The news: Abercrombie & Fitch is the latest company to feel the ripple effects of the war in the Middle East, as its Europe, Middle East, and Africa sales fell 10% YoY, with comp sales down 11% in the quarter ended May 2. Those results reduced the retailer’s overall net sales growth by more than 50 basis points.

But it is hardly alone. The conflict is driving up oil prices, disrupting supply chains, and cooling demand in the Middle East and beyond.

• Supply chain disruptions tied to the war shaved 315 basis points off Under Armour’s gross margin in Q1, costing the company about $35 million in its fiscal Q4, CFO Reza Taleghani said during the company's earnings call.
• Whirlpool cut its full-year EPS guidance roughly in half and pointed to the war as driving “recession-level industry contractions,” with discretionary demand down about 15%.
• While Walmart absorbed about $175 million in unexpected fuel costs across its logistics network to hold prices steady in Q1, it has signaled that it may need to increase prices later this year.

Luxury brands are also feeling the impact. Kering’s Middle East revenue declined 11% YoY and Western Europe sales fell 7%, while LVMH said the conflict reduced Q1 organic growth by around 1%, with the largest hit in fashion and leather goods. CEO Bernard Arnault warned there could be a “world catastrophe” if the conflict continues.

Zooming in: The fallout from the conflict is broad, but rising fuel prices alone highlight the challenge facing retailers and brands. Under our sustained energy shock forecast scenario, core retail sales growth, excluding gas and autos, is expected to slow to 3%, down from our 3.7% baseline.Higher fuel costs are eroding consumers’ purchasing power, causing them to pull back on discretionary categories like apparel, electronics, furniture, and home improvement. That translates to roughly $37 billion less in discretionary spending.

That pressure isn’t limited to the US. In Europe, fuel prices rose 20.8% YoY in April, following a 12.9% increase in March—a sharp reversal from the pre-conflict trend, when prices were generally declining across most EU countries. As a result, European consumers are likely to follow a similar pattern, prioritizing essentials and pulling back on discretionary spending.

Implications for retailers and brands: Retailers are being squeezed from both sides. Rising input costs are pressuring margins at the same time that consumers are pulling back, limiting how much of those increases they can pass along. That dynamic is forcing retailers like Walmart to make tough decisions around how much margin they can absorb to sustain demand.

It also raises the stakes for discretionary players like Abercrombie to maintain profitability by keeping a tight control of inventory and adjusting their store mix through openings, closures, relocations, and remodels.

That puts the onus on retailers and brands to find a delicate balance that ensures they’re protecting both margin and market share.