Kohl's (KSS) Q3 2025 earnings review
Sales Stabilization Continues, Prompting Significant Guidance Raise
Kohl's delivered its third consecutive quarter of improving sales trends, with comparable sales declining just 1.7%, a marked improvement from the -4.2% seen in Q2. The performance, driven by strong operational discipline in inventory and cost management, beat internal expectations and prompted a significant raise in full-year guidance. Adjusted EPS is now forecasted at $1.25-$1.45, more than doubling the prior midpoint. However, the turnaround remains a work in progress; the core Kohl's Card customer continues to lag, and the key Sephora growth engine posted a concerning 1% decline in comparable sales, suggesting new store openings are masking weakness in the mature fleet.
🐂 Bull Case
The consistent sequential improvement in comparable sales, culminating in a positive 1% comp in October, signals that turnaround initiatives are beginning to stabilize the top line.
Management more than doubled its midpoint for full-year Adjusted EPS guidance to $1.35 from $0.65 previously, indicating strong confidence in holiday season execution and cost controls.
Gross margin expanded 51 bps and SG&A expenses fell 2.1% YoY. This operational rigor is generating significant cash flow ($630M YTD) and has allowed Kohl's to reduce its revolver borrowings by over $700M YoY.
🐻 Bear Case
The critical Sephora partnership, a key traffic driver, posted a -1% comparable sales figure. This is a major red flag, suggesting the high growth from new shop openings is ending and mature locations are weakening.
Despite improvement, the core Kohl's Card customer sales were still down 'high single digits'. The business cannot achieve a full recovery until this highly loyal and profitable segment returns to growth.
While the trend is positive, sales are still shrinking. A return to sustained positive growth is not yet certain, especially in an uncertain macroeconomic environment pressuring Kohl's target customer.
⚖️ Verdict: ⚪
Mixed. The significant guidance raise and clear sequential improvement in sales are tangible signs of progress. However, the negative comp at Sephora and the continued weakness of the core credit card customer are serious concerns that temper the positive narrative. The turnaround is showing signs of life, but the most critical growth drivers are showing signs of stress.
Key Themes
Sephora's Comparable Sales Turn Negative
The primary growth driver for Kohl's showed a significant sign of weakness this quarter, posting a 1% decline in comparable sales. While total Sephora sales grew 2% due to new store openings, the negative comp in the existing fleet is a major concern. It suggests the maturation of the partnership is revealing underlying weakness and questions its ability to be a long-term driver of organic growth for the entire store, contradicting the consistently positive management narrative. Management announced the addition of MAC cosmetics in Spring 2026, a move clearly aimed at re-igniting growth and newness.
'Back to Basics' Strategy Gains Traction
Corrective actions to win back core customers are showing results. Proprietary brands, a key focus for value, delivered positive sales growth for the first time in several quarters. Expanded coupon eligibility for national brands helped drive a 500 basis point sequential improvement in the Kohl's Card customer sales trend. Furthermore, strategic store layout changes, like moving Juniors and Accessories adjacent to Sephora, are driving outperformance in those categories, with both posting positive sales growth in Q3.
Operational Discipline Drives Cash Flow and Margin
Kohl's continues to execute with strong financial discipline. Inventory was down 5% year-over-year, which contributed to a 51 basis point expansion in gross margin to 39.6%. Tight expense management led to a 2.1% decline in SG&A dollars. This combination is fueling strong cash generation, with year-to-date operating cash flow reaching $630 million, allowing the company to pay down over $700 million in revolver borrowings from the prior year.
Core Customer and Key Categories Still Under Pressure
Despite positive trends, key segments of the business remain weak. The core Kohl's Card customer, while improving, still saw sales decline in the high-single-digits. This directly pressures the high-margin credit revenue line, which was down 17% YoY. Additionally, management called out Footwear and Kids as 'challenged' categories, indicating the recovery is not yet broad-based across the merchandise assortment.
Navigating a Pressured Consumer Environment
Management commentary consistently highlights that their 'low to middle-income consumers' remain pressured and are 'becoming increasingly choiceful'. This macroeconomic backdrop explains the focus on value through proprietary brands and promotions. While the company is outperforming its own expectations, the external environment remains a headwind to achieving a full-throated recovery.
Digital Channel Rebounds to Growth
The digital channel, which had been underperforming, returned to growth with a 2.4% sales increase in Q3, outpacing stores. This was driven by a notable increase in traffic, with October traffic up in the high teens. This suggests that pricing transparency from expanded coupon eligibility and other digital enhancements are resonating with online shoppers.
Other KPIs
Stable. The company's ability to generate cash remains a key strength. Year-to-date operating cash flow of $630M significantly outpaces GAAP Net Income of $147M, driven primarily by a $948M cash benefit from inventory reductions. This demonstrates strong working capital management and provides financial flexibility for the turnaround.
Stable. Gross margin expanded by 51 basis points year-over-year. This was driven by strong inventory management (down 5% YoY), a favorable mix shift toward higher-margin proprietary brands, and disciplined promotional planning. The ability to protect and grow margin despite negative sales is a testament to improved operational execution.
Reversing/Negative. This high-margin revenue stream, primarily from the credit card business, declined 17% YoY. This is a direct reflection of the sales decline from the core Kohl's Card customer and serves as a significant drag on overall profitability. The trend is decelerating from the 4% decline in Q2 as the company begins to lap the co-brand card launch.
Guidance
Accelerating. This is a significant increase from the prior range of $0.50 to $0.80. The new guidance implies a Q4 Adjusted EPS of $0.71 to $0.91. While this is still down from $0.95 in Q4 last year, it reflects a dramatic sequential improvement in expected profitability and management confidence.
Decelerating decline. This is an improvement from the prior guidance for a decline of (5.0%) to (6.0%). It implies a Q4 net sales performance ranging from a decline of approximately (0.7%) to (2.7%). This represents a stable to slightly decelerating trend compared to Q3's -2.8% decline, suggesting a prudent outlook for the holiday season.
Decelerating decline. An improvement from the previous (4.0%) to (5.0%) decline. This new guidance implies a Q4 comparable sales result between +0.4% and -1.6%. The midpoint suggests a continued sequential improvement from Q3's -1.7% and holds open the possibility of the first positive comp quarter in over two years.
Key Questions
Sephora's Negative Comp
Sephora's comparable sales declined 1% this quarter. What specific factors are driving this slowdown in mature locations, and what are your expectations for Sephora's comp growth in 2026, especially with the addition of MAC cosmetics?
Balancing Customer Segments
Non-Kohl's Card customers have grown for four straight quarters, but the core Kohl's Card customer is still down high-single-digits. Is there a risk that initiatives to win back the core, such as more promotions, could alienate the newer, non-card customers you've acquired?
Path to Recovery for Lagging Categories
Footwear and Kids continue to underperform the company average. What specific actions, beyond what has already been tried, are being taken to turn these categories around, and when do you realistically expect them to stop being a drag on overall performance?