Large retailers overcome cost pressures to post higher profits

Article originally posted on CoStar on June 17, 2026

Despite rising inflation, ever-shifting tariffs and higher energy costs, U.S. retailers posted higher profits and expanded margins in the first quarter.

The Census Bureau’s latest Quarterly Financial Report, which covers retail corporations with at least $50 million in assets, showed that first-quarter after-tax profits grew at a meaningfully faster rate than sales.

Seasonally adjusted after-tax profits totaled $64.5 billion in the first quarter, up 7% from the fourth quarter of 2025 and nearly 40% above year-ago levels. Sales increased to $1.126 trillion, rising 1.1% quarter over quarter and 4.7% year over year. This divergence pushed after-tax profit margins to 5.73%, up from 5.41% in late 2025 and 4.31% one year earlier.

The data point to a clear conclusion: Profit growth is being driven largely by margin expansion, not growth in consumer demand. This means that, at least among larger retailers, the ability to scale operations and aggressively manage costs is translating into higher earnings per dollar of revenue.

Those expanding profits have now extended a multiyear recovery following a compression of margins in 2023 and early 2024. First-quarter margins were roughly 3.3% in 2024 and 3.25% in 2023, compared with nearly 5.7% in the latest quarter, representing a gain of more than 200 basis points over two years.

This improvement is not simply a rebound from a weak base. Profits have nearly doubled since early 2024, while sales have risen far more modestly, underscoring a structural shift in how larger retailers are managing inventory, pricing and operating expenses. Even after accounting for seasonality, first-quarter margins improved both sequentially and year over year, signaling strengthening profitability.

The trend is occurring alongside a steady but not accelerating sales environment. Census data show retail sales continuing to increase at a moderate pace, with year-over-year gains holding in the mid-single digits, suggesting that consumer spending is holding up. Combined with a broader macro backdrop of modest economic growth and elevated inflation, the retail environment is one of steady but constrained demand rather than a demand-driven expansion.

However, the strength reflected in the Quarterly Financial Report is not evenly distributed across retailers. While larger retailers are benefiting from scale advantages, smaller independent operators are facing a more challenging environment. Many mom-and-pop retailers cannot easily offset rising input costs through supply chain efficiencies, automation or alternative revenue streams, leaving their margins more exposed to inflation and cost volatility.

The fact that margins are expanding despite rising fuel costs, which not only raise retailers’ transportation expenses but also weigh on consumer spending, highlights how aggressively large retailers have adjusted their operating models. Across the sector, companies are leaning on tighter inventory management to reduce markdowns, supply chain efficiencies to offset cost increases and selective pricing actions to preserve profitability. At the same time, many are expanding higher-margin revenue streams, such as marketplace platforms and advertising, which enhance earnings without requiring significant incremental inventory investment.

These operational shifts, along with greater labor efficiencies, help explain why profit growth has significantly outpaced sales growth. Retail performance, particularly among larger operators, has increasingly been driven by execution and efficiency rather than strictly by consumer demand.

Looking ahead, the sustainability of margin gains will depend on how retailers manage a still-challenging environment. Inflation, particularly in energy, remains a key risk, while higher-for-longer interest rates and sagging consumer sentiment are likely to continue to impact spending patterns.

For now, however, despite rising costs and a measured pace of sales growth, retailers are operating more efficiently and generating higher margins, effectively defying the broader consumer economy slowdown. 

The U.S. economy has remained relatively buoyant despite the weight of higher tariffs on imports over the last year and higher energy costs stemming from the closure of the Strait of Hormuz in March.

Consensus expectations are for the economy to grow by 2.1% this year and next, similar to last year’s gain but slower than earlier projections produced before the conflict in the Middle East began. Consumers have been the main support of growth, funded by larger-than-expected income tax refunds. But business investment, particularly in artificial intelligence-related software and equipment, has surged and was a larger contributor to growth in the first quarter than was consumer spending.

This pattern is likely to continue, as large capital investments into data centers and technology proliferate.