US apparel, footwear, and department store retailers are navigating a challenging landscape due to the country's tariff-heavy trade policies, says a recent report from Moody’s Ratings.

As these businesses sell through existing inventories, import duties are significantly eroding their profitability, the report adds. With limited ability to raise prices, revenue growth for the sector is projected to reach a maximum of 3 per cent.

Led by Christina Boni, Senior Vice President, Moody’s analysts have assigned a negative outlook to the sector, citing a persistently ‘difficult consumer environment.’ These retailers are ‘the most exposed to current tariffs and vulnerable to further increases, Boni highlights.

In 2025, department stores experienced monthly declines with the exception of January, shows year-on-year sales data from the US Department of Commerce, However, apparel retailers saw gains in most months. Value-oriented players like Walmart, with its significant grocery exposure, and off-price retailers are expected to outperform, according to Moody's research. In contrast, Target's operating performance is anticipated to be weak, partly due to its higher mix of discretionary general merchandise sales.

Moody’s Ratings analysts had initially projected an EBIT (Earnings Before Interest and Taxes) decline of over 10 per cent for the sector (excluding e-commerce) over the next 12 months.

However, with reciprocal tariffs pushed to August 1, this forecast has been considerably reduced to a decline of 3 per cent to 5 per cent. Despite this adjustment, revenue growth expectations remain unchanged because weak consumer demand makes it difficult for retailers to offset higher costs through price increases. Mickey Chadha, Vice President-Corporate Finance, Moody’s Ratings warns, a further worsening of tariffs would lead to a corresponding decline in EBIT expectations.

Pricing remains a significant challenge, largely because consumers were already exercising caution with discretionary spending before new import levies were implemented. Some retailers using the retail inventory accounting method are experiencing margin swings, complicating the assessment of tariff impacts.

Beyond tariffs, Moody's also points to broader macroeconomic factors pressuring retail, including elevated interest rates, which weigh on larger discretionary and housing-related purchases. Analysts anticipate, a cooling US employment market, with unemployment expected to reach 4.3 per cent by year-end and 4.5 per cent next year.