Kohl's (KSS 22.70%), a major U.S. department store chain, reported its financial results for Q2 fiscal 2025 on August 27, 2025. Despite ongoing declines in both net and comparable sales, the retailer delivered results that surpassed its own conservative forecasts. The quarter’s total revenue reached $3.55 billion, down from $3.73 billion in the prior year period (GAAP). Adjusted diluted EPS was $0.56, just below last year’s $0.59, while reported (GAAP) EPS surged to $1.35, reflecting a $129 million one-time legal settlement gain. Management modestly improved full-year earnings guidance, reflecting slightly firmer expectations for profitability, though it remains clear that revenue challenges persist. Overall, the quarter reflected disciplined cost and inventory management, but the core sales trend remained negative.
| Metric | Q2 2025 | Q2 2024 | Y/Y Change |
|---|---|---|---|
| Adjusted Diluted EPS (Non-GAAP) | $0.56 | $0.59 | (5.1 %) |
| Total Revenue (GAAP) | $3.55 billion | $3.73 billion | (4.9 %) |
| Gross Margin Rate | 39.9 % | 39.6 % | +0.3 percentage points |
| SG&A Expenses | $1.20 billion | $1.25 billion | (4.0 %) |
| Adjusted Operating Income | $161 million | $166 million | (3.0 %) |
About the Business and Recent Strategic Focus
Kohl’s operates as a value-oriented department store, offering a mix of private-label and national brands across apparel, footwear, home goods, and beauty. Its merchandise strategy centers on both exclusive house brands such as SO and Lauren Conrad, and partnerships like its in-store Sephora beauty shops. With over 1,000 stores and a growing e-commerce presence, Kohl’s aims to provide customers a broad and affordable assortment for everyday needs.
Recently, the company's priorities have included raising the penetration of higher-margin proprietary brands, refining its product assortment, and tightly managing inventory levels. Efficient distribution and fulfillment, especially with its investments in retail and e-commerce centers, is also a critical operational focus. Maintaining a competitive product mix and adapting to shifts in consumer preferences have become key success factors as the retailer contends with fierce competition from both online and traditional peers.
Quarter in Review: Financial and Operational Developments
The second quarter saw net sales decline 5.1 % year over year, totaling $3.3 billion in net sales (GAAP), with comparable sales—meaning sales at stores open at least one year—down 4.2%. This contraction continued the negative trend seen in the prior quarter. While management noted that sales were “ahead of our expectations,” these results did not mark a return to growth.
Gross margin rate, a measure of the percentage of sales remaining after accounting for the cost of merchandise, climbed by 28 basis points to 39.9% (GAAP). This improvement was attributed to disciplined buying and tighter inventory (down 5% from the prior year at $3.0 billion). Expense control was another highlight, with selling, general, and administrative (SG&A) costs reduced by 4.1% to $1.20 billion (GAAP). However, since revenue dropped more steeply, SG&A expenses rose as a share of sales, reflecting less efficiency on lower volume.
Headline profitability was substantially boosted by a one-time $129 million legal settlement related to credit card interchange fees. This drove reported (GAAP) operating income up to $279 million, compared to $166 million in Q2 FY2024. When excluding this non-recurring gain and other adjustments, adjusted operating income was $161 million, very close to the prior year’s $166 million.
Adjusted diluted EPS (non-GAAP), which strips out one-time items, was $0.56—just below last year's $0.59. However, the headline diluted EPS (GAAP) of $1.35 was inflated by the lawsuit win and does not represent ongoing earning power. Operating cash flow improved significantly to $598 million, supported by both cash discipline and settlement proceeds.
On the balance sheet, Kohl's reduced near-term risk by repaying $353 million in debt due July 2025 and cutting outstanding borrowings on its revolving line of credit by $335 million. Yet, to fund longer-term needs, the company raised $360 million in seven-year notes at a 10% interest rate, increasing future interest expenses. Inventories were down 5% year over year.
In terms of product mix, the company continued focusing on raising proprietary and private-label brand sales, which generally offer better profit margins than national brands. With the recent full rollout of its Sephora in-store beauty shops, the mix between owned brands and partners is shifting, but higher penetration of private brands remained a notable theme in management’s remarks. Specific categories such as fine jewelry, which was reintroduced last year, and women’s apparel continued to receive attention, though no detailed breakdown was released for the quarter.
Looking Forward: Guidance and Key Areas to Watch
For the remainder of fiscal 2025, management nudged up full-year earnings expectations. Net sales are now forecast to decline by 5% to 6%, compared to a previous 5% to 7% range. Adjusted operating margin is projected at 2.5% to 2.7%. and adjusted diluted EPS (non-GAAP) guidance rose to a range of $0.50 to $0.80, up from $0.10 to $0.60. Capital expenditures remain targeted at $400 million. There was no change in the quarterly dividend, which stays at $0.125 per share.
Ongoing risks include pressure on same-store (comparable) sales, the potential need for deeper promotional discounts to attract shoppers, and the impact of higher long-term debt costs. Management’s ability to drive consistent merchandise execution, uphold tighter cost discipline, and sustain margin gains will remain important, especially as the retail environment continues to evolve. While the company lifted earnings guidance for the year (adjusted, non-GAAP basis), the outlook relies on successful execution and further operational improvements in the coming quarters.
Revenue and net income presented using U.S. generally accepted accounting principles (GAAP) unless otherwise noted.
