Tariffs are a wrinkle in back-to-school shopping. That's why we like these 3 retail stocks

The current back-to-school shopping season is challenged by rising tariffs and budget-conscious consumers, leading to an anticipated ~2% year-over-year decline in apparel and accessory spending. Despite mixed signals on overall consumer health, emerging tariff-driven inflation is prompting consumers to prioritize value. This environment uniquely benefits value-oriented retailers such as TJX Companies, Costco, and Amazon, which are leveraging pricing flexibility, private labels, and diversified supply chains to mitigate tariff impacts, protect margins, and capture market share from cost-conscious shoppers.

Analysis

The back-to-school retail season is facing significant headwinds from both U.S. tariffs and increasingly budget-conscious consumers, creating a bifurcated market. Forecasts from UBS and the National Retail Federation project a roughly 2% year-over-year decline in spending on key categories like apparel and accessories, with consumers starting to shop earlier out of concern for tariff-driven price hikes. While overall consumer health presents a mixed picture, with Morgan Stanley noting a weakening but not outright weak consumer and robust July retail sales of +0.5%, the trend towards value-seeking is clear. This is exacerbated by tariff-driven inflation, evidenced by price increases in categories like apparel (+0.4% in June) and household furnishings (+1% in June, +0.7% in July). This environment creates a challenging landscape for general retailers who may struggle to pass on costs, but it provides a distinct advantage to value-oriented players. Retailers like Costco (COST), TJX Companies (TJX), and Amazon (AMZN) are identified as key beneficiaries. Costco is proactively mitigating tariff impacts through supplier negotiations, leveraging its high-margin Kirkland Signature private label, and diversifying its supply chain. TJX's off-price model serves as a natural defense, positioning it to capture market share from shoppers trading down, a sentiment echoed by analysts at UBS and Telsey who maintain buy ratings. Amazon is leveraging its massive e-commerce platform and Prime Day event, which saw a 175% sales increase in school supplies, to attract deal-seeking consumers with both competitive pricing and convenience.

Key Decisions for Investors

• Consider overweighting exposure to value-oriented retailers such as TJX, Costco, and Amazon, as they are strategically positioned to capture market share from consumers trading down due to tariff and inflation pressures.
• Exercise caution with broad retail sector exposure, particularly for companies lacking pricing power or diversified supply chains, as they face significant margin compression risk in the current environment.
• Closely monitor upcoming earnings reports from sector bellwethers like Walmart and Target for further commentary on consumer behavior and tariff impacts, as these will be key indicators of the health of the broader consumer economy.
• Watch for sustained inflation in tariff-sensitive CPI categories like apparel and household furnishings, as this could further dampen consumer sentiment and accelerate the shift towards discount and off-price channels.