Kohl's Q2 2025 Earnings Call: Contradictions in Proprietary Brand Impact, Tariff Strategies, and Sales Performance

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%
• EPS: $0.56 adjusted EPS; prior-year comparison not provided
• Gross Margin: 39.9%, up 28 bps YOY

Guidance:

• FY25 net sales down 5%–6% (prior -5% to -7%).
• FY25 comparable sales down 4%–5% (prior -4% to -6%).
• Other revenue down 13%–14%.
• Gross margin +~30 bps YOY (low end of prior +30–50 bps).
• SG&A down 4.0%–4.5% (prior -3.5% to -5%).
• Depreciation ~$705M (prior $730M).
• Interest expense ~$305M (prior $315M).
• Adjusted operating margin 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; capex ~$400M; expect to exit revolver by year-end.

Business Commentary:

• Sales and Comps Performance:
• Kohl's Corporation reported comparable sales down 4.2% and adjusted earnings per diluted share of $0.56 for Q2 2025, both exceeding expectations.
• The sales progressively improved throughout the quarter, with July comp sales flat to last year.

• This improvement was driven by the digital business and proprietary brand sales, despite continued consumer pressure and a focus on value by lower to middle-income customers.

• Inventory Management and Gross Margin Expansion:

• Inventory declined by 5% compared to last year, with disciplined inventory management reflected in receipts reduced by mid-teens.
• Gross margin expanded by approximately 30 basis points, driven by category mix benefits and strong performance of proprietary brands.

• These improvements were attributed to strategic efforts to enhance inventory and product assortment and align with customer needs.

• Digital and Proprietary Brand Success:

• Digital sales outperformed store sales, driven by strong conversion rates and the inclusion of additional brands in coupon offerings.
• Proprietary brand sales improved by 500 basis points from the previous quarter, with key brands like Tek Gear and Lauren Conrad leading the growth.

• The focus on digital channels and proprietary brands positioned the company to leverage value offerings that resonated with customers, particularly during challenging macroeconomic conditions.

• Omnichannel and In-Store Experience:

• Efforts to optimize store layout and product flow led to a flat July comp sales, with improvements in key categories like intimates and accessories.
• The Sephora partnership continued to perform well, driving more units in the basket and a 3% year-to-year growth.
• These adjustments aimed to improve customer experience, enhance trip assurance, and restore confidence in the Kohl's shopping experience.

Sentiment Analysis:

• Management said Q2 results and $0.56 adjusted EPS were ahead of expectations; July comps were flat. Gross margin expanded 28 bps YOY and inventory down 5%. However, consumers remain pressured, core Kohl’s Card customers underperformed (sales down low teens), and guidance assumes a challenged macro with tariffs weighing on margins (taking FY GM to low end of prior range).

Q&A:

• Question from Mark R. Altschwager (Baird): Which initiatives are most driving the top line now, and where do you see the most opportunity to improve comps in the back half?
  Response: Reinvesting in proprietary brands and broader coupon eligibility are the biggest drivers; expect proprietary-led momentum—especially in Women’s—to continue in 2H.

• Question from Mark R. Altschwager (Baird): How should we think about Q3 vs. Q4 comp cadence and gross margin after the guidance update?
  Response: Expect similar comp cadence in Q3 and Q4; FY gross margin targeted around +30 bps with flexibility to support value and mix shifts as digital outperforms.

• Question from Charles P. Grom (Gordon Haskett Research Advisors): How many brands have been re-added to coupons, what’s left, and how quickly do customers notice online vs. in-store?
  Response: Wave 1 (late Q1) added larger brands; August added ~50 mainly smaller/digital-native brands. Digital reacted immediately; stores improving with added signage and associate training.

• Question from Charles P. Grom (Gordon Haskett Research Advisors): How is August/back-to-school trending?
  Response: August started well; strength in backpacks, kids footwear, fleece, fashion denim; proprietary brands (SO, Lauren Conrad, Nine West) and Levi’s/Nike are performing.

• Question from Paul Lawrence Lejuez (Citigroup): Please break down comps (transactions vs. ticket/AUR/UPT) and what improved into July; how do you see 2H drivers?
  Response: Traffic is the main swing factor; average transaction value roughly flat. Initiatives like jewelry/petites (non-substitutable) aim to rebuild trips, especially with core customers.

• Question from Paul Lawrence Lejuez (Citigroup): How are tariffs impacting 2H and beyond; what’s the net effect after mitigation?
  Response: Diversified sourcing, vendor negotiations, value engineering, and elasticity-based buys mitigate impacts; FY gross margin moved to low end to preserve price competitiveness.

• Question from Oliver Chen (TD Cowen): What will it take to return to positive comps and which initiatives matter most near vs. long term?
  Response: Near term: restore proprietary-brand mix and coupon value, expand Sephora/Impulse to drive units. Longer term: curated assortments, improved store layouts, and trip assurance.

• Question from Oliver Chen (TD Cowen): What’s different now with private label/value, store racetrack plans, and biggest category opportunities/risks?
  Response: Refocused on core private labels at opening price points with depth in essentials and tighter fashion curation; thoughtful racetrack use. Biggest opportunities: Kids and Men’s; right-sizing dresses.

• Question from Michael Binetti (Evercore ISI): How will Q3 vs. Q4 gross margin differ given tariff timing, private-label mix, and coupons?
  Response: Expect proprietary-brand mix benefits to accelerate; inventory discipline supports turns. Tariff pressure weighted to 2H but margins should be fairly balanced between Q3 and Q4.

• Question from Lorraine Corrine Maikis Hutchinson (BofA Securities): Why did the other revenue (credit) outlook step down despite Q2 upside?
  Response: Co-brand launch benefit laps in 2H (tougher comps) and core credit customers are down mid-teens, limiting AR growth and revolvement, thereby reducing credit income.