The news: Q1 was strong for many retailers, with mass merchants, discounters, department stores, and more reporting better-than-expected results as consumers displayed resilience.

But as companies ranging from Burlington to Best Buy noted, much of that strength was largely fueled by larger tax returns, which have now mostly run their course. Meanwhile, retailers’ tariff relief may prove short-lived as the Trump administration looks to impose fresh duties on trade partners. Combined with skyrocketing energy and input costs, those factors could add further pressure to their bottom lines in the coming months.

With the war in Iran creating fresh headwinds for companies and consumers alike, many retailers—even those best-placed to benefit from uncertainty—are staying cautious.

• Five Below left its comparable sales guidance for the second half of its fiscal year unchanged despite recording a 22.7% same-store sales increase in Q1, citing the uncertain environment.
• Walmart’s FY outlook calling for net sales growth of 3.5% to 4.5% and adjusted earnings per share of $2.75 to $2.85 trailed analyst estimates.
• Companies like e.l.f. Beauty and TJX also issued conservative guidance, despite strong sales and clear value propositions.

Zoom out: As Five Below CFO Daniel Sullivan pointed out on the company’s earnings call, the retailer’s customers are living in a world “with rising fuel costs, with very sticky inflation, with a somewhat soft labor market.” Tax refunds may have helped ease the pain earlier in the year, but the loss of that cushion could push lower- and middle-income consumers to sharply adjust spending as their cost of living rises.

Those shifts are already becoming apparent.

• Walmart noted that the average number of gallons customers purchased at its fuel stations fell below 10 for the first time since 2022.
• Visits to gas stations and discretionary retailers fell YoY for most of April and May, a sign that consumers are looking to limit shopping trips as fuel costs rise, per Placer.ai.
• Discretionary spending intent across most categories fell in May, with categories like furniture, restaurant meals, and sports equipment posting the biggest declines, according to a McKinsey & Company report.

Implications for retailers: So far, the strain on consumers hasn’t meaningfully shown up in retail sales, in large part because steady spending from affluent shoppers has offset weakness among lower- and middle-income households. Flexible payment options like buy now, pay later are also helping consumers stretch their budgets, though they are also contributing to rising household debt.

However, sustained higher energy prices could be a shock that many households struggle to manage. One in 3 US adults report being financially stressed, while another 51% are “financially conflicted,” meaning they aren’t in immediate distress but occasionally have to make trade-offs, according to a recent survey by Edward Jones and Gallup.

With gas prices set to eat up a larger chunk of consumers’ budgets, core retail sales—which exclude auto and gas—could be nearly $37 billion lower than our initial forecast. The advantage will lie with companies like Walmart and Costco that can absorb higher fuel costs while offering shoppers lower prices.