KSS Q2 Deep Dive: Proprietary Brands and Operational Discipline Drive Margin Upside Amid Sales Decline

Department store chain Kohl’s (NYSE:KSS) reported Q2 CY2025 results topping the market’s revenue expectations, but sales fell by 5% year on year to $3.55 billion. Its non-GAAP profit of $0.56 per share was 88.6% above analysts’ consensus estimates.

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StockStory’s Take

Kohl’s delivered second-quarter results that received a strong positive reaction from the market, driven largely by better-than-expected margin expansion and non-GAAP earnings performance. Management pointed to the company’s focus on proprietary brands and a disciplined approach to inventory and expenses as key contributors. CEO Michael Bender highlighted that proprietary brands, particularly in women’s and accessories, saw sequential improvement, while cost controls kept margins resilient even as overall sales declined. Bender noted, “The improved performance was driven by our digital business and our proprietary brand sales, both of which performed positively in July.”

Looking forward, Kohl’s updated annual guidance reflects ongoing efforts to balance value and assortment for its core customer base, particularly as lower- to middle-income shoppers remain cautious. Management plans to emphasize proprietary brands, extend coupon eligibility to more products, and continue optimizing store and digital experiences. CFO Jill Timm said, “We really think we’re set up well to continue to deliver that value when it’s going to become incredibly important to that customer in the back half and especially holiday.” However, the company remains cautious given ongoing macroeconomic pressures and uncertainty around tariffs, and is building flexibility into its margin outlook to address these variables.

Key Insights from Management’s Remarks

Management attributed the quarter’s margin gains and earnings outperformance to the ongoing repositioning of its merchandise mix and enhanced focus on value for core customers, while acknowledging persistent sales pressures from cautious consumer spending.

• Proprietary brands rebound: Investments to rebuild proprietary brands such as Sonoma, Lauren Conrad, and FLX led to improved performance, especially in women’s apparel, where these brands are most prominent. Management stated this focus is resonating with loyal customers seeking quality at accessible price points.
• Accessories and beauty partnerships: The accessories business, bolstered by a revitalized jewelry segment and the ongoing expansion of the Sephora at Kohl’s partnership, consistently outperformed other categories. Jewelry sales rose substantially, with fashion jewelry benefiting from expanded store placement and Sephora drawing younger and new shoppers to cross-shop adjacent categories.
• Coupon eligibility expansion: Kohl’s accelerated the addition of brands eligible for coupons, responding to customer demand for greater value and price transparency. The immediate impact was most evident in digital channels, with management planning further in-store marketing to raise awareness among shoppers.
• Expense and inventory discipline: Operating discipline was reflected in a 5% inventory reduction and a 4% decrease in SG&A (selling, general, and administrative) expenses, which supported margin expansion even as sales declined. This approach enabled the company to maintain flexibility as it navigates a cautious consumer environment.
• Store experience enhancements: Early-stage initiatives to optimize store layouts, adjust product flows, and improve visual merchandising began to show results, particularly in categories like accessories and juniors. Management is prioritizing a more cohesive and inspirational in-store experience to drive customer engagement and trip frequency.

Drivers of Future Performance

Kohl’s outlook for the remainder of the year is shaped by macroeconomic headwinds, evolving promotional strategies, and a continued push to expand proprietary brands and digital engagement.

• Value-focused merchandising: Management is prioritizing value through proprietary brands and expanded coupon eligibility, aiming to reengage price-sensitive core customers. These initiatives are expected to drive incremental trips and improve customer retention, but the pace of recovery remains uncertain due to ongoing pressures on lower-income shoppers.
• Margin flexibility amid tariffs: The company is proactively addressing potential margin pressures from tariffs and competitive holiday promotions by tightening inventory and leveraging proprietary brands, which carry higher margins. Management has adjusted margin guidance to allow for price competitiveness and quick adaptation to changes in global trade policy.
• Digital and omnichannel investments: Recent hires in digital and technology leadership signal an increased focus on digital sales growth and omnichannel experience enhancements. These investments are intended to support both top-line growth and operational efficiency, particularly as digital sales continue to outpace store performance.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will closely monitor (1) the pace of proprietary brand recovery and customer response to expanded coupon eligibility, (2) the effectiveness of store layout and digital investments in driving traffic and engagement, and (3) management’s ability to maintain margin flexibility amid tariffs and promotional pressures. Continued execution on inventory discipline and the scaling of omnichannel initiatives will also be critical to track.

Kohl's currently trades at $15.45, up from $13.04 just before the earnings. Is there an opportunity in the stock?The answer lies in our full research report (it’s free).

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