By Sabrina Escobar

Americans are more value-focused than ever, and discount retailers are reaping the benefits.

Dollar General, Five Below, Ollie's Bargain Outlet, Walmart, Burlington Stores, and TJX Cos. all reported better sales than expected for the July quarter. All six companies posted higher same-store sales, with growth ranging from Dollar General's 2.8% to 12.4% for Five Below.

Companies that typically cater to middle- and higher-income shoppers had a more difficult quarter. Target's same-store sales fell 1.9% from last year and Kohls's dropped 4.2%. Gap recorded a 1% increase, lower than the 3% rise from the year-ago quarter; analysts tracked by FactSet had expected 2%.

All three companies are in the midst of turnaround efforts, so some of that sales weakness stems from operational challenges. But the lackluster performance is also a function of a shift in consumer behavior: Americans are hunting for value, and are trading down from more premium brands to cheaper alternatives.

"Q2 2025 retailer earnings largely were mixed, as deep discount retailers tended to outperform higher-end retailers, such as TGT," wrote Jeff Buchbinder, chief equity strategist for LPL Financial. "It's notable that tariff-related costs have not entirely been felt by retailers and consumers, however, consumers are becoming more cautious, selective, and increasingly driven by price and necessity."

So-called trade-down behavior is a natural consumer response to tougher macroeconomic conditions. It makes sense that it is happening now because the recent cooling down in the labor market and the potential for tariff-induced price increases have given consumers reason to worry about their household finances.

The University of Michigan's consumer sentiment index was roughly 14% lower this August than a year ago, according to data released Friday. Declines in sentiment were widespread across age, income, and stock wealth.

That is a boon to discounters, who are well positioned to meet rising demand from new, wealthier customers. Higher-income shoppers tend to spend more and buy pricier items that offer high margins.

"The off-price sector has historically benefited from disruptions within the supply chain and the retail industry," said James Conroy, CEO of Ross Stores. "We believe this time will be no different."

Ross hasn't yet noticed an increase in wealthier people shopping at its stores, but noted that it saw "broad-based" strength from various demographic groups throughout the quarter.

Dollar General, in contrast, said it achieved significant market-share gains among middle- and higher-income customers. Despite a series of tariff-related increases, Dollar General aims to keep its prices lower, on average, than mass retailers, CEO Todd Vasos said.

"Ultimately, customers across all income brackets are coming to Dollar General as they seek value," he said.

Ollie's and Five Below also said they saw an influx of new shoppers throughout the quarter; Burlington saw an improvement in sales trends across "all demographic" areas; and Walmart has been steadily gaining share among wealthier consumers for the better part of the past three years.

"We told you that we expect to gain share during this period of economic uncertainty, and that's what's happening," said Walmart Chief Financial Officer John David Rainey on an investor call.

Analysts are betting consumers will remain value-focused for the better part of the next few quarters.

Joseph Feldman, an analyst at Telsey Advisory Group, upgraded shares of Dollar Tree to Outperform from Market Perform Friday, arguing that the value the chain offers will continue to resonate among various consumer groups. Dollar Tree reports earnings on Wednesday.

"We see upside potential for the next several years at Dollar Tree as it evolves its multi-price point strategy, while remaining a value-first retailer (currently average unit retail is $1.35, with 85% of items still under $2) that wins customers across income demographics, especially higher income households," Feldman wrote.

He also raised his target for the shares' price to $130 from $100, joining other analysts who have done the same. Over the past month, average price targets for Dollar Tree, Dollar General, Five Below, Ollie's, Walmart, Burlington, TJX, and Ross Stores, have been increasing.

That said, it is worth noting that the trade-down windfall won't last forever. Wealthier consumers often return to their normal shopping habits, leaving discount stores behind, once they feel better about their finances.

It is difficult, but not impossible, to retain them, as Walmart has proven lately. The Walmart+ membership program and investments in capabilities like drive-up and same-day delivery have meant more higher-income shoppers are "transacting more frequently" with the retailer, executives have said.

Walmart's success proves that in the long run, the ultimate bargain isn't just price, it's convenience, too. But in the short term, with economic uncertainty weighing on consumers, a good deal may matter more.

Write to Sabrina Escobar at sabrina.escobar@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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August 29, 2025 14:48 ET (18:48 GMT)

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