Consumers flash holiday warning signs

High-income consumers are trading down, Gen Z is spending less, and low-income shoppers are still struggling, according to many consumer companies that shared their latest quarterly results in recent weeks.

Those trends may not bode well for the big-box and mall retailers that have yet to report their earnings. That is, unless the strength of their brands — or high-income consumers who see their products as a good deal — help them transcend the gloomier consumer climate.

While the Atlanta Fed’s GDPNow tracker is projecting 4% U.S. GDP growth in the third quarter, there are cracks showing in the economy. Earlier this month, U.S. consumer sentiment slipped to near record lows, fueled by concerns about higher prices and the federal government shutdown. Plus, private data sources show that the U.S. economy was losing jobs through late October.

Investors will get a wider snapshot in the coming week. Some of the biggest names in retail, including Walmart, Target, Gap and Home Depot, will report their latest earnings and provide insights into how spending during the critical holiday season is shaping up.

According to credit card data from equity research firm and bank Truist, sales have softened in recent weeks across many of the retailers that it watches. Sales trends slowed at Walmart, Home Depot and Lowe’s in October after after they saw solid sales in August and September, according to Truist.

Wall Street has noticed slower spending, too. Michael Baker, a retail analyst for D.A. Davidson, said he now expects weaker holiday spending than he did before as consumers face a challenging mix of higher tariffs, slower job growth and pressure on lower-income households.

He expects holiday sales to grow in the high 3% range year over year, down from the firm’s previous view that holiday sales growth would accelerate from last year’s 4.3% increase.

“There’s just a lot of headwinds building for the consumer and a lot of the data we track [at retailers] was just really bad in September and even worse in October,” he said.

For roughly two years, executives have warned investors that low-income consumers were spending less, dining out less frequently and growing picky about their shopping.

Now there are more signs that high-income shoppers are watching their budgets, too. That trend could help some of the retailers reporting in the weeks ahead, such as Walmart, Dollar General and Dollar Tree, while hurting others like Target and Best Buy.

The fast-food industry saw traffic from high-income diners climb by nearly double digits in the third quarter, according to McDonald’s CEO Chris Kempczinski. McDonald’s, often seen as bellwether for the economy, is gaining share with high-income consumers, thanks to deals like its Extra Value Meals, he said on the company’s conference call earlier this month.

“I think sometimes there’s this idea that value only matters to low-income [consumers],” Kempczinski said. “But value matters to everybody, whether you’re upper income, middle income, lower income, feeling like you’re getting good value for your dollar is important.”

Fast-food chains aren’t the only ones benefitting from higher-income diners trading down.

Dine Brands, which owns Applebee’s and IHOP, is seeing a similar trend. With a 2 for $25 promotion at Applebee’s and a $6 value menu at IHOP, the casual-dining chains are pulling customers away from higher-priced options.

“We’re seeing a greater increase of higher-income guests joining us this year,” Dine CEO John Peyton told CNBC, adding that the jump in traffic from that cohort is offsetting the decline in visits from low-income diners.

High-income shoppers are also hunting for deals at retailers. Savers Value Village, which runs a chain of thrift stores across the U.S., Canada and Australia, said during its fiscal 2025 third-quarter earnings call that it’s seeing growth in both its “younger and more affluent” customer groups.

“High household income cohort continues to become a larger portion of our consumer mix. It’s trade down for sure and our younger cohort also continues to grow in numbers,” CEO Mark Walsh said on a call with analysts in October. “We couldn’t ask for a better outcome.”

Consulting firm Alvarez & Marsal recently conducted a consumer sentiment survey that polled over 2,000 shoppers and found 24% of respondents earning $100,000 or more a year are planning to spend less this holiday season.

Joanna Rangarajan, a partner and managing director with the firm’s consumer and retail group, said that could partially be because they plan to trade down — or already are.

“They’re going to pull back spending in a variety of ways. They may do that by buying fewer things, they may switch to less expensive brands, or they may switch to lower cost retailers overall, or it could be a combination of any of those things,” said Rangarajan.

While lower-cost brands and retailers could be seeing their core consumers spend less, it might not matter as much if they’re winning over new, higher-income shoppers.

