Kohl's (KSS)

Department store chain Kohl’s (NYSE:KSS) reported revenue ahead of Wall Street’s expectations in Q1 CY2025, but sales fell by 4.4% year on year to $3.23 billion. Its GAAP loss of $0.13 per share was 41.1% above analysts’ consensus estimates.

Company Overview

Founded as a corner grocery store in Milwaukee, Wisconsin, Kohl’s (NYSE:KSS) is a department store chain that sells clothing, cosmetics, electronics, and home goods.

Department stores emerged in the 19th century to provide customers with a wide variety of merchandise under one roof, offering a convenient and luxurious shopping experience. They played an important role in the history of American retail and urbanization, and prior to department stores, retailers tended to sell narrow specialty and niche items. But what was once new is now old, and department stores are somewhat considered a relic of the past. They are being attacked from multiple angles–stagnant foot traffic at malls where they’ve served as anchors; more nimble off-price and fast-fashion retailers; and e-commerce-first competitors not burdened by large physical footprints.

Department or general merchandise retail competitors include Macy’s (NYSE:M), Nordstrom (NYSE:JWN), and Dillard’s (NYSE:DDS).

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years.

With $16.07 billion in revenue over the past 12 months, Kohl's is one of the larger companies in the consumer retail industry and benefits from a well-known brand that influences purchasing decisions. However, its scale is a double-edged sword because it’s harder to find incremental growth when you’ve penetrated most of the market. To expand meaningfully, Kohl's likely needs to tweak its prices or enter new markets.

As you can see below, Kohl’s revenue declined by 3.7% per year over the last six years (we compare to 2019 to normalize for COVID-19 impacts) as it didn’t open many new stores and observed lower sales at existing, established locations.

This quarter, Kohl’s revenue fell by 4.4% year on year to $3.23 billion but beat Wall Street’s estimates by 1%.

Looking ahead, sell-side analysts expect revenue to decline by 5.6% over the next 12 months, a slight deceleration versus the last six years. This projection is underwhelming and suggests its products will face some demand challenges.

Number of Stores

The number of stores a retailer operates is a critical driver of how quickly company-level sales can grow.

Over the last two years, Kohl's has kept its store count flat while other consumer retail businesses have opted for growth.

When a retailer keeps its store footprint steady, it usually means demand is stable and it’s focusing on operational efficiency to increase profitability.

Note that Kohl's reports its store count intermittently, so some data points are missing in the chart below.

Same-Store Sales

A company's store base only paints one part of the picture. When demand is high, it makes sense to open more. But when demand is low, it’s prudent to close some locations and use the money in other ways. Same-store sales is an industry measure of whether revenue is growing at those existing stores and is driven by customer visits (often called traffic) and the average spending per customer (ticket).

Kohl’s demand has been shrinking over the last two years as its same-store sales have averaged 5.5% annual declines. This performance isn’t ideal, and we’d be concerned if Kohl's starts opening new stores to artificially boost revenue growth.

In the latest quarter, Kohl’s same-store sales fell by 3.9% year on year. This decrease represents a further deceleration from its historical levels. We hope the business can get back on track.

Kohl's has good unit economics for a retailer, giving it the opportunity to invest in areas such as marketing and talent to stay competitive. As you can see below, it averaged an impressive 40.2% gross margin over the last two years. That means for every $100 in revenue, $59.79 went towards paying for inventory, transportation, and distribution.

Kohl's produced a 43.3% gross profit margin in Q1, in line with the same quarter last year and exceeding analysts’ estimates by 8.5%. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting it strives to keep prices low for customers and has stable input costs (such as labor and freight expenses to transport goods).

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Kohl's was profitable over the last two years but held back by its large cost base. Its average operating margin of 3.3% was weak for a consumer retail business. This result is surprising given its high gross margin as a starting point.

Looking at the trend in its profitability, Kohl’s operating margin decreased by 1 percentage points over the last year. Kohl’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

This quarter, Kohl's generated an operating profit margin of 1.9%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Kohl's has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 2.6% over the last two years, slightly better than the broader consumer retail sector.

Taking a step back, we can see that Kohl’s margin dropped by 3.7 percentage points over the last year. This decrease warrants extra caution because Kohl's failed to grow its same-store sales. Its cash profitability could decay further if it tries to reignite growth by opening new stores.

Kohl's burned through $202 million of cash in Q1, equivalent to a negative 6.2% margin. The company’s cash burn increased from $133 million of lost cash in the same quarter last year. These numbers deviate from its longer-term margin, indicating it is a seasonal business that must build up inventory during certain quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Kohl's historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 12%, somewhat low compared to the best consumer retail companies that consistently pump out 25%+.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Kohl’s $7.37 billion of debt exceeds the $153 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $1.26 billion over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Kohl's could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Kohl's can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

We were impressed by how significantly Kohl's blew past analysts’ gross margin, EPS, and EBITDA expectations this quarter. We were also excited its revenue outperformed Wall Street’s estimates. On the other hand, its full-year EPS guidance missed. Overall, we think this was a decent quarter with some key metrics above expectations. The stock traded up 3.4% to $8.40 immediately after reporting.

Updated: July 10, 2025 at 10:35 PM EDT

When considering an investment in Kohl's, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Kohl's doesn’t pass our quality test. To kick things off, its revenue has declined over the last six years, and analysts expect its demand to deteriorate over the next 12 months. And while its gross margins indicate a healthy starting point for the overall profitability of the business, the downside is its projected EPS for the next year is lacking. On top of that, its shrinking same-store sales tell us it will need to change its strategy to succeed.

Kohl’s P/E ratio based on the next 12 months is 36.7x. At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $9.33 on the company (compared to the current share price of $9.66), implying they don’t see much short-term potential in Kohl's.