Kohl's Q2 Profit Beats on Tariff Refunds, Sales Still Slide

A Profit Beat Built on a One-Time Windfall

Kohl's delivered one of the more contradictory earnings reports of the retail season this week, posting a sharp bottom-line beat while still failing to grow sales. For the second quarter of fiscal 2026, ended Aug. 1, the Menomonee Falls, Wisconsin-based department store chain reported net income of $151 million, or $1.28 per diluted share, comfortably surpassing Wall Street's consensus estimate of roughly $0.56 to $0.57 per share 16911. Net and comparable sales, however, both slipped 0.9% to $3.32 billion, missing at least one widely cited analyst estimate near $3.4 billion 91117.

CEO Michael Bender, who was named permanent chief executive last November after a period of leadership turmoil, told the Milwaukee Journal Sentinel he feels "good about the trajectory of the business," pointing to an improved sales trend and a much stronger cash position 114. In prepared remarks, he said the results reflect "ongoing progress against our initiatives, leading to another improvement in our comparable sales trend," while acknowledging "critical work ahead" 68913.

Where the Earnings Beat Actually Came From

The scale of the profit surprise wasn't primarily a story of stronger demand — it was a story of tariffs. Kohl's disclosed that it received approximately $150 million in IEEPA tariff refunds during the quarter, with roughly $100 million of that flowing directly through gross margin, adding an estimated 65 cents per share to earnings 681217. Another $40 million in refunds is still expected 68. Gross margin expanded 305 basis points to 43.0% from 39.9% a year earlier, but company executives noted that excluding the tariff benefit, gross margin would have improved by only about 5 basis points — essentially in line with prior guidance 712.

That distinction matters. Several outlets framed the quarter as evidence that Kohl's underlying operating improvement remains modest even as its headline numbers look impressive 71819. Operating income actually declined to $261 million from $279 million a year earlier, and net income fell 1.3% from $153 million, underscoring that the adjusted per-share beat was flattered by the one-time refund rather than reflecting outright profit growth 6813.

Sales Trend Improving, But Still Negative

Comparable sales fell 0.9%, an improvement from a 4.2% decline in the same quarter a year earlier, and executives cited this deceleration as the clearest sign that turnaround initiatives are taking hold 689. Store sales fell 2.0% while digital sales rose 2.8%, and Kohl's Card customer sales increased 1%, reversing prior declines even as overall store traffic stayed slightly negative — despite what the company called its best quarterly traffic performance in years 71215.

Category performance was mixed. Proprietary brands grew comparable sales 3%, home rose, juniors jumped 10%, and jewelry and impulse categories continued to drive growth in accessories 71215. But the Sephora at Kohl's partnership, long touted as a growth engine since 2022, saw sales decline 4%, which the company attributed to expanded distribution of key beauty brands beyond its stores 71315. Footwear improved roughly 500 basis points from the first quarter, aided by fresh depth in core athletic brands 7.

Operationally, Kohl's has been narrowing its apparel assortment by a mid-teens percentage to simplify store layouts, while adding inventory depth to key items — a strategy executives describe as delivering "easier, simpler shopping" 67. The retailer is also combining marketing and digital leadership under one executive, expanding delivery partnerships with Instacart and DoorDash, rolling out an AI shopping assistant, and preparing a new buy-now-pay-later partnership with Klarna ahead of the holidays 7. The quarter also brought further leadership change: chief marketing officer Christie Raymond is departing in September, while chief digital officer Arianne Parisi was promoted to chief customer officer 813.

Balance Sheet Strength and Capital Return

Where the quarter showed unambiguous improvement was on the balance sheet. Cash and equivalents surged to $821 million from $174 million a year earlier, with no borrowings outstanding under Kohl's credit facility 71219. Merchandise inventories fell about 3% to roughly $2.9 billion, and long-term debt dropped to $1.325 billion, its lowest level since 2007, after the company repurchased $113 million of debt at a discount 79.

That financial cushion gave Kohl's room to restart share buybacks for the first time in four years, with plans to repurchase up to $100 million in stock during 2026 under its existing $3 billion authorization 1681217. The board also declared a quarterly dividend of $0.125 per share, payable Sept. 23 810.

Raised Guidance, With an Asterisk

Kohl's raised its full-year 2026 outlook, now projecting net and comparable sales down 1.5% to flat, versus a prior range of down 2% to flat 8910. Adjusted operating margin guidance rose to 3.5%-4.0% from 2.8%-3.4%, and adjusted diluted earnings per share guidance jumped to $1.80-$2.40 from $1.00-$1.60 — comfortably above the analyst consensus of $1.43 91117. Management said the new EPS range bakes in about 65 cents from the tariff refunds already received but excludes any additional future refunds 12.

Capital expenditures for the year are expected to total $350 million to $400 million 710. Executives cautioned that the coming holiday season is likely to be more promotional, which could erode some of the margin gains achieved this quarter 7.

A Skeptical Market Reaction

Despite the earnings beat and higher guidance, Kohl's shares fell roughly 5% to 6% in early trading, dropping toward the $16.65-$16.75 range 10171819. Coverage attributed the decline to investor concern that the profit surge was largely a function of the tariff windfall rather than a durable rebound in demand 71819. One analysis noted Kohl's price-to-earnings ratio of about 7.5 and a stock price still well below its 52-week high of $25.22, suggesting the market continues to price in significant execution risk 7.

The contrast with off-price rivals sharpened that skepticism. Ross Stores reported comparable sales up 10% for a second straight quarter, and TJX also posted organic growth, with both companies benefiting from their own tariff refunds without relying on them to mask flat or negative demand 19. That comparison led some commentary to argue Kohl's remains the outlier among retail peers in lacking genuine comparable-sales growth 1819. Morningstar analyst David Swartz offered a more constructive read, noting that rising credit card sales and improved merchandising suggest the turnaround efforts are producing real, if incremental, results 1315.

The Bigger Picture

Kohl's has spent years losing ground to Amazon and off-price chains amid management upheaval, supply-chain strain and softening demand for discretionary goods, with the stock down roughly 80% over five years before this year's rally attempts 16. Bender, elevated to permanent CEO last November, has pursued a strategy of trimming underperforming styles, emphasizing core basics, reviving jewelry and accessories, and leaning on Sephora to draw younger shoppers 1620.

Earlier quarters help frame this one. In the first quarter, Kohl's posted a smaller-than-expected loss of 13 cents per share against expectations of a 19-cent loss, with comparable sales down 1.1% — its best such performance in years — and shares jumped 17% to 23% on that report 1620. The prior fourth quarter, by contrast, showed steeper declines, with comparable sales down 2.8% and management citing traffic weakness during peak holiday periods.

Taken together, the latest results depict a retailer that has meaningfully strengthened its balance sheet, tightened costs and slowed the pace of sales erosion, but has not yet proven it can generate organic sales growth without the help of external factors like tariff refunds. The company's low- to middle-income customer base remains under pressure from inflation in everyday costs such as food and gas, keeping value positioning central to Kohl's strategy heading into the holiday season 71215. Whether comparable sales turn positive, Sephora rebounds, and margins hold once tariff refunds fade will determine whether this quarter marks a genuine inflection point or simply a temporary lift.