Americans shift their spending, Target and Walmart are in high demand

After years of rising prices and rising interest rates, American consumers are changing their shopping habits. They've turned to discount chains like Target and Walmart, while cutting back on spending at Macy's and Lowe's.

Inflation changes consumer habits in the US. (Source: Bloomberg)

In the second quarter of 2024, sales at Target stores open a year or more increased 2%, and the company's profits increased sharply by 36%, thanks to a discount strategy.

The company slashed prices on more than 5,000 items typically purchased in stores to attract customers. The strategy worked, with traffic to Target stores rising 3% in the second quarter of 2024 and customers spending more on non-essential items like clothing.

Consumers are focusing on essentials, while spending selectively on non-essential items, said analyst Joseph Feldman at investment consulting firm Telsey Advisory Group.

Inflation and high interest rates have put a lot of pressure on consumers, forcing them to spend more selectively than at the beginning of the pandemic and focus on discount stores.

In addition to Target, consumers are also spending big at Walmart. Walmart's sales at U.S. stores open a year or more rose 4.2% last quarter.

Target's revenue increase last quarter ended a four-quarter streak of declines. Target's revenue and earnings surged during the height of the COVID-19 pandemic in 2020 and have continued to grow through 2023.

However, Target has struggled over the past year, due to its higher merchandise mix and prices compared to rivals like Walmart.

More than half of Target's merchandise is nonessential. While Target has added food and essentials to its stores in recent years, it still lags behind Walmart, which makes about half of its sales from food.

TJX, the parent company of discount clothing chains TJ Maxx and Marshalls, also reported strong results in the quarter. Same-store sales at stores open a year or more rose 4%. TJX raised its full-year sales forecast.

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