With the Iran war stretching into its fourth month, U.S. retail companies that have so far banked on a resilient consumer could face a tougher road ahead as rising gas prices and economic pain gradually erode the buffer.
Results from Dollar Tree (DLTR.O), Walmart (WMT.O), Gap (GAP.N) and others in the past few weeks showed that consumers are still spending, but in an increasingly selective way, prioritizing essential upgrades and value-driven purchases, while pulling back on discretionary items.
The strain on retailers is starting to show more clearly as the current earnings season draws to a close.
Core lower-income customers are cutting back on expenses, including food, discount retailer Dollar General (DG.N) CFO Donny Lau said during an earnings call on Tuesday. Dollar stores are increasingly pulling in shoppers earning over $100,000 annually, who are trading down.
U.S. consumer confidence eased slightly in May as inflation concerns tied to the Middle East conflict and higher fuel costs offset improving labor market sentiment.
"So far, consumers aren't pulling back significantly, but they are clearly shifting behavior," said Michael Gunther, CFA, senior vice president, Research & Market Intelligence at Consumer Edge.
"Going forward, gas prices will be key, if they stay high through summer and back-to-school season, they could start putting more pressure on discretionary spending."
Retailers typically book about 50% to 60% of their annual revenue in the second half of the year, beginning with the back-to-school shopping in the summer and Thanksgiving and Christmas towards the end of the year.
Apparel companies and department stores such as Kohl's and Macy's lean toward the higher end of that range.
"Uncertainty, however, is rising as the long-term effect of the Iran war on the economy is unknown," Telsey Advisory Group analysts said in a note.
Expectations around consumer spending could moderate, the longer the national average gas price remains above $4.00 per gallon, the note added.
Analysts and experts have warned that even if the war were to end soon, considering the damage already done to energy infrastructure and global supply chains, prices will remain high well into the second half.
Despite strong first-quarter results, the earnings growth rate for the consumer discretionary sector for the S&P 500 companies was projected at about 5.2% for the second quarter of 2026, versus the 40.4% projection in the previous quarter, according to data compiled by LSEG.
WINNERS AND LOSERS
"Spending growth is positive, but cooling. People also are looking for cheap thrills, while necessities have gotten more expensive. Restaurants, beauty products, and personal care seem to be doing alright," said Brian Jacobsen, chief economic strategist, Annex Wealth Management.
The divide is particularly evident in apparel. Gap and American Eagle have struggled with demand from budget-strained consumers, as well as merchandising missteps in key categories, including women's wear, disappointing investors.
By contrast, shares in Abercrombie & Fitch, Bath & Body Works and Victoria's Secret jumped after strong results, as they capitalized on fresh styles and full-price sales, while benefiting from demand for affordable luxuries.
The results add to signs of a K-shaped recovery in U.S. consumer spending, with higher-income shoppers continuing to spend on apparel, accessories and high-end beauty products, while lower-income households pull back under inflationary pressure.
"They (customers) keep showing up ... We're not seeing any change in performance across cohorts," Abercrombie CEO Fran Horowitz said.
Membership clubs such as Costco and Walmart's Sam's Club are drawing in more shoppers to their fuel pumps and stores, with cheaper gas and everyday essentials.
"There's certainly nothing to panic about right now. But when you dig into the details, you can see that the pressure is a little bit uneven, and so it's something that we're keeping our eye on," Walmart's finance chief John Rainey said last month.
