What happened

Shares of American Eagle Outfitters (AEO 1.00%) are falling 7.4% at 11:28 a.m. ET on Friday in sympathy with rival Gap Stores (GPS 0.57%), which updated its first-quarter guidance yesterday to say its business is deteriorating worse than expected and sales would be down in the low-to-midteens compared to prior forecasts of a mid-to-high-single-digit decline.

Gap announced that the longtime president and CEO of its Old Navy brand had left the company and a search for a new executive had begun.

Paper airplane made out of money crashing into stock pages.

Image source: Getty Images.

So what

The worst inflation the country has seen in 40 years is hollowing out retailers as consumer wallets are emptied. Higher gas prices and an economy about to be hit with higher-than-expected interest rate hikes has many poised for the economy to enter a recession.

More ominously, St. Louis Federal Reserve president James Bullard has indicated even harsher prescriptions may be needed to get rising prices under control, such as former Fed president Paul Vocker instituted in the 1980s when he raised rates to 20% as a means of halting economic growth.

Now what

American Eagle is also coping with supply chain problems like most other retailers, but last month it reported its shipping costs were exceptionally high due to its factories in Thailand closing because of new COVID outbreaks.

Three-quarters of the $80 million in freight costs the apparel stock bore was specifically related to flying inventory from Thailand, which caused an approximate 400-basis-point headwind to its gross margin rate.

Retail is still getting its sea legs back from the pandemic, but a sour economic environment could sink the business of American Eagle Outfitters and others.