Executive Summary / Key Takeaways

• Kohl's is actively pursuing a strategic turnaround focused on rebalancing its assortment, reestablishing value leadership, and enhancing the omnichannel experience, aiming to reverse recent sales declines and navigate a challenging consumer environment.
• First quarter Fiscal 2025 results showed improvement over the prior year's net loss and operating income, with disciplined expense management and gross margin expansion offsetting a 4.1% net sales decrease and 3.9% comparable sales decline.
• Key growth initiatives like Sephora at Kohl's and Impulse continue to perform well, while the company is taking aggressive actions to regain momentum in core categories like jewelry, petites, and proprietary brands that were previously deemphasized.
• The company is focused on strengthening its balance sheet and liquidity, having recently refinanced debt maturities and reduced its dividend to rebuild cash and reduce reliance on its revolving credit facility.
• Full-year 2025 guidance anticipates continued sales pressure (comparable sales down 4% to 6%) and modest operating margin (2.2% to 2.6%), reflecting the early stages of the turnaround and ongoing macroeconomic uncertainty, while excluding potential charges from fulfillment center closures.

Setting the Scene: Kohl's Place in the Evolving Retail Landscape

Kohl's Corporation stands as a long-established omnichannel retailer in the U.S. market, primarily serving suburban customers with a broad assortment of moderately-priced apparel, footwear, accessories, beauty, and home products. Operating over 1,100 physical stores and a robust e-commerce platform (Kohls.com), the company's business model is built on convenience, value, and a loyalty-driving credit program. However, like many traditional department stores, Kohl's operates within a fiercely competitive landscape, facing pressure from diverse rivals including mass merchandisers like Target (TGT), off-price retailers such as TJX Companies (TJX), direct competitors like Macy's (M) and Nordstrom (JWN), and the pervasive force of e-commerce giants like Amazon (AMZN).

The competitive dynamics are intense. While Kohl's benefits from its extensive physical footprint and established brand recognition, it contends with rivals who may offer broader product ranges (Target), deeper value propositions (off-price), stronger urban market presence (Macy's), or more advanced digital capabilities (Amazon, Nordstrom). Kohl's has historically leveraged its loyalty programs, particularly the Kohl's Cash and credit card, to foster customer retention, a key differentiator in its model. However, recent years have seen shifts in consumer behavior, increased price sensitivity, and a greater demand for seamless digital integration, challenging traditional retail models.

In this environment, technology plays a crucial, albeit less publicly detailed, role in Kohl's strategy. While specific, quantifiable technological moats akin to specialized manufacturing processes are not highlighted, the company emphasizes investments in its omnichannel platform to deliver a "frictionless shopping experience." This includes enhancing digital personalization and leaning into social commerce to reach younger audiences. Operationally, technology supports supply chain efficiency, with mentions of "advanced technology capabilities at newer EFC facilities" enabling consolidation and closure of older centers. The strategic intent behind these technology investments is clear: to improve operational efficiency, enhance the customer journey across channels, and support growth initiatives like e-commerce fulfillment and targeted marketing. While the precise performance metrics of these technologies compared to rivals are not detailed, their stated goals align with industry trends focused on speed, convenience, and personalized engagement, aiming to bolster Kohl's competitive standing.

Strategic Shifts and Recent Performance: A Period of Adjustment

Kohl's strategic journey in recent years has been marked by significant shifts aimed at revitalizing growth and attracting new customers. A central pillar of this effort has been the highly successful partnership with Sephora, which has rapidly expanded to over 1,100 stores, creating a nearly $2 billion beauty business and attracting millions of new customers. Alongside Sephora, the company invested heavily in new market brands and underpenetrated categories such as home decor, gifting, and impulse items, which have shown solid momentum and growth acceleration, collectively representing a high-teens percentage of the business. The launch of Babies "R" Us shops in 200 stores and online in Q3 2024 is another example of this focus on bringing newness and expanding reach, particularly with younger families.

