Kohl's: The Sephora Engine Is Stalling, and the 'Beat' Rests on Tariff Money

Kohl's just handed the market its best-looking quarter in years. Comparable sales fell only 0.9% — the smallest decline since 2021, snapping a streak of 18 straight declining quarters — the company raised its full-year outlook, and the stock has nearly doubled off its 52-week low of $11.38. On the surface it reads like a department store finally turning a corner.

Then look at the line that carries the whole turnaround story. Beauty has been the one part of Kohl's with real momentum and exclusive brands, the reason to believe a shrinking retailer could pull in new customers. And in the second quarter, sales at Sephora at Kohl's fell 4%, after already sliding in Q1. Beauty is roughly 10% of Kohl's revenue, so a 4% drop there is meaningful on a top line that is shrinking less than 1% overall.

Here is what makes that decline a tell rather than a footnote. The broader U.S. prestige beauty market grew 7% in the first half to over $17 billion. So the category is booming at a time Kohl's own beauty shops are shrinking. That divergence is the evidence that what is happening at Sephora at Kohl's is an execution and assortment problem inside the company, not a demand problem in the industry.

CEO Michael Bender's explanation essentially concedes the gap. Kohl's built Sephora shops partly on exclusive access to prestige brands; now, he says, a handful of the biggest brands have expanded distribution to other retailers, and "customers have other options to purchase those items that we've had exclusive in the past." The newer brands Kohl's is adding are "not big enough right now" to offset the volume lost from the big established names, and there has been a shortage of fresh product. He told analysts to expect the softened performance to persist until the new brands reach scale. Kohl's is pushing back with holiday gift-set outposts in 130 stores and fragrance towers rolling out to 250 stores in November — real moves, but none of them yet a measurable fix.

The deeper problem with the quarter is that even the headline "beat" depends more on bookkeeping than on shoppers. Adjusted earnings of $0.56 a share beat the roughly $0.30 analysts expected, and Kohl's raised full-year guidance to adjusted EPS of $1.80 to $2.40. But the quarter included about $150 million in tariff refunds tied to the IEEPA trade disputes, roughly $100 million of which flowed straight into gross margin. Gross margin jumped 305 basis points to 43% — but strip out the tariff money and underlying margin moved only about 5 basis points. Roughly $0.65 of the full-year EPS guidance comes from a one-time government credit that will not repeat. The profit beat is less a sign of a healthier business than of a lucky check landing in the quarter.

None of this means the stabilization is fake. Outside beauty, the quarter had genuine bright spots: proprietary brands grew 3%, digital sales rose 2.8%, toys grew at a double-digit rate, juniors rose 10%, and the third-party marketplace grew 88% — the marketplace accounts for most of the gap between reported comps of -0.9% and a nearly flat -0.2% when gross merchandise value is included. The balance sheet is quietly getting stronger: $821 million in cash, long-term debt down to $1.3 billion, and Kohl's restarted share buybacks for the first time since 2022 with up to $100 million planned, on top of a dividend yielding about 2.8%.

Valuation is where the risk/reward debate has to be honest. Kohl's trades at roughly half of book value, about 2x EV/EBITDA, and around 7x forward earnings — by far the cheapest of the large department stores, against Macy's at roughly 3.6x EV/EBITDA and Dillard's at more than 8x. Cheap is not a thesis by itself; the market is pricing Kohl's as a business in permanent structural decline, and the multiple already punishes it.

That is the honest center: the stock is cheap for a reason, and the improvement this quarter is real but thinner than it looks. The two things that would make this a compelling buy — a durable growth engine and profit momentum that comes from operations — are both in question. Beauty, the one credible growth story, is shrinking even as the industry grows, and the "beat" leans on one-time tariff money. There is not yet evidence the beauty engine is turning, only a promise that new brands and holiday setups will eventually lift it. That proof shows up over the next two to four quarters, and until it does, the rally at roughly $17.80 is a bet on a mechanism the operating data has not yet confirmed. It is a watch, not a rush.