Retailers’ holiday results delivered, but dark forecasts and tariffs signal trouble ahead

Retailers wrapped up strong fourth-quarter results so far this earnings season, with the vast majority of names topping earnings and sales expectations. But while the holiday season delivered, many stocks were weighed down by a less festive outlook for the year ahead. Until recently, strong job growth, rising wages, and buoyant equity markets have kept consumers’ wallets open despite high prices and and diminishing excess savings.

But that momentum hit a wall in January, after consumer spending dipped 0.2% — the first decline since March 2023 and the steepest drop in almost four years. While on its own, this could be hand-waved away by the unseasonably cold weather and the wildfires that ravaged California, the drop looks more concerning when coupled with a string of gloomy guidance from retailers on how this year will progress and tariffs adding to inflationary pressures.

Guidance revision

Historically top-performing retailers have started to take a more cautious outlook as they brace for a possible slowdown ahead. Last month, Walmart shares took their biggest hit since 2023 after the world’s biggest retailer forecast a steep sales slowdown, even after beating Q4 estimates. For the full year, Walmart projected earnings per share of $2.50 to $2.60, well short of expectations. However, it should be noted that the company has tended to sandbag its guidance in recent years.

Target shares also tumbled after the company dropped its results Wednesday, as cautious consumers and deep discounts weighed on sales. The retailer also warned of a “meaningful” profit drop for the first quarter, blaming weak February sales and slipping consumer confidence. Costco shares suffered their worst loss in nearly a year on Friday after the membership warehouse missed fiscal Q2 EPS expectations, even as sales modestly surprised to the upside. In February, University of Michigan’s consumer sentiment plummeted to its lowest level since 2023, more than erasing all of its postelection bump.

Tariff turmoil

President Trump’s impending tariff policies continue to cast a shadow over future earnings. Also included in Target’s comments about a soft first quarter were fears that 25% tariffs on Mexican imports could jack up prices on staples like bananas and avocados. Best Buy also warned that electronics prices would likely rise once the tariffs hit, since China and Mexico are the company’s biggest suppliers (though management didn’t include tariff impacts in forward-looking estimates). Meanwhile, Victoria’s Secret is bracing for a $10 million to $20 million hit from a 10% tariff on Chinese-made goods. Last month, Walmart executives also said the company wasn’t completely immune to tariff pain and, this week, reportedly asked some of its Chinese suppliers for major price reductions.

Bright spots

As shoppers tighten their belts, off-price retailers have emerged as bright spots. On Thursday, shares of Burlington Stores soared nearly 12% after the Jersey-based retailer smashed same-store sales guidance expectations, with full-year net income soaring 48% to $504 million. On the company’s earnings call, CEO Michael O’Sullivan noted that while “the outlook for 2025 is very uncertain,” the company’s pricing model is well suited for the environment.

Shares of TJX, which owns T.J. Maxx, Marshalls, and HomeGoods, also jumped after the discount retailer reported record $56.4 billion in annual sales. TJX has benefited as cash-strapped consumers trade down to discount chains, and plans to open 150 new stores this year.

It’s not just off-price retailers cashing in: Gap shares surged 13% on Friday after the ’90s mall staple reported operating profits for its fiscal year 2024 of $1.1 billion, up more than 80% on last year’s efforts. Home improvement giants Home Depot and Lowe’s also saw shares climb after both reported better-than-expected Q4 results and snapped an eight-quarter streak of declining comparable sales.

Looking ahead...

Since consumer spending makes up nearly 70% of US GDP, any weakness could spell trouble for investors as a whole. Retail executives are already bracing for more challenging times ahead, with two-thirds of those surveyed in Deloitte’s 2025 US Retail Industry Report expecting consumers to shop more often but with smaller baskets, focusing on essentials.

To that end, the SPDR S&P Retail ETF, which tracks a broad swath of US retail companies, recently lagged consumer staple stocks by the most since late 2021, when fears that the Omicron variant would force a return to lockdowns weighed on risk assets.

The Fed’s latest Beige Book echoed a similar sentiment on Wednesday, calling out slower consumer spending in part due to rising price sensitivity, especially among lower-income shoppers. Retail earnings continue this week with Dick’s Sporting Goods, Kohl’s, American Eagle, and Ulta Beauty all set to report.