However, this aggressive pursuit of newness and growth categories, coupled with a focus on tight inventory management, led to unintended consequences. Management acknowledged that they "deemphasized products and categories that are important to our loyal customers," such as fine jewelry, petites, intimate apparel, and proprietary apparel brands. This resulted in reduced inventory and receipts in these core areas, causing "friction and frustration" among loyal shoppers who rely on Kohl's for value and specific product needs. The expansion of coupon exclusions on many brands further exacerbated this issue, reaching an "all-time high in 2024."

The impact of these strategic choices and a challenging macroeconomic environment, characterized by pressured middle and low-income consumers facing inflation and high interest rates, became evident in recent financial performance. Fiscal year 2024 saw net sales decline 9.4% in Q4 and 7.2% for the full year, with comparable sales down 6.7% in Q4 and 6.5% for the year. Q3 2024 was particularly disappointing, with comparable sales declining 9%. While key growth areas like Sephora (comparable beauty sales up 13% in Q4 2024) and Impulse (sales growth >70% in Q2 2024) performed well, they were insufficient to offset declines in the core business. Digital sales underperformed store sales in Q4 2024 (down 13.4% comp) and Q1 2025 (down 7.7% comp), partly due to softness in home and an online inventory issue, despite digital outperforming stores in Q3 2024.

Despite top-line pressures, Kohl's demonstrated operational discipline. Gross margin expanded in Q4 2024 (up 49 bps) and Q1 2025 (up 37 bps), driven by inventory management, merchandise mix, and moderating shrink. SG&A expenses were tightly managed, decreasing 4.5% in Q4 2024 and 5.2% in Q1 2025, leading to SGA leveraging as a percentage of revenue. This operational control helped improve the net loss in Q1 2025 to $15 million ($0.13 per diluted share) compared to $27 million ($0.24 per diluted share) in Q1 2024, and contributed to positive operating income of $60 million in Q1 2025 compared to $43 million in the prior year.

The Turnaround Plan: Rebalancing for the Core Customer

Recognizing the need to address the friction caused with its core customer while continuing to build on growth initiatives, Kohl's has outlined a strategic turnaround plan centered on three key areas for 2025: offering a curated, more balanced assortment; reestablishing leadership in value and quality; and delivering a frictionless shopping experience.

A critical component of the rebalancing effort is increasing investment in proprietary brands and categories previously deemphasized. The company is actively working to increase receipts and inventory support for key private apparel brands, which saw inventory decrease by over 20% in Q3 2024. This effort is already showing early signs of impact, with proprietary brand performance in Q1 2025 approximately 400 basis points better than Q4 2024, driven by brands like Tek Gear and Lauren Conrad. The reintroduction of fine jewelry in 200 stores (rolled out Fall 2024) and the expansion of petites assortments to all stores (completed end of 2024) are direct responses to regaining momentum in categories highly valued by loyal customers, with jewelry sales up 10% and petites up high teens in Q1 2025.

Reestablishing value leadership involves not only elevating proprietary brands but also enhancing promotions. Acknowledging that a growing list of coupon exclusions frustrated customers, Kohl's began phasing in more coupon-eligible brands at the end of April 2025, with plans to complete the majority of changes by mid-August 2025. Early reads indicate a positive customer response, particularly in the digital channel.

Enhancing the omnichannel experience focuses on improving store layout, restoring trip assurance, and increasing inspiration. Based on productivity analysis, the company is repositioning categories like Accessories (behind Sephora) and Juniors (to the front of the store) to capitalize on cross-shopping opportunities, seeing encouraging early results in Q1 2025 with Accessories comp (excl. Sephora) up 4% and Juniors comp down 1%. Improving in-stock rates on core basics and essentials is also a priority to ensure customers find what they need. Investments in digital personalization and social commerce aim to improve the online experience and reach younger demographics.

Operational Discipline and Financial Health

Amidst the strategic shifts, Kohl's has maintained a focus on operational discipline and strengthening its financial position. SG&A expenses have seen significant reductions, decreasing 5.2% in Q1 2025 on top of a 3.7% decline in Q4 2024, reflecting disciplined expense management across the organization. Inventory management remains a priority, with receipts down 8% in Q1 2025, contributing to gross margin expansion. The company aims to tightly manage inventory down throughout the year while ensuring sufficient depth in key items.

