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SEC filingNet sales decreased 5.1% in Q2 2025, but operating income rose 68% due to a $129 million legal settlement gain.
In the second quarter of 2025, Kohl's reported total revenue of $3.546 billion, a decrease of 5.0% compared to $3.732 billion in the same period last year. Net sales fell 5.1% to $3.347 billion, driven by a 4% decline in transaction volume and a 1% decrease in average transaction value. Comparable sales decreased 4.2%. Despite the top-line decline, gross margin improved by 28 basis points to 39.9% of net sales, benefiting from favorable merchandise mix, disciplined inventory management (receipts down 16%), and moderating shrink levels.
Selling, general, and administrative (SG&A) expenses decreased 4.1% to $1.199 billion, but deleveraged by 32 basis points as a percentage of total revenue (33.8% vs. 33.5% last year). The dollar decrease was driven by lower store payroll, marketing, and distribution costs.
Operating income surged to $279 million from $166 million in the prior year, a 68.1% increase. This was primarily due to a $129 million gain on legal settlement from a credit card interchange fee lawsuit. Excluding this gain and $11 million in impairment and store closing costs, adjusted operating income was $161 million. Net income rose to $153 million ($1.35 per diluted share) from $66 million ($0.59 per diluted share) in the prior year. Adjusted net income was $64 million ($0.56 per adjusted diluted share).
All merchandise categories experienced sales declines in the second quarter except for Accessories (including Sephora), which grew 1.1% to $673 million. Women's, the largest category, fell 6.1% to $943 million. Men's and Home each declined 6.9%, while Children's fell 6.7% and Footwear decreased 5.9%. Digital sales decreased 2.9% and represented 26% of net sales, up from 25% in the prior year.
For the full year 2025, Kohl's expects net sales to decrease 5% to 6% and comparable sales to decrease 4% to 5%. The company guided adjusted operating margin in the range of 2.5% to 2.7% and adjusted diluted earnings per share of $0.50 to $0.80. Capital expenditures are planned at approximately $400 million, including investments to complete the rollout of Sephora shops, expansion of impulse queuing lines, and expansion of the E-commerce Fulfillment Center in Etna, Ohio. The company declared a quarterly cash dividend of $0.125 per share and does not plan any share repurchases during the current year. Management noted proactive measures to mitigate tariff exposure, including leveraging a diverse factory network and adjusting orders based on pricing elasticity analysis.
Cash and cash equivalents stood at $174M as of August 2, 2025, up from $134M at fiscal year-end. Total interest-bearing debt (long-term debt plus revolving credit facility borrowings) was $1,595M, down from $1,817M at February 1, 2025, primarily due to repayment of $353M in 4.25% notes and net repayment of $215M under the revolver, partially offset by $357M net proceeds from new 10.0% senior secured notes due 2030. Shareholders' equity increased to $3,927M from $3,802M, driven by net income and lower dividend payments. Inventory rose modestly to $2,994M.
Total future lease payments (operating and finance) amount to $8,464M, with operating leases at $4,899M and finance leases at $3,565M. Additionally, financing obligations (failed sale-leasebacks) have future payments of $1,466M. Combined contractual obligations total $9,930M, with $259M due within one year, $903M in years 2-3, and the remainder beyond three years. The weighted-average remaining lease term is 19 years for operating leases and 18 years for finance leases. The company also has a supplier finance program with $226M in accounts payable outstanding.
During the six months ended August 2, 2025, Kohl's paid $28M in dividends, maintaining a quarterly dividend of $0.125 per share. No share repurchases were reported. The company issued $360M of 10.0% senior secured notes due 2030, using proceeds for general corporate purposes, while repaying $353M of maturing 4.25% notes and reducing revolver borrowings. Capital expenditures totaled $200M, representing 3.1% of net sales, down from $239M in the prior-year period. The company remains in compliance with all debt covenants.
Kohl's operates as a single reportable segment. The CODM uses net income to assess performance and allocate resources. Revenue disaggregation by line of business (Note 2) shows Women's ($1,794M), Accessories including Sephora ($1,319M), Men's ($1,273M), Home ($776M), Children's ($647M), and Footwear ($587M) for the six months. All categories declined year-over-year. No geographic mix is disclosed.
The provided cash flow statement excerpt focuses on lease and financing obligation disclosures rather than the full statement. Key observations include a modest increase in operating cash flows from operating leases ($146M vs $134M) and a significant reduction in property and equipment acquired through finance lease liabilities ($5M vs $70M). This suggests lower capital intensity via leasing. Financing cash flows from finance leases rose to $42M from $38M. The company also received $10M in proceeds from financing obligations, which were zero in the prior period. Without the full cash flow statement, net CFO, FCF, and capital returns cannot be computed, but the lease-related cash flows indicate stable operating performance and disciplined capital allocation.