Target slashed prices. It paid off

New York (CNN) — US consumers, strained by years of higher prices and elevated interest rates, are changing their shopping patterns. Americans are buying more at discount chains like Target and Walmart while dialing back spending at Macy’s and Lowe’s.

Target’s sales at stores open at least one year increased 2% last quarter, and its profit boomed 36%. The company’s stock (TGT) surged 13% in premarket trading.

Target was boosted by price cuts. The company slashed prices on 5,000 frequently bought items at stores to draw customers. That strategy worked. Foot traffic to Target’s stores increased 3% during the quarter, and shoppers spent on discretionary products like clothing.

“Consumers are showing resiliency as they continue to search for value and focus on essentials, while selectively spending on discretionary items,” Joseph Feldman, an analyst at Telsey Advisory Group, said in a recent note to clients.

Still, Target signaled a cautious outlook for the rest of the year, a sign it expects consumers to spend carefully. Target expects sales to rise by up to 2% this year but said it would likely come in lower than that.

Inflation and higher interest rates have taken a toll on consumers. So many shoppers are spending more selectively than they were early in the pandemic, focusing instead on discount stores.

In addition to Target, shoppers are also spending at Walmart. Walmart’s US sales at stores open for at least one year increased 4.2% last quarter.

TJX, the parent of discount clothing chains TJ Maxx and Marshalls, also posted strong results last quarter. Sales at stores open at least one year increased 4%, the company said Wednesday, and it raised its guidance for the year.

Breaking a losing streak

Target’s sales increase last quarter snaps four consecutive quarters of declining sales for the chain.

Target’s sales and profit surged during the height of the pandemic in 2020 and its run continued until 2023. But Target has struggled over the past year.

Heading into Wednesday, Target’s stock was flat on the year, trailing the S&P 500.

Target’s core middle-class customer base has been strained by higher prices and pulled back on discretionary goods like home decor, electronics and nonessential clothing in favor of groceries and everyday essentials.

Target has also slumped because of its merchandise mix and higher prices compared to rivals like Walmart.

The chain stocks more non-essential merchandise compared to competitors such as Walmart and Costco. More than half of Target’s merchandise is discretionary. Target in recent years has added more food and essentials to its stores, but still trails Walmart, which gets around half of sales from groceries.

While consumers are spending at Walmart, Target and TJ Maxx, they are cutting back elsewhere.

Starbucks and McDonald’s are struggling as people reject higher fast-food prices in favor of home-cooked meals. Home Depot and Lowe’s have also posted sales declines as Americans take on fewer major home renovation projects.

Macy’s has also fallen off as consumers switch to discount chains.

Macy’s quarterly sales at stores open for at least one year fell 4%, the company said Wednesday, and the company cut its forecast for the year.

Macy’s stock plunged 7% during pre-market trading.

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