Walmart, in particular, has spoken about its gains among customers with an annual household income of more than $100,000. That dynamic has boosted the big-box retailer’s business for more than two years, especially as shoppers across all incomes have felt pinched by higher grocery prices. The company has also made some strategic moves to woo wealthier shoppers, such as remodeling stores, launching a new grocery brand and speeding up home deliveries.

Even the dollar stores have attracted higher-income shoppers.

Dollar General CEO Todd Vasos said on the company’s earnings call in late August that the retailer saw increased spending among its core customers, who tend to be lower income, despite “worsening sentiment” in the quarter that ended Aug. 1. But he added Dollar General also saw growth among middle- and high-income consumers, which “has been accelerating over the last few quarters.”

At an investor day in mid-October, Dollar Tree CEO Michael Creedon said higher-income households are the retailer’s “fastest growing cohort.”

Value-oriented companies, such as Walmart and warehouse clubs, are best positioned to post strong results in the coming weeks as they attract deal-hunting customers across incomes, D.A. Davidson’s Baker said.

On the other hand, he said Target and Best Buy are in a tougher spot as they lose market share. For example, Baker said Best Buy customers are trading down to big-box stores like Walmart and club players like Costco for lower-priced TVs.

Gen Z and millennials are not spending the way that they used to as they contend with a slowing job market, rising unemployment and the resumption of student loan collection, which the federal government restarted in May.

The generational trend is particularly bad news for fast-casual restaurants, which skew toward younger diners. Fast-casual favorites like Chipotle Mexican Grill, Cava and Sweetgreen reported that consumers aged 25 to 35 years old aren’t visiting as frequently anymore. All three chains cut their full-year forecast following disappointing third-quarter results.

At Chipotle, the 25- to 35-year old cohort typically accounts for about a quarter of sales. However, those diners haven’t been visiting the burrito chain’s restaurants as frequently, instead opting to cook at home, according to CEO Scott Boatwright.

“This group is facing several headwinds, including unemployment, increased student loan repayment and slower real wage growth,” he said on the company’s conference call last month.

Beyond their fast-casual meals — known colloquially by some as “slop bowls” — younger consumers are also trying to spend less on necessities, like new glasses or contacts.

The younger shoppers that glasses maker Warby Parker serves have been feeling “increasingly… uncertain about their future” and “more selective in their purchasing behavior,” said Warby’s co-founder and co-CEO Dave Gilboa on the company’s 2025 third quarter earnings call earlier this month.

“We’ve seen a moderation in average order value or basket size in categories that skew younger,” said Gilboa. For example, the company has seen shoppers pull back on its higher priced frames in favor of its $95 option.

In weakening economies, younger people can start to feel distressed earlier than older groups because they tend to earn less and have less money in savings, and are more likely to be unemployed, according to economists.

To add to the issues, companies across the U.S. have paused hiring, which puts younger consumers who have just graduated high school or college at a particular disadvantage, according to Allison Shrivastava, a senior economist for Indeed. Plus, a stream of recent job cuts has targeted many entry-level employees, worsening employment prospects for younger workers.

The difference in unemployment rates between younger and older people is now starker than usual, Shrivastava said. The unemployment rate for workers between 25 and 34 years old hit 4.4% in August, higher than the 3.5% rate for the 35- to 44-year old cohort and the 2.9% rates for the 45- to 54-year old and 55 years and older segments. (More recent data from the Bureau of Labor Statistics is unavailable due to the federal government shutdown.)

Shrivastava sees the pullback in spending as largely a response to the frozen labor market.

“We’re starting to get some frostbite in the form of declining consumer spending,” Shrivastava said, adding that “significant” layoffs could push the economy into a recession.

Though consumers have cut their spending in key areas, some companies have proved resilient because of their brand strength or the perceived quality of their products.

Even as some younger shoppers bought fewer Chipotle burritos and Cava bowls, Coach parent Tapestry said it saw strong handbag sales in recent months — with Gen Z customers driving much of the growth.

Tapestry, which also owns Kate Spade, raised its full-year forecast after beating quarterly sales and profit expectations.

In an interview with CNBC, Tapestry Joanne Crevoiserat attributed that to both the popularity of the Coach brand and younger shoppers who are spending on fashion rather than other areas. She said the company’s research shows “the Gen Z consumer specifically is highly fashion engaged, spending slightly more of their budget on fashion.”

