Fitch cuts 2025 outlook for U.S. retail, consumer sectors

April 09, 2025 (MLN): Fitch Ratings has lowered its 2025 outlook for the U.S. retail and consumer products sectors to Deteriorating from Neutral, according to the statement issued by the Rating yesterday. 

This change reflects the expected impact of newly announced tariffs on spending as consumer sentiment moderates and retail costs rise.

Most Fitch-rated retailers and consumer product companies have sufficient rating headroom, which should support rating stability through the current volatility.

Companies with exposure to discretionary categories could experience negative rating actions, especially those with limited rating headroom due to recent operating challenges and financial policy decisions, including M&A.

Weakening consumer sentiment will pressure retail sales, particularly in discretionary categories like apparel, home, and consumer electronics.

The new tariffs will lead to higher consumer prices, further pressuring retail volumes. Some costs are likely to be absorbed by retailers and consumer products manufacturers, which will negatively affect margins.

Higher-rated retailers and consumer products manufacturers are generally better equipped to manage near-term volatility.

These companies have strong relationships with vendors and consumers, good cash positions, and various business levers to navigate near-term challenges while investing in the longer term.

Conversely, weaker players already struggling with market share and operating erosion could face amplified headwinds.

Retraction from these weaker players could support longer-term market share stability for remaining competitors.

Consumer spending through 2024 held up well due to low unemployment, some wage growth, and housing and asset price appreciation, despite significant inflation.

However, persistent inflation and moderating savings levels have impacted consumer health, particularly among middle- to lower-income households.

Fitch expects consumer health and purchasing power to deteriorate further due to weaker consumer sentiment, higher-for-longer interest rates and government spending reductions.

Fitch now expects that 2025 retail sales ex auto and gas and consumer products revenue could each be flattish to modestly negative, with weaker results in discretionary categories mitigated by better performance in staples categories.

This is below Fitch’s early-2025 view that retail sales and consumer products revenue could be flattish to modestly positive.

Fitch previously forecasted revenue declines across many discretionary categories due to waning consumer sentiment and less compelling upgrade and replacement cycles in some categories, even before the recent tariff announcements.

Tariff implementation will exacerbate these declines by increasing consumer prices across categories, leading to reduced volume.

While the impact of the tariffs will vary across categories, Fitch expects the most significant effect will be the overall impact on consumer health and sentiment, pressuring sales across segments.

Most retail products in the U.S. are at least partly manufactured abroad, and many companies have diversified supply chains beyond core sources like China. However, the “Liberation Day” tariffs on countries like Vietnam, Cambodia, and India will lead to broad-based tariff exposure across retail.

Food retail is likely to be the least affected due to the higher level of domestic sourcing for core grocery inventory.

High inflation will disproportionately affect lower-income consumers. Value-oriented retailers can benefit competitively due to their lower-price offerings, although their exposure to lower-income customers could yield outsized volume declines in discretionary categories.

Higher-income consumers, who have held up well so far, could be adversely impacted by recent financial market volatility.

Some retailers could benefit in the long term from strong operational execution and accelerated competitive fallout.

While most of Fitch’s coverage is U.S.-focused, a few retailers have significant international exposure where tariff implementation will have less of an impact.

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