• by Sarah Mahoney , Staff Writer @mahoney_sarah, August 17, 2022

This should be good news. Target just posted sales results that met expectations and is holding firm to its outlook for the rest of the year. But as it slashed prices to unload unwanted merchandise, its earnings wildly missed forecasts.

It all adds up to a complex consumer-spending outlook.

New data from McKinsey & Co.'s latest consumer pulse sheds light on this conflicting data. Consumers are trading down. That means they're turning to stores like Target and Walmart, which also posted a nice sales gain. When they get there? They’re expecting markdowns.

But consumer spending is rising, even after adjustments for inflation.

Target "continues to grow traffic and sales while delivering broad-based unit-share gains in a very challenging environment," says Brian Cornell, chairman and chief executive officer of Target Corporation, in the company's announcement.

Total revenue for the Minneapolis-based retailer grew 3.5% to $26 billion. Comparable sales rose 2.6%, and traffic climbed 2.7%. And sales picked up in all five of its core areas, with food and beverage, beauty and household essentials gaining the most.

The pain came in plunging profits, walloped by higher markdown rates as it tried to get rid of slow-moving discretionary categories, as well as labor costs and freight costs. Net earnings plummeted 90% to $183 million, compared to $1.82 billion in the second quarter of last year.

McKinsey's Consumer Pulse data indicates the pressure on consumer confidence isn't going away. The consulting company's research comes from its July survey of 4,000 U.S. adults, which strongly demonstrates that troubled outlook. Since March 2020, it's asked people how confident they are that the economy will bounce back in two to three months, and 80% agree. In this survey, only 26% agree. And 30% say they believe we're heading into a recession.

Consumerrs are changing how they handle money, with 44% dipping into or reducing their savings, 18% charging more to credit cards, and 13% taking on extra work.

And 74% say they are consciously trading down. (Again, that should be good news for Target, Walmart and other discount retailers.)

Yet they are also spending, and in many cases, more than they did a year ago. After adjusting for inflation, McKinsey says overall credit and debit spending is up 5% year over year. Among high-income shoppers, it’s up 9%, while middle-income families are spending about 2% more. Only the lowest income consumers are cutting back, trimming spending by 2%.

But despite a general feeling of pessimism, there are signals of hope in consumer behavior.

Except for Gen Z, "higher-income consumers of all ages say that their spending will continue to grow whether or not they're buying necessities or discretionary goods," it says in its report. "Millennials are especially optimistic—with high-income millennials indicating they plan to spend across almost every category, essential and discretionary."

That hope is strong at Target, too. "Looking ahead, the team is energized and ready to serve our guests in the back half of the year," Cornell says in its announcement, offering "a safe, clean, uncluttered shopping experience, compelling value across every category, and a fresh assortment."