Target shares dropped 13% in Wednesday trading on the earnings, which came in well below Wall Street’s estimates. It is the second time this year the retailer has misjudged consumer demand—in the spring executives said they were surprised by shifts away from furniture and appliances.

Government data released Wednesday showed that retail spending, including purchases at restaurants, car dealers and gas stations, rose 1.3% in October from September. The data aren’t adjusted for inflation and the government earlier reported that consumer prices rose 7.7% in October from a year earlier.

Target executives said that sales worsened sharply in October and November with guests’ shopping behaviors increasingly affected by inflation, rising interest rates and economic uncertainty.

“Clearly it’s an environment where consumers have been stressed,” said Target Chief Executive

Brian Cornell

on a call with reporters. “We know they are spending more dollars on food and beverage and household essentials, and as they are shopping for discretionary categories they are looking for promotions.”

Target executives said consumers are waiting to purchase items until they spot a deal, buying smaller pack sizes and giving priority to family needs. Sales of food, beverage, beauty products and seasonal items were strong, they said.

Retailers are facing an uncertain holiday season with high food and gas prices pinching some households. Target, like many of its peers, has been discounting to try to clear out a glut of goods this summer. Target’s inventory rose 14.4% in the October quarter from a year ago, while its revenue rose 3.4%. Quarterly net income tumbled by half.

“We are committed to being clean at the end of the holiday season,” regarding excess inventory, said Target Chief Financial Officer

Michael Fiddelke,

on a call with analysts Wednesday. If consumer trends of recent weeks persist, “it will come with more markdowns to make sure we accomplish exactly that goal.”

Rival TJX Cos. reported mixed quarterly results on Wednesday, with lower sales and higher profit margins. The off-price retailer said its U.S. comparable-store sales declined 2% in the quarter, as gains in its Marshalls and T.J. Maxx apparel chains were offset by a drop in its HomeGoods chain.

TJX said it was comfortable with its inventory levels heading into the holidays and said it now expected U.S. comparable-store sales to be flat or up 1% from a year ago.

Walmart gets over half of its U.S. revenue from groceries, while Target’s business is more skewed toward discretionary categories such as home goods, apparel, electronics and beauty products. As consumers absorb higher prices, many are pulling back spending where they can.

For the most recent quarter, Target said comparable sales, those from stores and digital channels operating at least 12 months, rose 2.7% in the quarter ended Oct. 29 compared with the same period last year.

On Tuesday Walmart said U.S. comparable sales rose 8.2% in the quarter. Walmart executives said the retailer is attracting more higher-income shoppers as many shift spending away from discretionary categories to food and look for value.

Target said it is gaining market share in its five main categories, even as consumers pull back spending in some cases. Existing shoppers are buying more and visiting more frequently, said Christina Hennington, Target’s chief growth officer. Traffic to stores increased 1.4% in the most recent quarter.

This year Target expects a hit to its gross margin of around $600 million due to shrink, the industry term for theft and other product loss, said Mr. Fiddelke. “We’ve seen that trend has grown over the course of the year,” he said.

Target, which surprised investors by slashing its forecasts twice in the spring, on Wednesday reduced its sales and profits expectations for its fiscal year, which ends in January.

“We expect the challenging environment to linger on beyond the holiday,” said Mr. Fiddelke.

The company now expects a low-single-digit percentage decline in comparable sales and an operating margin around 3% for the fourth quarter. In August Target said sales would grow in the low- to mid-single-digit percentage range for the full year and operating margin would be around 6% for the second half of the year.

Target executives said they would look to cut at least $2 billion in costs over three years. Executives said the company isn’t planning major layoffs or hiring freezes as part of the new cost-cutting program, but streamlining processes inside the company.

—Suzanne Kapner contributed to this article.

Write to Sarah Nassauer at sarah.nassauer@wsj.com