Kohl's Corporation Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Curated Assortment: Rebalancing product assortment, focusing on Women's, intimates, and petites. Women's business improved with proprietary brands, intimates saw better in-stocks, and the petites category accelerated.
• Value and Quality: Elevating proprietary brands, with sales up 500 basis points from Q1. Enhancing promotional strategies by making more brands coupon eligible, positively impacting digital sales.
• Omnichannel Experience: Optimizing store layout, adjusting product flows, and restoring trip assurance. Examples include a dedicated accessories pad, relocating juniors near Sephora, and improving in-stock levels in intimates.

Segment Performance

• Women's: Saw progress with investments in proprietary brands, streamlined intimates, and reintroduced petites. Women's slightly lagged overall but improved, with July showing a positive comp driven by brands like Sonoma, Lauren Conrad, and FLX. Intimates saw improvement with reduced choice count and better in-stocks. The petites category accelerated, up almost 40% in Q2, led by Lauren Conrad and Simply Vera Vera Wang.
• Accessories: Outperformed the company by low single digits. The jewelry business was up 12% in Q2, driven by reestablishing jewelry and the Sephora partnership. Impulse and Sephora partnership also contributed to the strength.
• Proprietary Brands: Up 500 basis points from Q1, with comparable sales down 3% in Q2 and July up low single digits. Key brands like Tek Gear, Simply Vera Vera Wang, Lauren Conrad, and FLX performed well. Launched new home brands and expanded FLX to the kids category.
• Net Sales: Declined 5.1% in Q2 and 4.6% year-to-date. Comparable sales decreased 4.2% in Q2 and 4% year-to-date. Digital sales outpaced store sales, with new and non-Kohl's Card customers driving growth.
• Gross Margin: 39.9% in Q2, up 28 basis points, driven by category mix, proprietary brands, and inventory management.
• SG&A: Decreased 4.1% in Q2 to $1.2 billion, due to lower spending in stores and marketing.
• Inventory: Down 5% compared to last year, with receipts managed down mid-teens.

Guidance

• Net Sales: Decline of 5% to 6% (previously 5% to 7%).
• Comparable Sales: Decline of 4% to 5% (previously 4% to 6%).
• Other Revenue: Down 13% to 14%.
• Gross Margin: Expansion of approximately 30 basis points (previously 30 to 50 basis points).
• SG&A: Decline of 4% to 4.5% (previously 3.5% to 5%).
• Depreciation: $705 million (down from $730 million).
• Interest Expense: $305 million (down from $315 million).
• Adjusted Operating Profit: 2.5% to 2.7% (up from 2.2% to 2.6%).
• Adjusted Diluted EPS: $0.50 to $0.80 (up from $0.10 to $0.60).

Risks

• Macroeconomic Uncertainty: Including global trade policy and its impact on consumer behavior.
• Core Customer Pressure: Core customers remain selective with spending, posing challenges.
• Tariff Impact: Uncertainty around tariffs and their effect on costs and pricing.

Question and Answer

Q: Unpack drivers of comp improvement into July and second half drivers A: Jill Timm mentioned traffic was a key driver, with average transaction value relatively flat. Improvement came through regaining customer trips, especially in nonsubstitutable categories like jewelry and petites. Second half drivers include continuing to bring back customers, leveraging proprietary brands, and digital business outperformance.

Q: Status of adding brands to coupon and consumer notice A: Jill Timm said they added brands like IZOD, Hurley, Champion in Q1, and 50 more in August. Immediate impact on digital business, with stores seeing improvement as signage and associate training increased.

Q: Tariff impact and margin guidance A: Michael Bender and Jill Timm discussed mitigation efforts like leaning into proprietary brands and sourcing adjustments. Margin guidance adjusted to low end (30 basis points) due to tariff uncertainty, with flexibility to stay price competitive.

Q: What it takes for positive comp and timing of initiatives A: Michael Bender and Jill Timm mentioned focusing on curated assortments, proprietary brands, and store experience improvements. Short-term gains from initiatives like Sephora partnership and Impulse queuing lines, with longer-term focus on winning back core customers and value equation.

Q: Other revenue and credit income state A: Jill Timm noted co-brand card revenue comping in back half, and core credit customer down mid-teens, leading to step down in other revenue in back half.