Moody's lifts retail and apparel outlook as $4 billion in tariff refunds land

Moody's has upgraded its outlook on the retail and apparel sector, moving it to a more positive footing as lower tariffs and refunds ease costs across the industry. The ratings agency now expects what it calls “solid household finances” to bring greater stability to the sector.

The agency describes consumer spending in the months ahead as “resilient but increasingly bifurcated.” Growth in consumption, Moody's said, will be driven mainly by upper-income households, while the rest of the market behaves quite differently.

Lower- and middle-income households are stressed by rising housing, insurance, food and energy costs. Moody's expects those shoppers to stay focused on value and essentials, and to rely more heavily on credit to cover what they buy.

Who wins in the split

Discounters, off-price chains and dollar stores are expected to do well in that environment. Moody's named Walmart and Target, which hold approximately $4 billion in combined tariff refunds they “can use strategically to reinvest in pricing and strengthen their market positions.”

Moody's also flagged the off-price sector's “treasure hunt” appeal as a source of significant growth opportunity. It expects price-conscious consumers to turn to TJX and Ross Stores, along with dollar stores such as Dollar General.

Levi's and Macy's have likewise been using tariff refunds to bolster their respective turnaround efforts. We reported Macy's and Vince both raising full-year outlook after a strong second quarter, so the refund tailwind is already visible in guidance.

Lower tariff rates and refunds have cut costs most for import-dependent apparel and footwear retailers, Moody's said, naming Nike and Gap. The same relief extends to large discounters and general merchandise stores, including Walmart and Target.

Where the pressures remain

Rising interest rates are constricting the housing market, which Moody's said will likely affect home improvement and furnishings. It projected tepid growth for home-improvement companies such as Home Depot and Lowe's.

The picture is not uniformly weak. Because low fixed-rate mortgages are common in the U.S., existing homeowners may want to “pursue smaller projects that do not require financing,” which should keep some demand flowing through the category.

U.S. trade policy is still uncertain, particularly in relation to Mexico and Canada. Moody's said trade agreements with both countries are “under review amid elevated tensions,” a risk the upgrade does not remove.

Energy is the other persistent hazard. An extended period of high prices amid continued geopolitical tensions may hurt discretionary consumer demand and input costs, the agency warned, and rising energy costs are listed among the sector's current factors.

Higher energy costs would also hurt retailers' freight and transportation, and could “reignite pressure for companies to raise prices.” That would land on the same budget-stretched shoppers the agency expects to lean on credit.

Despite the largely positive outlook, the agency left itself a path back. 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.”

The holiday season comes first. Moody's expects it to be promotion-driven, with budget-conscious consumers shopping carefully and planning ahead, which extends the value-first behaviour it described for lower- and middle-income households.

The split the agency describes runs through our own retail coverage. When we examined China's listed apparel makers in the first half of 2026, we found the market pulling apart into winners and laggards.

It shows in individual names too. We reported Lululemon's leggings sales falling 20% as its new chief executive arrived to a downgraded outlook, while Macy's and Vince lifted guidance, a divergence in line with the bifurcation Moody's describes.

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Image: Moody's