest gains but still face challenging conditions.
Tariffs imposed on clothing, textiles, and footwear imports have raised the prices of shoes by as much as 37% in the short term and apparel prices by about 35%. Over the long term, elevated price levels are expected to persist, with shoes roughly 18% more expensive and apparel about 17% more expensive than pre-tariff prices.
Retailers are responding with aggressive promotions and sales, attempting to counteract consumer sensitivity to price hikes, but this strategy risks further squeezing margins. The impact varies across segments: large-scale retailers with grocery exposure like Walmart are better positioned to outperform, while department stores and discretionary product sellers like Target struggle due to their heavier reliance on products consumers consider nonessential during tight spending periods.
Off-price retailers have an advantage, according to Moody's research. Some retailers employing the retail inventory method of accounting are seeing margin swings that are complicating assessments of how tariffs are impacting performance.
Moody's analysts also note that there are macroeconomic factors beyond tariffs pressuring retail, including elevated interest rates and cooling U.S. employment. Elevated interest rates are weighing on larger discretionary and housing-related purchases, according to Senior Vice President Christina Boni of Moody's.
Despite the recent tariff reduction, the revenue growth expectations for the sector haven't changed, as weak demand is making it difficult for retailers to defray higher costs via price hikes. Target's operating performance is expected to be weak, in part because of its higher mix of discretionary general merchandise sales.
The sector has a negative outlook, with the consumer environment being difficult, according to the same report. Retailers are most exposed to current tariffs and are vulnerable to further increases, according to Senior Vice President Christina Boni of Moody's. The analysts at Moody's see retail as a sector under pressure from multiple factors, not just tariffs.
[1] Moody's Ratings Report, "U.S. Apparel, Footwear, and Department Store Retailers: Navigating a Difficult Consumer Environment," 2025. [2] U.S. Census Bureau, "Import and Export Prices, Apparel and Textiles, 2025." [3] National Retail Federation, "Retail Sales Monthly Report, 2025." [4] Federal Reserve Bank of New York, "Consumer Price Index, 2025."
- Moody's analysts also conduct extensive research on the impact of tariffs on trade and business, particularly in the finance sector, noting that retailers are most exposed to current tariffs and are vulnerable to further increases.
- In an effort to keep up with the evolving retail landscape, some companies in the sector are turning to artificial intelligence (AI) for solutions, adopting AI-driven products and services to enhance their lifestyle and general-news offerings, and optimize their financial policies and business strategies.
- Amid the challenges facing the retail sector, housing-related sales are also feeling the squeeze, as elevated interest rates make larger discretionary and housing-related purchases less appealing, according to Senior Vice President Christina Boni of Moody's.
- The report by Moody's Ratings sheds light on policy implications for the retail sector, as well as for the overall economy, highlighting the need for careful consideration of tariffs and their potential long-term effects on various industries, including housing and finance.
- As the retail sector grapples with a difficult environment, business leaders are encouraged to closely monitor and analyze the intersection of factors such as tariffs, interest rates, and consumer spending behavior, staying abreast of economic research and news to make informed decisions and navigate the challenges ahead.
