Kohl's Q2 2025: Contradictions Emerge on Proprietary Brands, Tariff Mitigation, Sephora Integration, and Weather Impact

The above is the analysis of the conflicting points in this earnings call

Date of Call: August 27, 2025

Financials Results

• Revenue: Net sales down 5.1% YOY; comparable sales down 4.2% (Q2 2025)
• EPS: $0.56 adjusted diluted EPS (Q2 2025); YOY comparison not provided; excludes $0.87 from one-time settlement
• Gross Margin: 39.9%, up 28 bps YOY

Guidance:

• FY25 net sales expected down 5% to 6% (prior: down 5% to 7%).
• FY25 comparable sales down 4% to 5% (prior: down 4% to 6%).
• Other revenue down 13% to 14% for FY25.
• Gross margin expansion ~30 bps for FY25 (low end of prior 30–50 bps).
• SG&A down 4% to 4.5% (prior: down 3.5% to 5%).
• Depreciation ~$705M (prior $730M).
• Interest expense ~$305M (prior $315M).
• Adjusted operating profit 2.5%–2.7% (prior 2.2%–2.6%).
• Adjusted diluted EPS $0.50–$0.80 (prior $0.10–$0.60).
• Year-end inventory down mid-single digits; expect to be out of revolver by year-end.
• CapEx ≈$400M; complete Sephora rollout and 613 Impulse queue lines by Q3.

Business Commentary:

* Sales Performance and Strategic Initiatives: - Kohl's reported comparable sales down 4.2% and adjusted earnings per diluted share of $0.56 for the second quarter, slightly ahead of expectations. - The improved performance was attributed to the ongoing progress against their 2025 strategic initiatives, particularly the emphasis on proprietary brands and value offerings.

• Digital Business and Proprietary Brands:
• The digital business outpaced store sales, driven by strong conversion rates and the inclusion of more brands in coupon offerings.

• Proprietary brand sales improved by 500 basis points from Q1, contributing to a positive July comp performance. Key brands such as Sonoma, FLX, and Lauren Conrad performed well.

• Inventory and Promotional Strategies:

• Kohl's reduced inventory by 5% and expanded gross margin by 30 basis points due to disciplined inventory management and strategic promotional strategies.

• A focus on expanding proprietary brand offerings and increasing coupon eligibility for national brands improved customer engagement and sales.

• Customer Engagement and Targeted Investments:

• Efforts to reengage the core customer base by emphasizing value and targeting specific product categories, such as jewelry and petites, showed positive results.
• New initiatives like the expansion of the Sephora partnership and Impulse queuing lines contributed to improved sales and customer experience.

Sentiment Analysis:

• Management: “Comparable sales… down 4.2%… adjusted EPS of $0.56, both ahead of expectations.” “Consumers continue to be pressured… lower- to middle-income customers remain the most challenged.” Guidance kept prudent with tariff uncertainty; FY EPS raised to $0.50–$0.80 and operating profit to 2.5%–2.7%.

Q&A:

• Question from Mark R. Altschwager (Baird): Which initiatives are most driving the top line now, and where do you see the most back-half comp improvement?
  Response: Reinvestment in proprietary brands is the primary growth driver and will be leaned into in 2H.

• Question from Mark R. Altschwager (Baird): How should we think about back-half comp cadence and gross margin trajectory?
  Response: Back-half comps similar to 1H; gross margin roughly +30 bps with flexibility for promotions and digital mix.

• Question from Charles P. Grom (Gordon Haskett): How many brands were added back to couponing, what’s left, and how fast do customers notice?
  Response: Large wave at Q1-end plus ~50 more in August; digital saw immediate lift, with added store signage to boost awareness.

• Question from Charles P. Grom (Gordon Haskett): Any read on August/back-to-school trends?
  Response: August started well with strength in backpacks, kids’ footwear, fashion denim, and key proprietary/national brands (e.g., Levi’s, Nike).

• Question from Paul Lawrence Lejuez (Citigroup): Break down comps (traffic vs. ticket) and tariff impact/assumptions?
  Response: Traffic is the main driver of improvement; tariff headwinds mitigated via sourcing shifts, vendor negotiations, proprietary mix; guidance embeds flexibility.

• Question from Paul Lawrence Lejuez (Citigroup): Is a net tariff impact included in the back half?
  Response: Yes; gross margin outlook cut to the low end to absorb tariffs while staying price competitive.

• Question from Oliver Chen (TD Cowen): What will it take to achieve positive comps and timing? Rank near-term vs. longer-term initiatives.
  Response: No timing offered; focus is on proprietary brands and reinstated core categories to regain traffic, with store experience improvements over time.

• Question from Oliver Chen (TD Cowen): Why will private label/value work now; racetrack approach; biggest category opportunity?
  Response: Restoring beloved private labels with depth at opening price points; targeted racetrack use; Kids (and Men’s) are biggest improvement opportunities.

• Question from Carson (Evercore ISI, for Michael Binetti): How does gross margin shape up in Q3 vs. Q4 amid tariffs and coupons?
  Response: Expect balanced Q3/Q4 margins; proprietary mix and better turns offset tariffs; margin guide at low end for pricing/coupon flexibility.

• Question from Lorraine Hutchinson (BofA Securities): Update on other revenue/credit income trajectory?
  Response: 2H credit revenue steps down as co-brand laps; core cardholder sales down mid-teens limit AR growth and revolve.