By Sabrina Escobar

Tariffs have made the first half of 2025 a tough one for retailers. The second six months could be even more challenging as the levies start trickling down to the bottom line.

That is the biggest takeaway from the latest earnings reports from America's largest retail chains. After several months of hedging, many companies finally bit the bullet and cut their full-year financial guidance in response to higher import costs and how they could hurt consumer spending.

Companies didn't start paying the bulk of the new levies until early April, meaning the first quarter wasn't as affected as the current one might be, not to mention the rest of the year.

Macy's, Target, Best Buy, and Abercrombie & Fitch all trimmed their forecasts for earnings or revenue. Other companies, including American Eagle Outfitters, Deckers Outdoors, and Ross Stores, declined to provide full-year guidance altogether, citing uncertainty.

Gap, which said it had maintained its guidance for the full year, noted that its outlook didn't factor in tariffs, which could dent operating income by between $100 million to $150 million. The worst effects would come in the second half of the year, executives said.

Even a company like Ulta Beauty, which raised guidance slightly, warned that the outlook for the latter half of the year was murky.

"The operating environment continues to be very dynamic, and the evolving global trade landscape has created more uncertainty related to consumer wallet pressures, especially for the second half of the year," said Chief Financial Officer Paula Oyibo. Operating margins will come under increased pressure, she said.

Here are four other things we learned from retail earnings season:

The First Quarter Was Largely OK

While earnings guidance for the year is looking a bit bleak, the actual first-quarter results themselves were, for the most part, not as bad as feared. An LSEG analysis of 163 companies in the retail and restaurant index that had reported results as of Wednesday suggested that average first-quarter earnings grew by 7.9% from last year, while first-quarter revenue ticked up 2.9%.

Indeed, although consumers are worried about the tariffs' effects on prices and the economy -- consumer sentiment declined for the first four months of the year -- they are still spending, albeit more cautiously. Walmart CFO John David Rainey noted that consumers still seem to be under pressure, spending more on necessities instead of discretionary items. But commentary from other specialty retailers suggest that Americans are happy to splurge.

"We haven't seen any signs of a demand slowdown," Urban Outfitters CEO Richard Allen Hayne said on the company's earnings call. Customers "continued to show resilience" during the first quarter, he said.

Perhaps Macy's CEO Tony Spring said it best. "The consumer is continuing to react differently than the sentiment," he said. "So while sentiment, I guess, yesterday improved a little bit, the demand is still better than the sentiment."

Uncertainty Abounds...

Doubts about what comes next aren't just making it hard for retailers to forecast consumer demand in the coming months, they are permeating retailers' businesses at every level, said Wayne Best, chief economist of Visa. That includes everything from trying to procure products and setting prices to opening stores or building production facilities.

"As a business, I have the uncertainty of whether I can get the item, and I also have the double whammy of whether somebody will come in and buy the item at the new price," Best said.

The past few days have only made trade policy murkier. A surprise ruling by the U.S. Court of International Trade on Wednesday found that many of President Donald Trump's tariffs were illegal, but a federal appeals court issued a temporary stay on that order Thursday afternoon. And on Friday, Trump posted on Truth Social that China violated a May truce where both sides agreed to lower tariffs as negotiations continued.

...But Many Retailers Are Staying the Course

Even though tariff implementation is still in flux -- there is a slight chance that they will be waived altogether at some point -- retailers aren't willing to take the risk.

Almost all spoke about how committed they are to mitigation efforts. Tactics include sourcing more from the U.S. and countries with lower tariff rates, negotiating with vendors, raising prices, and cutting costs elsewhere.

Longer-term capital allocation is still up in the air, but many companies are charging ahead with initiatives. For instance, Dick's Sporting Goods announced plans to acquire Foot Locker in mid May, arguing the sneaker retailer will help its expansion in the footwear market. And Gap said it's still investing a portion of the money freed up by a $150 million cost-savings program in growth projects.

"While we have contemplated whether to delay these strategic investments in the face of trade policy headwinds, between our foundational execution and balance sheet strength, we believe that pursuit of these initiatives remains important to the long-term momentum of the company," said Katrina O'Connell, Gap's chief financial officer.

Prices Are Going up. Retailers Hate It.

Retailers will likely have to raise prices to offset the worst of the tariff effects if the levies are implemented. But they really, really don't want to.

"We remain committed to providing quality items at the lowest possible prices and raising prices is always seen as a last resort," Gary Millerchip, Costco's chief financial officer, said on a call with investors Thursday.

Many companies are worried that inflation-weary consumers will chafe at the sight of higher prices, so they are planning to absorb at least part of those costs. Well-capitalized companies like Costco and its rivals Walmart and Amazon.com may be better positioned than some smaller retailers to "eat the tariffs," but most companies will try to find ways to spread the costs out to avoid raising prices too drastically.

Write to Sabrina Escobar at sabrina.escobar@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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May 31, 2025 02:30 ET (06:30 GMT)

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