Retailers in the US prepare for increased consumer strain due to prolonged conflict.

As the Iran conflict enters its fourth month, US retailers who've relied on robust consumer spending may soon encounter significant challenges due to escalating fuel costs and growing economic hardship.

Retailers like Dollar Tree, Walmart, and Gap have recently reported consumer behavior shifting towards essential upgrades and value-driven purchases, with a notable decrease in discretionary spending. This trend is evident in the past few weeks' sales data from these companies.

Retailers in the US are beginning to feel the pinch as the latest earnings reports come into focus slowly.

Low-income consumers are tightening their belts by reducing discretionary spending, such as groceries, according to Dollar General's CFO Donny Lau, who made this observation during a recent earnings call on Tuesday. Meanwhile, dollar stores are attracting higher-income shoppers, individuals earning over $100,000 annually, who are opting for more affordable alternatives.

US consumer confidence showed a modest dip in May, with inflation worries stemming from the Middle East conflict and rising fuel prices countering optimism about the job market.

Michael Gunther, senior vice president of Research & Market Intelligence at Consumer Edge, notes a subtle yet distinct shift in consumer behavior nationwide.

As the conflict drags rising gas costs are poised to become a major concern for retailers, particularly during peak seasons like summer and back-to-school.

The majority of retailers' yearly earnings are secured between July and December, with a significant portion coming from sales during the back-to-school season and holiday periods such as Thanksgiving and Christmas.

US retailers like Kohl's and Macy's are positioning themselves at the upper end of this projected spectrum.

Rising uncertainty stems from the unclear economic impact of the protracted Iran conflict, according to an analysis by Telsey Advisory Group's experts.

As the national average gas price stays above $4.00 per gallon, consumer spending expectations may adjust downward accordingly over time.

Experts caution that even a swift resolution would leave lasting economic scars, with damaged energy infrastructure and disrupted supply chains contributing to sustained price hikes through at least the next six months.

Strong first-quarter earnings have been reported, yet consumer discretionary sector growth is forecasted to slow down significantly in the second quarter of 2026, with a projected rate of 5.2%, compared to the previous quarter's 40.4% estimate from LSEG data.

Retailers face a mixed bag as consumer spending shows a slight slowdown despite overall growth. Meanwhile, consumers are seeking affordable indulgences amidst rising costs for essential items. Restaurants, beauty products, and personal care appear to be performing relatively well.

Apparel retailers are facing significant challenges, most notably evident in the struggles of Gap and American Eagle to meet demand from cash-pinched customers and flawed merchandise strategies.

In stark contrast to the struggles of some retailers, Abercrombie & Fitch, Bath & Body Works, and Victoria's Secret saw their shares surge following robust financial performances.

A K-shaped recovery is evident in US consumer spending patterns, where affluent consumers persist in purchasing luxury goods like clothing, jewelry, and premium cosmetics, whereas less affluent households are tightening their budgets due to rising costs.

Abercrombie's CEO, Fran Horowitz, notes a consistent trend among customers, with no improvement in performance observed.

Costco and Walmart's Sam's Club membership clubs are luring customers with lower-priced gasoline and household necessities at their retail outlets and fuel stations.

Walmart's finance chief John Rainey notes no cause for alarm at present, but upon closer examination, an uneven strain becomes apparent, prompting the company to closely monitor the situation. This scrutiny is warranted, given the current circumstances.