How Retailers Are Bracing for a Potentially Grim Year

The era of the ever-resilient American consumer may be coming to an end.

That is, at least, the prevailing sentiment among retailers, consumers and investors this week as the stock market sinks to a six-month low and fashion companies wrap up an earnings cycle defined by anxiety over what the next year will bring.

Department store chain Kohl’s, for instance, announced better-than-expected fourth-quarter earnings but issued a far more conservative forecast for 2025 than Wall Street estimates: This year, Kohl’s expects revenue to fall between 5 percent and 7 percent, compared to analysts’ projection of a 2 percent dip. It joins Abercrombie & Fitch, Macy’s, Victoria’s Secret and even off-price giant TJX, which has consistently outperformed its peers in recent years, to issue disappointing guidance for 2025, resulting in sinking shares across the retail sector.

The stock sell-off continued into Tuesday after the S&P 500 and Dow Jones Industrial Average posted their steepest declines since last fall. Meanwhile, consumer confidence plunged in February, registering its sharpest monthly drop since August 2021, according to the Conference Board.

Uncertainty around President Donald Trump’s trade policy has driven trepidation in the economy and renewed fears of an imminent recession, analysts said, but whether it will result in an actual spending pullback remains to be seen.

“We have to distinguish between feelings and reality,” said BMO Capital Markets analyst Simeon Siegel. “It’s not to say one can’t turn into the other, but it hasn’t yet. The idea that consumer sentiment is a survey and doesn’t always align with retail sales.”

As far as fourth-quarter earnings go, the results were mostly positive, Siegel added: about an average of 5 percent gains in sales.

Even so, the unpredictability of what 2025 holds in store for the industry means retailers must make some tough calls, from keeping inventories low to taking on profit erosion and freezing hires. But risky bets on capital expenditure could pay off too, such as with a new attractive product category or digital user experience.

“Maybe the tariffs will be a nothing burger or maybe it’ll be a massive change in how we are operating as an economy,” said Forrester analyst Sucharita Kodali. “The wisest thing is to tread water right now and be careful with your investments.”

Time for Triage

In times of low consumer confidence, it’s crucial for retailers to take a conservative approach to operations and keep costs low. “Inventory is the name of the game, and you have to be mean and lean,” said William Blair analyst Dylan Carden. And guiding cautiously, as retailers have done so far, is the right move, the experts agreed.

“Typically whenever there is uncertainty — as we saw with the pandemic — companies don’t spend,” Kodali added. “Don’t hire new people, no big raises, try to do more with less. Generate the same amount of revenue with fewer costs.”

At the same time, companies should consider doubling down on their strengths and provide the best possible value proposition, said TD Cowen analyst Oliver Chen. When there is an overall pullback from marketing investments, for example, the cost of attention might become cheaper in some channels.

To offer the best value, retailers should keep their prices steady — especially in a category as discretionary as fashion. This means taking on the increased cost of tariffs rather than passing them onto the consumer, said Chen. “If you can afford to do so, it’s time to lose margin and guide for that because no matter what, consumers today want exceptional value,” he said.

Victoria’s Secret, for instance, assumed in its 2025 guidance that operating income will fall short by $10 million to $20 million because of the additional 10 percent tariff on Chinese-made goods. Abercrombie & Fitch said it expects a $5 million hit.

But there are exceptions to the rule. While many apparel retailers have offered deeper discounts in recent months, the most powerful brands can still get away with price hikes. Ralph Lauren has seen significant increases to average unit retail in recent quarters because of its years-long efforts in brand elevation, discipline in inventory management and a pullback from promotions.

“Whether it’s tariffs or cotton price hikes or a labour strike, anytime a company has a cost increase they have to decide how much they can pass on and how much they can absorb,” said Siegel. “And that’s contingent on how powerful their brand is.”

Make Strategic Investments in Product and Experience

Despite the macroeconomic headwinds, some retailers see opportunities for growth. Urban Outfitters, for instance, plans to expand the assortment of opening-price products for its struggling marquee brand, but will also open new stores and expand private labels for Free People and Anthropologie, two of the highest performing segments in its portfolio. Earlier this year, Anthropologie launched a new label called Celandine, focusing on beach and resortwear, a category that the brand sees as having high growth potential.

Abercrombie & Fitch, meanwhile, said it will open 60 new stores in 2025 and remodel 40 additional locations. Chief executive Fran Horowitz also said the company will make further digital investments, including improving its app and mobile experience to ensure a glitch-free and more personalised experience for customers.

“What you’re seeing the best retailers do is innovate with partnerships and collaborations, diversify their sourcing, continuing to invest in their store base, and continuing to use data to inform them of product curation,” said analyst Dana Telsey of Telsey Advisory Group, who points to Birkenstock, Ralph Lauren and Bath & Body Works as examples of retailers driving expansion via strategic investments. “You have to give [consumers] a reason to show up,”

Ultimately, there is no reason yet to panic.

“The consumer is still strong and the wage growth dynamic is still out there,” said Carden of William Blair. “Mind your inventory, mind your leverage, and let’s see what happens.”