Kohl's Corporation (KSS) Earnings

Management highlights

### Core Performance Improvements - Comparable sales decline of 1.1% marked Kohl's best quarterly performance in over four years, with progressive improvement from the prior quarter - Core Kohl's card customer segment stabilized to a flat comparable sales, a 600 basis point improvement from Q4 2025, following a year of targeted re-engagement efforts - Inventory was 8% lower year-over-year, with an 8% improvement in inventory turns, while receipts for trending products grew 1% as the company shifted to a more flexible chase model for seasonal inventory - Net cash position improved by over $800 million year-over-year, ending Q1 with $429 million in cash and no outstanding borrowings on the ABL facility Initiative 1: Curated, Balanced Product Assortment - Reduced redundant SKU choice counts for national brands by high single digits, while increasing inventory depth for high-demand core items by high single digits, to improve trip assurance for customers - Reintroduced previously discontinued categories including petites and fine jewelry; fine jewelry is being expanded from a 200-store test to an additional 350 locations as a high-potential white space opportunity - Updated seasonal buying and allocation processes after 2025 holiday missteps, resulting in a mid-teens increase in Q1 spring seasonal sales year-over-year - Rolling out targeted new brand launches: Brixton lifestyle brand to 300 stores in July 2026, full nationwide rollout of MAC Cosmetics for Sephora at Kohl's in fall 2026, and new trending Korean skincare brands including Beauty of Joseon - Expanding kids' offerings: rolling out the Flex active brand to all kids departments by June 2026, adding 56 new Baby's R Us in-store locations for fall 2026, and launching new licensed toy assortments Initiative 2: Re-establish Kohl's as a Value Leader - Expanded coupon eligibility for more brands, which immediately increased coupon penetration and resonated with core customers; no further broad eligibility changes are planned at this time - Launched the company-wide "Buy Kohl's" marketing campaign to increase awareness of proprietary brands, which deliver high quality at affordable opening price points and are exclusive to Kohl's; the campaign will continue through Q2 and the back-to-school season - Rolled out in-store value initiatives including $10-and-under deal bars for seasonal and gifting items, and $4.99-$9.99 toy towers, both of which exceeded initial performance expectations - Continued targeted investment in in-store experience upgrades for top-performing proprietary brands, following successful early launches for LC Lauren Conrad and TechGear Initiative 3: Enhance Omnichannel Frictionless Shopping Experience - Launched an AI-powered gift finder tool on the Kohl's website built on Google Gemini, with early positive results and plans for additional AI-enabled shopping tools to improve product discovery and conversion - Investing in core digital experience upgrades, including improved assortment navigation, clearer delivery information, and simplified returns - Planning to more than double the number of items available on the Kohl's digital marketplace in 2026, to expand into new white space categories that complement the company's core offering

Guidance

- Management reaffirmed its full-year 2026 guidance, with no upward or downward revision - Comparable sales are projected to be in the range of a 2% decrease to flat compared to 2025 - Operating margin is projected to be between 2.8% and 3.4% - Diluted earnings per share is projected to be between $1.00 and $1.60 - Full-year capital expenditures are expected to remain in the range of $350 million to $400 million - Full-year inventory is expected to decline by low to mid single digits year-over-year - Operating cash flow is expected to be approximately $900 million, resulting in full-year free cash flow of $500 million to $600 million - All guidance excludes any potential impact from claimed Section 301 (China) tariff refunds; Kohl's has submitted $140 million in claims for a total eligible amount of $190 million, with no refunds received as of the end of Q1 - Management expects other revenue (primarily from the Kohl's credit card business) to improve throughout 2026 as core Kohl's card customer performance stabilizes

