Kohl's Corp

Kohl's comparable sales fell 0.9% in 2026's second quarter. Including a $100 million benefit from a tariff refund, gross margin on sales rose 305 basis points to 43%. EPS was $1.28, up from $0.56 (adjusted).

Why it matters: After years of management turmoil and declining sales, there are signs, such as rising credit card sales, that efforts to improve merchandising and inventory management, elevate customer experience, deliver value, and use promotions more efficiently are working. Excluding the tariff refund, results were in line with our forecast. Department stores face many threats, but we think Kohl's has strengths, including its customer base of more than 60 million, its value pricing, and large e-commerce (27% of sales). Beginning in 2027, we think Kohl's investments will bring annual same-store sales growth of 1%.

The bottom line: We do not expect to make any material change to our $41 fair value estimate on no-moat Kohl's shares, leaving them very undervalued. We think investors overlook progress on financial liquidity and are overly pessimistic about prospects for sales and margin growth. Kohl's lifted its 2026 operating margin guidance to 3.5%-4.0% from 2.8%-3.4% prior, implying a small increase excluding the tariff refund. We think the firm will reach long-term operating margins of around 4.5%, sufficient to maintain financial stability and consistent free cash flow. Although we think its core low- to middle-income customers are pressured by inflation, we are encouraged that Kohl's did not lower its sales outlook for the remainder of 2026, as some other retailers have done.

Key stats: After four years without repurchases, Kohl's plans for as much as $100 million in share buybacks by the end of 2026. We think repurchases create value for shareholders at current market prices and reflect balance sheet health with long-term debt nearly halved since 2020. In addition, Kohl's offers a 3% dividend yield, and we expect annual dividend increases.

We raise our fair value estimate on Kohl’s shares to $41.50 from $41.00 after its second-quarter report. Although still negative, its comparable sales result was its best since 2021.

Specifically, Kohl's comparable sales fell 0.9%. Including a $100 million benefit from a tariff refund, gross margin on sales rose 305 basis points to 43%. EPS was $1.28, up from $0.56 (adjusted). Excluding the tariff refund, results were in line with our forecast.

For 2026, we project a 0.6% comparable sales decline, revised from a 1.1% decline previously. Due, primarily, to a tariff refund, our operating margin estimate rises to 3.7% from 3.2% previously and our EPS estimate rises to $2.15 from $1.45. For 2027, we forecast 1% comparable sales growth, a 3.5% operating margin, $1.62 in EPS, and $1.2 billion in EBITDA (all unchanged). Based on our 2027 estimates, our valuation implies a P/E of 26 and enterprise value/EBITDA of 5.

We anticipate Kohl’s will have compound average annual revenue growth of about 1% over the next 10 years. The company has been investing in its stores, its merchandising, its Sephora partnership, and its digital capabilities. It has a large e-commerce business, but it still generates most of its sales in physical stores, the productivity of which has been declining for years.

We do not project significant margin improvement in the long run. We expect Kohl’s gross margin on net sales (excludes credit revenue) will be around 37% in the long term, slightly better than its results in the prepandemic years. However, we forecast Kohl’s long-term selling, general, and administrative margin (excluding depreciation and amortization) at about 31%-32%, much worse than historical SG&A margins around 23% in 2008-15. We believe its SG&A margin has permanently eroded on higher fulfillment costs with e-commerce, coupons, and discounts.

Kohl’s can be hit by labor shortages and wage increases. We estimate labor costs constitute 35%-40% of its selling, general, and administrative expenses. Therefore, it may face material additional costs if wage and benefit costs continue to rise. There is also a risk that higher energy costs or US tariffs on imports could affect Kohl’s profitability, but the impact has been limited thus far.

We assign a no-moat Morningstar Economic Moat Rating to Kohl’s. We believe there is insufficient quantitative or qualitative support for a moat, based on a brand intangible asset or any other source.

Many financial measures suggest that Kohl’s lacks a competitive edge. First, it has struggled to produce any top-line growth: it consistently generated about $19 billion in annual net retail sales in the years before the pandemic, but its retail sales were less than $15 billion in 2025. Second, its annual selling, general, and administrative expenses (excluding depreciation and amortization) as a share of total revenue have risen to about 33% from an average of 26% in the five years before the pandemic, resulting in operating margins that have dropped to 3%-4% from about 7%-8%. Going back further, Kohl’s consistently achieved operating margins above 10% prior to 2012. We believe the firm has been unable to cut expenses materially despite its lagging sales because market forces have forced it to reinvest any cost savings back into marketing and merchandising. As its profitability has waned, the company has struggled to generate adjusted returns on invested capital above our 9% weighted average cost of capital estimate, having failed to do so since 2021.

