Tariffs Deepen Retail Divide As Low-Income Shoppers Cut Back, Bank Of America Says

Bank of America Securities data indicates August retail sales (ex-autos) rose 1.9% year-over-year, accelerating from July, signaling consumer resilience despite inflation. Apparel sales climbed 4.4% driven by back-to-school demand, though a widening consumption gap saw higher-income households increase spending while lower-income consumers pulled back. This trend is further evidenced by discount outlets gaining 1.3% as department store sales contracted 0.8%, indicating a shift towards value, with jewelry and beauty categories also showing strong growth.

Analysis

Bank of America Securities' analysis of August card data reveals a resilient but bifurcated consumer landscape. Headline retail sales, excluding autos, accelerated to 1.9% year-over-year growth from 1.1% in July, primarily driven by a 4.4% surge in apparel spending for the back-to-school season. However, this top-line strength conceals a widening consumption gap, as higher-income households increased spending while lower-income cohorts pulled back, a trend attributed to heightened price sensitivity and the potential ripple effects of new tariffs. This consumer trade-down is further evidenced by channel performance: discount apparel outlets saw growth accelerate to 1.3%, while department store sales worsened their contraction to -0.8%. While discretionary categories like jewelry (+8.6%) and beauty (+9%) demonstrated robust growth, athletic footwear and apparel lagged significantly, declining 2.4% and signaling specific areas of weakness within broader consumer spending.

Key Decisions for Investors

• Investors should consider overweighting exposure to off-price and discount retailers, which are capturing market share from the consumer trade-down, while re-evaluating positions in traditional department stores facing accelerating sales declines.
• Monitor companies highly exposed to lower-income consumers for signs of margin pressure, as this demographic is showing clear signs of spending reduction, posing a risk to future earnings.
• Given the categorical divergence, capital allocation may favor brands in the outperforming beauty and jewelry sectors over those in the athletic apparel and footwear segment, which is exhibiting significant demand weakness.