Retail's New Reality: Navigating Tariff-Driven Declines to Find Resilient Retail Plays

The U.S. retail sector faces a critical crossroads. May 2025's 0.9% decline in retail sales—0.3 percentage points worse than expected—signals a deepening shift in consumer behavior. Yet within this downturn, patterns emerge that favor specific sectors: discount retailers and domestic-focused brands. This article explores how tariff pressures and inflation are reshaping spending habits, and identifies companies poised to thrive in this environment.

The May Sales Decline: Winners and Losers in a Cost-Conscious Era

The May report revealed stark divides. Motor vehicle sales plunged 3.5%, gas stations fell 2.0%, and food service sales dipped 0.9%. But discount and non-store retailers bucked the trend. Non-store retailers (e.g., e-commerce) surged 0.9% month-over-month, while general merchandise stores edged up 0.1%. Year-over-year, non-store retailers grew 8.3%, and food service/drinking places rose 5.3%, underscoring resilience in sectors that cater to budget-conscious shoppers.

The key takeaway? Consumers are prioritizing affordability and convenience. This aligns with historical patterns seen during the 2018–2019 trade wars, when discount retailers like Walmart (WMT) and Target (TGT) outperformed peers by leveraging pricing power and domestic supply chains.

Historical Precedent: How Discount Retailers Thrived in Past Tariff Cycles

During the Trump-era tariffs (2018–2019), U.S. retailers faced a 0.2% GDP contraction and 142,000 lost jobs. Yet discounters adapted. Key lessons:

1. Price Sensitivity Trumps Everything:
2. Hard discounters (e.g., Aldi, Lidl) saw sales grow disproportionately to price cuts. Consumers prioritized cost over brand exclusivity.

3. National brands sold at discounters faced heightened price competition, forcing retailers to optimize margins through narrow product lines and aggressive pricing.

4. Domestic Production = Resilience:

5. Tariffs on Chinese imports (e.g., furniture, electronics) boosted demand for U.S.-made alternatives. Companies with localized supply chains, like Costco (COST), thrived by sourcing domestically.

6. Data-Driven Agility Pays Off:

7. Retailers using real-time transaction data (e.g., the CNBC/NRF Retail Monitor) adjusted faster to shifting consumer preferences.

Current Opportunities: Where to Invest Now

The May decline and tariff pressures highlight sectors and companies with pricing discipline and supply chain flexibility.

1. Discount Retailers: The Bedrock of Affordable Shopping

• Walmart (WMT): Its low-cost model and expansion into online grocery delivery (e.g., Omnichannel sales grew 56% post-pandemic) position it to capture cost-conscious buyers.
• Target (TGT): Its mix of national and private-label brands, coupled with a 4.6% year-over-year sales growth in general merchandise, signals strong execution.

2. Domestic Brands with Pricing Power

• VF Corporation (VFC): Outdoor brands like The North Face and Vans have strong U.S. demand. VF's focus on sustainability and localization reduces tariff exposure.
• Dollar General (DG): Its rural footprint and 8.2% YoY growth in 2024 reflect demand for ultra-affordable goods.

3. Non-Store Retailers: The Digital Edge

• Amazon (AMZN): Its dominance in e-commerce and ability to manage logistics under inflation (e.g., Amazon's Prime pricing stability) make it a defensive play.

ETF Play:

The SPDR S&P Retail ETF (XRT) offers broad exposure to discounters and e-commerce leaders.

Risks and Considerations

• Inflation vs. Real Sales: While nominal sales rose 3.3% year-over-year, real sales grew just 0.9%, highlighting the drag of rising prices. Companies with inelastic demand (e.g., food staples) will fare better.
• Geopolitical Uncertainty: New trade policies or tariff changes could disrupt supply chains. Monitor companies with diversified sourcing strategies.

Investment Thesis

The May sales data and tariff history reveal a clear path: discount retailers and domestic brands with cost control and agility will outperform. Investors should prioritize:
1. Discounters (WMT, TGT) for their price discipline and omnichannel reach.
2. Domestic producers (VFC, DG) insulated from tariff volatility.
3. Non-store retailers (AMZN) benefiting from convenience-driven spending.

The retail sector's decline is not uniform—it's a sieve separating the agile from the rigid. Those who adapt to cost-conscious consumers will lead the next recovery.

Final Note: Always conduct further research and consult with a financial advisor before making investment decisions.