Although Kohl’s is the second-largest traditional department store company by sales, the relevance of this channel has been in decline. Indeed, in the last two decades, several department store companies have gone out of business, and thousands of stores have been closed. According to Euromonitor, total US department store annual sales declined by half between 2008 and 2025 (to about $56 billion from $112 billion).

We attribute the weakness in department stores to a loss of shoppers to alternatives. Kohl’s competes with stores and online channels operated by specialty clothing brands, discounters, mass stores, its own vendors, and e-commerce companies. The latter group has become especially problematic for traditional store operators over the past dozen or so years. Kohl’s has e-commerce of its own, but its supply chain, marketing, and merchandising are still geared toward supporting its roughly 1,150 physical stores. Realistically, its online business may not be viable without the support of its large store base. Consequently, it has struggled to match the product selection, convenience, targeted marketing, and low prices of some digital-only operators. Between 2010 and 2025, the share of footwear and apparel sold through retail e-commerce skyrocketed to 39% from 9%, while department stores’ share fell to just 5.5% from 17% (Euromonitor).

While the channel is struggling, Kohl’s differs from some competitors, such as no-moat Macy’s, Dillard’s, and JCPenney, in that most of its stores are not attached to enclosed malls. This difference is potentially beneficial as mall-based stores have been struggling, but the productivity of Kohl’s stores is underwhelming, as its sales per square foot of about $180 trail those of most other large national apparel and home goods retailers.

Kohl’s has attempted to regain relevance by opening Sephora beauty shops in its stores. Traditionally, beauty was a weak category for Kohl’s at just a low-single-digit percentage of sales, so partnering with Sephora unquestionably makes it a much more attractive beauty destination. However, there is risk for Kohl's as the Sephora additions are costly in terms of necessary capital expenditures and staffing, and Kohl’s shares the merchandise margin with Sephora. Moreover, it is not clear that Sephora drives sales in other parts of Kohl’s stores. Ultimately, bringing Sephora to Kohl’s is an admission that the Kohl’s brand is not strong enough to support a viable beauty business.

Despite its problems, we acknowledge that Kohl's has strengths, including its roughly 60 million active customers, its loyalty program of more than 30 million members, its large e-commerce sales (29% of its 2025 total), its accessibility (80% of Americans live within 15 miles of a store), and its ability to offer both its brands and national brands at reasonable prices. However, the company has not demonstrated that it can build on these strengths in a way that would provide a competitive edge.

Based on industry dynamics and its history of disappointing results, our view is that Kohl’s does not have a moat based on a brand intangible asset. We think its long-term targets of low-single-digit percentage sales growth and 7%-8% operating margins may be out of reach. We forecast average annual sales growth of about 1% and a 4% average annual operating margin over the next decade. Further, we estimate an average annual adjusted return on invested capital of just 6%, well shy of our 9% WACC estimate and the 11%-14% levels that Kohl’s achieved in prepandemic years.

Having failed to build a brand intangible asset, we do not believe any of the other moat sources can be applied to Kohl’s, either. The firm sources much of its apparel, accessories, and home goods from many of the same third-party manufacturers in Asia as its competitors, so it has no material cost advantage. Similarly, Kohl’s distribution system is like that of competitors, meaning that it has no efficient scale advantage. Further, while the company does have a very large loyalty program, there is no evidence that it provides a beneficial network effect. Also, there is no cost for consumers to switch to other retailers.

Kohl’s yearly digital sales increased significantly between 2010 and 2025 (to $4.3 billion from $700 million), making it one of the largest online retailers in the US. Its large store base allows it to ship directly from stores and encourages in-store pickup.

Kohl’s owns hundreds of stores and the land beneath many of those stores. Kohl’s large real estate holdings provide assets that could be monetized and may attract activist investors.

Kohl’s is pursuing an aggressive strategy to improve its customer experience, inventory management, balance sheet, and merchandise.

Despite large investments, Kohl’s sales and operating margins have declined over the past decade. We anticipate below-market long-term sales growth of only 1%.

Kohl’s has lacked stability in leadership or a clear plan to increase shareholder value—the firm has had five different CEOs in the past decade.

All of Kohl’s lines of business have been negatively affected by the rise of discount channels, including e-commerce. This competition has put pressure on its sales and margins that it has not been able to overcome.