Financially, Kohl's is focused on rebuilding its cash balance and reducing reliance on its revolving credit facility. Cash and cash equivalents stood at $153 million as of May 3, 2025, down from $228 million a year prior, while borrowings under the revolving credit facility increased to $545 million from $355 million. The company's working capital and current ratio decreased year-over-year, reflecting increased borrowings and debt due within 12 months.

To address upcoming debt maturities and improve liquidity, Kohl's completed a private offering of $360 million aggregate principal of 10% senior secured notes due 2030 on May 30, 2025. The proceeds are intended to repay borrowings under the revolving credit facility, which will then be used to repay the remaining $353 million of 4.25% notes due in July 2025. This refinancing pushes the nearest debt maturity out to 2029 and keeps long-term debt at a 10-year low.

In a move to enhance balance sheet flexibility, the Board reduced the quarterly cash dividend to $0.125 per share (declared May 14, 2025) from $0.50 per share. The company is not planning share repurchases in the current year but expects to resume them over the long term as leverage improves. Capital expenditures for 2025 are planned between $400 million and $425 million, focused on completing the Sephora rollout, expanding Impulse lines, and expanding the Indiana e-fulfillment center. The company also announced the closure of an e-fulfillment center in Monroe, Ohio, in June 2025, expecting $25-$30 million in pre-tax charges (excluded from 2025 outlook).

Outlook and Risks: A Turnaround in Progress

Kohl's full-year 2025 financial outlook reflects the expectation that the turnaround initiatives will take time to gain full traction amidst a challenging consumer environment. The company expects net sales to decrease by 5% to 7% and comparable sales to decrease by 4% to 6%. Operating margin is guided in the range of 2.2% to 2.6%, and diluted earnings per share are projected between $0.10 and $0.60. This guidance was maintained after the Q1 2025 beat, citing the uncertain and fluid macroeconomic environment and pressure on middle-income consumers.

Key risks to this outlook include the continued pressure on consumer spending due to inflation and high interest rates, which could further impact traffic and average transaction values. The highly competitive retail landscape, especially during peak seasons, poses a challenge to driving sales and maintaining margins. Execution risk related to the turnaround initiatives, including rebalancing the assortment, enhancing promotions, and optimizing the omnichannel experience, could impact the pace and effectiveness of the recovery. Changes in the global trade environment and potential tariffs could increase merchandise costs. Payment-related risks, including potential fraud and regulatory changes (though the recent CFPB late fee rule was vacated), also remain. Furthermore, recent leadership transitions, including the termination of CEO Ashley Buchanan shortly after his appointment and the naming of Michael Bender as Interim CEO, introduce an element of uncertainty regarding strategic continuity and execution, although the company states Buchanan's strategies are expected to continue.

Despite these risks, management believes the strategic actions underway, coupled with operational discipline and a focus on value, position the company to navigate the environment and drive progressive improvement throughout 2025. The ability to mitigate tariff impacts through sourcing diversification is also a key assumption in the guidance.

Conclusion

Kohl's is currently engaged in a critical turnaround effort, seeking to leverage its foundational strengths – a large store footprint, extensive customer base, and established loyalty programs – to reverse recent performance declines. The strategic pivot to rebalance the assortment, re-emphasize value, and enhance the customer experience directly addresses past missteps that alienated core customers, while continuing to build on successful growth initiatives like Sephora and Impulse.

While recent financial performance reflects the challenges of this transition and a difficult macroeconomic backdrop, operational discipline in expense and inventory management has helped mitigate the impact on profitability. The proactive steps taken to refinance debt and strengthen the balance sheet, including the dividend reduction, underscore a focus on financial stability amidst uncertainty. The full-year 2025 guidance signals that this turnaround is in its early stages and will require time to yield significant top-line improvement. Investors should monitor the execution of the strategic plan, the company's ability to regain traction with its core customer base, and the impact of the macroeconomic environment on consumer spending. The success of the turnaround hinges on Kohl's ability to effectively execute its rebalancing strategy, deliver compelling value, and create a seamless omnichannel experience that resonates with both loyal and new customers in a competitive retail landscape.