She said the company has seen no difference in sales performance by income bracket, as it attracts shoppers from other generations as well as Gen Z.

Coach and Kate Spade’s price points provide an edge, too, according to a note from Telsey Advisory Group. Their handbags have a significant price gap with European luxury brands — even as Tapestry brands raise price points.

Even so, Tapestry disappointed Wall Street with a more conservative holiday-quarter outlook.

Tapestry isn’t alone. Swiss sportswear company On and Ralph Lauren are also finding growth across all consumer segments despite a choppy economy.

On, which reported fiscal 2025 third-quarter earnings on Wednesday, raised its full-year guidance for the third quarter in a row after seeing sales grow about 25%, bucking a slowdown in the sneaker market. 

The company’s performance stands in stark contrast to competitors like Nike and Hoka, which are planning for either a sales decline or slowdown in growth. In late September, Nike said it was expecting sales in its holiday quarter to fall by a low single-digit percentage. Deckers, the parent company of On’s fellow buzzy footwear brand Hoka, trimmed its sales guidance for Hoka in October. 

Meanwhile, Ralph Lauren raised its full-year outlook earlier this month after seeing sales rise 17% in its fiscal 2026 second quarter. During a call with analysts, CEO Patrice Jean Louis Louvet said it saw “balanced growth across men, women and younger cohorts.”

Ralph Lauren is benefiting because it has a higher-income core consumer, but the company has also worked to ensure its assortment is landing with shoppers and its brand is still relevant. One of the biggest holiday trends currently hitting TikTok is a “Ralph Lauren Christmas,” which combines the brand’s old-money aesthetic with decor for those looking for a traditional holiday feel.

“This cultural strength has also been instrumental in attracting younger consumers,” said GlobalData managing director and retail analyst Neil Saunders in a note. “Our data indicate that the brand’s penetration among younger demographics has increased. This is aided by designs such as the limited-edition Morehouse and Spelman College vintage collections, which resonate with younger consumers and play on their desire for nostalgia and heritage.”

Dutch Bros., the fast-growing drink chain, also saw growth from younger consumers in its latest quarter. The company’s wide-ranging menu, from protein lattes to vibrant energy drinks, can be heavily customized, a feature that has proved popular with Gen Z consumers.

“We’re seeing really incredible performance of those younger cohorts,” CEO Christine Barone said during the company’s conference call earlier this month. “I think that during times like this, customers are choosing the brands that they love most and really deciding to spend their dollars there.”

Dutch Bros. reported quarterly same-store sales growth of 7.4%, fueled by a nearly 7% increase in traffic to its stores.

Chili’s, which is owned by Brinker International, also saw traffic to its restaurants jump in its most recent quarter. The casual dining chain has won over diners through a turnaround strategy focused on improving the in-restaurant experience, plus savvy marketing that pitted its prices against those of fast-food chains.

“Our customer base is very representative of the U.S. consumer across all income cohorts, but our cohort growing the fastest is actually now households with income under $60,000,” Brinker CEO Kevin Hochman said on the company’s conference call in late October.

Others in the retail industry aren’t worried about slow spending during the holidays.

At the malls, buzzy companies like Vuori and Alo, digitally native brands like Princess Polly and popular retailers like Abercrombie & Fitch are drawing bigger crowds as the holidays approach, said Kevin McCrain, CEO of the retail business at Brookfield Properties, one of the largest U.S. mall owners.

Even as the economy shows blemishes, he said the company hasn’t seen a change in shopping patterns or landlord demand. And he said he still expects spending across November and December to increase from last year.

So does the National Retail Federation. The trade group expects overall holiday spending in November and December to grow by 3.7% to 4.2% year over year and to top $1 trillion for the first time, even as shoppers scout for deals and make tradeoffs.

Mark Mathews, chief economist at NRF, said the group’s consumer survey shows a larger percentage of shoppers are “holding off” for Black Friday and Thanksgiving weekend sales than a year ago. He added consumers are trimming back in other areas, like eating out, so they have money set aside for gifts.

“At the end of the day, it’s the holiday season,” Brookfield’s McCrain said. “People get caught up in the lights and Santa Claus, and everyone wants to be positive and hopeful and just have a great time.”