Segment performance

Overall Company: Net sales declined 1.7% year-over-year, with comparable sales down 1.1% (the best quarterly performance in over four years). Including marketplace results, comparable sales would have been down 0.6% (a 50 basis point improvement). The company reported a net loss of $14 million, or a loss per diluted share of 13 cents. Gross margin improved 4 basis points year-over-year, while SG&A expenses decreased by $20 million (1.6%). Store Segment: In-store comparable sales declined low single digits, driven by lower transaction volumes. Impulse queuing lines, a store-specific initiative, grew over 50% year-over-year in Q1. Digital Segment: Digital sales grew 4% year-over-year, fueled by increased traffic, with the marketplace business growing to become a more meaningful contributor to overall performance. Proprietary Brands Segment: Proprietary brands delivered a 6% increase in comparable sales, outperforming the overall business and driving gross margin expansion. Key outperformers include the So brand in juniors (up 10% overall), LC Lauren Conrad, Sonoma, and new kids brands Flex and Sea and Sky. Proprietary brands now represent a growing share of overall sales, with continued planned investment in inventory and in-store experiences. Apparel Categories: Women's delivered a flat comparable sales, with juniors up 10% and women's sportswear performing well driven by proprietary brands. Kids delivered a flat comparable sales, with new brand initiatives exceeding early expectations. Men's underperformed the overall company, with assortment changes planned to drive improvement starting in Q2. Non-Apparel Categories: Accessories delivered a flat comparable sales, with fine jewelry and impulse lines performing strongly. Home category comparable sales improved over 400 basis points from Q4 2025, with home decor up low single digits following assortment adjustments. Footwear underperformed the overall company, with new product depth planned for the back-to-school season to drive improvement. Sephora at Kohl's underperformed, with comparable sales down low single digits; fragrance and haircare were strong, while makeup and skincare underperformed.

Risks & headwinds

- The macroeconomic environment continues to pressure Kohl's core low-to-middle income customer base, leading to continued choiceful, cautious discretionary spending - Higher digital sales penetration creates ongoing gross margin headwinds from increased shipping costs - Inbound fuel and transportation costs are elevated compared to prior expectations, creating margin headwinds that are already incorporated into full-year guidance - Sephora at Kohl's underperformance in makeup and skincare is expected to persist through the first half of 2026 as new product initiatives roll out - Men's and footwear categories are currently underperforming the broader business, with improvement not expected until the second half of 2026 - There is uncertainty around the timing and ultimate amount of approved tariff refunds, which are not included in current guidance

Analyst Q&A

• Q: What were the key drivers of Q1's improved performance, and what early Q2 trends support continued momentum? /

  A: Management stated the biggest driver was the strong 6% comp growth of proprietary brands, which was broad-based across women's, men's, and kids categories and resonated with value-focused customers due to their high quality and affordable opening price points. Fixed Q1 spring seasonal inventory planning also drove a mid-teens comp increase after holiday 2025 missteps, with cleaner inventory allowing the company to chase trending products more effectively. Early Q2 performance has continued the sequential improvement from Q1, with an earlier spring seasonal transition expected to benefit results into Q3.

• Q: With a much cleaner inventory position, what are the expected gross margin impacts for the full year? /

  A: Management noted that while clean inventory reduces unplanned clearance markdowns and supports higher regular selling prices, the company plans to invest any margin tailwinds back into enhanced value for customers, which will keep margins flat to slightly down year-over-year. Lower-income customers remain under significant financial pressure, so Kohl's must prioritize value to remain in customers' consideration sets, with the under $10 deal bar and low-priced toy towers already resonating strongly. The company prioritizes driving customer traffic and repeat visits over near-term margin expansion.

• Q: What is the timeline for improving underperforming categories including Sephora at Kohl's, men's, and footwear, and what is the outlook for the stabilizing Kohl's card customer? /

  A: Management expects men's assortment edits (reducing redundancy, focusing on core proprietary brands) to drive visible improvement starting in Q2 2026. Footwear is expected to improve in the back half of 2026, driven by new product depth for back-to-school from key brands including Nike and Adidas. For Sephora at Kohl's, new product launches (MAC Cosmetics full rollout, new Korean skincare lines) are expected to lift underperforming makeup and skincare categories gradually, with performance aligning with the overall company by year end. The 600 basis point improvement in Kohl's card comp performance is expected to continue, as the customer base has responded positively to the return of value and the expanded assortment of high-demand categories they favor.

• Q: What is the outlook for proprietary brand penetration, and will it hit a peak this year? /

  A: Management stated there is no fixed target penetration rate for proprietary brands, and the mix will be determined by customer demand. National brands remain an important part of Kohl's assortment, and the company will not return to the penetration levels seen before the Sephora at Kohl's rollout. Given the current economic environment, proprietary brands are outperforming, with 6% comp growth in Q1, so the company is increasing inventory investment in the segment and expects growth to continue for the foreseeable future.