Kohl’s (KSS) Raised Profit Guidance as Comparable Sales Fell Again. How Much is From Tariff Refunds?

Kohl's Corporation (NYSE: KSS ) raised its profit outlook after reporting a mixed fiscal second quarter. Company-defined non-GAAP adjusted diluted EPS increased to $1.28 from $0.56 a year earlier. However, GAAP diluted EPS declined to $1.28 from $1.35 because the prior-year period included a legal-settlement gain.

Net sales and comparable sales each declined 0.9%, extending the run of negative comparable sales to 18 consecutive quarters. The gap between improving adjusted earnings and persistently weak sales puts the focus on approximately $150 million of tariff refunds received by Kohl's Corporation (NYSE:KSS) during the quarter.

About $100 million of the refunds reduced merchandise costs and benefited gross profit. The refunds also provided additional financial flexibility for investments in pricing, inventory, marketing and store staffing. Kohl's Corporation (NYSE:KSS) separately attributed the restart of its share-repurchase program primarily to its stronger balance sheet and confidence in its direction.

Tariff Refunds Drove Nearly All the Margin Expansion

Gross margin reached 43.0%, expanding 305 basis points year over year. Kohl's Corporation (NYSE:KSS) CFO Jill Timm said on the August 26 earnings call that gross margin would have increased only about five basis points without the tariff benefit. Approximately 300 of the reported 305 basis points of expansion, or roughly 98%, therefore came from the refunds.

Kohl's Corporation (NYSE:KSS) raised its company-defined non-GAAP adjusted diluted EPS forecast to $1.80-$2.40 from $1.00-$1.60. The midpoint increased by $0.80, while management said approximately $0.65 of the updated forecast reflects tariff refunds. The refunds explain about 81% of the midpoint increase. Timm indicated that improving credit revenue accounted for much of the remainder.

Several operating indicators at Kohl's Corporation (NYSE:KSS) moved in the right direction. The comparable-sales decline moderated from 1.1% in the first quarter, digital sales increased 2.8%, and sales involving Kohl's Card customers rose more than 1%.

Inventory declined 3% as merchandise choices were reduced and depth behind selected products increased. That approach could improve product availability while making stores easier to shop. Kohl's Corporation (NYSE:KSS) also plans to reinvest part of the refund benefit in lower prices, opening-price-point brands, marketing, and customer-facing store staffing.

The refunds cannot generate recurring earnings by themselves, but they give Kohl's Corporation (NYSE:KSS) additional resources to support initiatives that could improve future demand.