Kohl’s Corp. reported sales in its active apparel categories outperformed in the second quarter with a boost from Nike. Athletic footwear continued to lag overall sales but company leadership said the category is showing some improving trends in the current quarter with newer offerings from Nike and Adidas.
Overall, same-store sales in the second quarter at Kohl’s declined 0.9 percent, marking its 18th consecutive quarter of declines.
Net income more than doubled to $151 million, or $1.28 per share, from $64 million, or 56 cents, a year ago, on an adjusted basis. Earnings came in well above analysts’ estimate of around 55 to 57 cents per share, although the beat was largely due to tariff refunds.
Excluding a gain on legal settlement, net income was $153 million, or $1.35 per share, in the year-ago quarter.
Gross margins reached 43.0 percent, an increase of 305 basis points year-over-year. SG&A expenses were 33.8 percent, consistent with the prior year.
Operating income was $261 million compared to $279 million in the prior year. As a percentage of total revenue, operating income was 7.4 percent, a decrease of 45 basis points year-over-year. Adjusted operating income was $161 million and 4.6 percent of total revenue in the prior year.
On an analyst call, Michael Bender, CEO, said the quarter reflects “continued progress we are making against our key initiatives, leading to another improvement in our comparable sales trend,” while a focus on expenses and inventory management is helping “substantially” improve the retailer’s balance sheet and cash flow generation.
“The solid financial foundation we have built over the past year is enabling us to invest in the business, drive value for our customers, and return capital to shareholders,” said Bender. “We are operating in a challenging macroeconomic environment where our customers are experiencing persistent financial pressures from inflation in their everyday expenses, like gas and food. While their day-to-day priorities may change, the consumer is consistently looking for value, a compelling assortment, and an inspiring experience.”
Among categories in the second quarter, Bender said Active “outperformed,” led by its top national brands and core private labels. He said the performance was driven by Nike, which “saw its largest gains of the year, alongside sustained strength in our proprietary Tek Gear and FLX brands.”
Among other apparel categories, denim returned to positive growth, “and we are well-positioned to build on this momentum as we transition into the critical back-to-school season,” said Bender.
The broader women’s business saw comps decline 1.5 percent for the quarter although juniors continued to see “standout strength” with another 10 percent increase. Bender said, “This momentum was driven by exceptional customer response to our SO brand, and a successful infusion of newness throughout the assortment.”
The dress category also continues to be a “strong category,” driven by both proprietary and national brands from Apt. 9 and Haggar.
Intimates underperformed and growth in proprietary brands slowed during the quarter. Bender said, “This was primarily a result of higher than anticipated sell-throughs early in the quarter, which left us inventory constrained and unable to effectively chase back into the business.”
The men’s apparel business improved by 100 basis points from the prior quarter, now running in line with the total company. Bender said, “This category continues to work through assortment edits to reduce redundancy and improve clarity in our offering. Men’s is seeing strong customer engagement with proprietary brands, which increased by high single digits during the second quarter. Key growth drivers include Tek Gear and FLX, with FLX benefiting from the successful debut of its new golf apparel collection.”
Kohl’s during the quarter launched “value-driven family fan zones” featuring localized team apparel and accessories. Bender said, “We saw strong traction around the World Cup, and we have recently transitioned these spaces to showcase our NFL licensed products ahead of the new season.”
Footwear reportedly continued to trail overall company performance, but the category delivered a “significant” sequential gain, with comp performance accelerating approximately 500 basis points compared to Q1. Bender said of footwear, “Momentum built across the quarter as we introduced fresh inventory and enhanced depth in core active brands like Nike and Adidas. Additionally, we saw strength in our kids footwear business running up mid-single digits, which gives us confidence in our back-to-school assortment. Looking ahead, we are reinvesting in women’s boots to capture the demand unfulfilled last year because of tariff constraints. We anticipate this category will serve as a positive driver in the fall.”
Among other categories, home had the strongest performance this quarter, delivering sales growth of 1%. The strength in home was driven by decor and small electrics. Bedding and bath categories were flat for the quarter. Sephora at Kohl’s business faced headwinds this quarter, with sales down 4%. Excluding our Sephora business, accessories increased mid-single digits. This performance was driven by newness, and impulse, and jewelry.
Looking ahead, Kohl’s expects net sales and comparable sales to decline in the range of 1.5 percent to flat against prior guidance calling for a decrease of 2 percent to flat.
Adjusted operating margin is now projected in the range of 3.5 percent to 4.0 percent against prior guidance estimating 2.8 percent to 3.4 percent, reflecting the tax refund. Adjusted diluted EPS is expected in the range of $1.80 to $2.40 against prior guidance between $1.00 to $1.60.
Management said about 65 cents of that guidance reflects tariff refunds. The company expects those refunds to be reinvested in the business rather than fully passed through to profit.
Regarding its guidance, Jill Timm, CFO, said that while the second quarter marked “continued progress” against its turnaround initiatives, “we want to be mindful of the current macroeconomic environment we are operating in. We continue to see choiceful discretionary spending from our core low to middle income customer as they remain financially pressured.”
She added that the realization of approximately $150 million of tariff refunds has provided Kohl’s with “even greater financial flexibility” and the company will focus on strengthening its inventory positioning to support opening price point brands. Kohl’s is also “investing in media to deepen customer engagement and increasing store apparel to build on positive results from our recent staffing tests, which demonstrating meaningful improvements in customer satisfaction and sales productivity.”
Image courtesy Kohl’s
