KSS - NYSE

Thank you for standing by, and welcome to the Kohl's Corporation Second Quarter 2025 Earnings Conference Call. [Operator Instructions] I'd now like to turn the call over to Trevor Novotny, Director of Investor Relations. You may begin.

Thank you. Certain statements made on this call, including projected financial results and the company's future initiatives, are forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause Kohl's actual results to differ materially from those projected in such forward-looking statements. Such risks and uncertainties include, but are not limited to, those that are described in Item 1A in Kohl's most recent annual report on Form 10-K and as may be supplemented from time to time in Kohl's other filings with the SEC, all of which are expressly incorporated herein by reference. Forward-looking statements relate to the date initially made, and Kohl's undertakes no obligation to update them. In addition, during this call, we may make reference to non-GAAP financial measures. Please refer to the cautionary statement regarding non-GAAP measures and reconciliation of these measures included in the investor presentation filed as an exhibit to our Form 8-K as filed with the SEC and available on our Investor Relations website. Please note that this call will be recorded. However, replays of this call will not be updated. So if you are listening to a replay of this call, it is possible that the information discussed is no longer current, and Kohl's undertakes no obligation to update such information. With me this morning are Michael Bender, our Interim Chief Executive Officer; and Jill Timm, our Chief Financial Officer. I will now turn the call over to Michael.

Thank you, Trevor, and good morning, everyone, and thank you for joining Kohl's second quarter earnings conference call. On today's call, I'll be discussing highlights from our second quarter performance, followed by the progress we're making against our 2025 initiatives. Before I get into the performance, I would first like to say thank you to all of our associates at Kohl's. It's been a pleasure to work with you over the last 4 months. Each day, I've been inspired and energized by your commitment and hard work. And I'm very proud of what we've accomplished, and I'm excited about continuing to make progress against the significant opportunity that lies ahead for us. Now let me turn to our second quarter performance. We're pleased with our results as we delivered comparable sales of down 4.2% and adjusted earnings per diluted share of $0.56, both of which were ahead of our expectations. These results reflect the continued progress we're making against our 2025 strategic initiatives. Now while it's clear that these efforts are beginning to resonate with our customers, we also recognize that this performance is not yet where we aim to be. Our entire team remains focused on enhancing the way we serve customers and over time, returning the company to growth. We saw our sales progressively improve throughout the quarter, with May having the softest performance due in part to colder, wetter weather over the last couple of weeks of the month, including the Memorial Day holiday, which negatively affected our spring seasonal businesses. We saw improvement in June and ended the quarter strong with July comp sales flat to last year. The improved performance was driven by our digital business and our proprietary brand sales, both of which performed positively in July. In addition to better-than-expected top line performance, we continue to operate the business with discipline. We were able to expand our gross margin by approximately 30 basis points, lower our inventory by 5% and reduce our SG&A expenses by 4% in the quarter. Although we are encouraged by our second quarter results and the improved sales trend we saw throughout the quarter, we also recognize that consumers continue to be pressured and are being choiceful with their purchases. Specifically, our lower to middle income customers remain the most challenged, while our higher income customers have proven to be more resilient. These lower- to middle-income customers continue to prioritize value and are trading down into lower opening price point products. Several of our key initiatives are focused on delivering greater value to these customers through investing in our proprietary brands and adding more coupon eligible brands. As Jill will discuss in more detail, our outlook for the balance of the year assumes the macroeconomic environment will remain challenged. However, our strong operating discipline and improved cash flow generation will continue to provide meaningful support to drive progress against our initiatives and build on the momentum from the first half of the year. Our efforts are focused on 3 key strategic priorities, all rooted in putting the customer at the center of our decisions and delivering the products and experiences they expect from Kohl's. First, offering a curated, more balanced assortment that fulfills the needs of our customers. Next, reestablishing Kohl's as a leader in value and quality; and lastly, delivering a frictionless shopping experience across our omnichannel platform. Beginning with our first initiative, offering a curated and more balanced assortment that fulfills the needs across all of our customers. In recent years, Kohl's focused too heavily on altering our merchandising assortment in order to attract a new customer. This overemphasis led to unintentional displacement of products and categories that were important to our most loyal customers. We know our customers come to Kohl's with an expectation that we will deliver the products they need for themselves, their families and their home. We're working to rebalance our full product assortment across key categories. A more curated, balanced assortment will ensure a more consistent and inspirational shopping experience every time. Women's is a very important category for us as it serves our core customer and is a key driver of overall company performance. During the second quarter, we started seeing progress in our Women's business as we invested back into proprietary brands, streamlined the choices in intimates and reintroduced the petites category. our Women's business overpenetrates in our proprietary brands. And as we've reinvested in these brands, the Women's business has benefited. Although Women's slightly lagged the company performance, we saw steady improvement as our inventory investment in proprietary brands gained traction, ultimately delivering a positive comp in July. The strength was driven by key brands like Sonoma, Lauren Conrad and FLX. Next, in our intimates category, we reduced the choice count and improved in-stocks enhancing shopability and delivering greater clarity for our customers. As these changes took effect, we began to see meaningful improvement in the business, culminating in a flat comp performance in July. Last, as we reestablished the petites category in all stores, this business accelerated, up almost 40% in the second quarter. This strong performance was led by the introduction of our proprietary brands, Lauren Conrad and Simply Vera Vera Wang. We are extremely encouraged by these results as this category provides an incremental sale because it is not a substitutable category and overpenetrates with our core and most loyal customer. Our Accessories business continued to outperform the company by low single digits in the quarter. This strength was driven by reestablishing our jewelry business and investing in key growth categories such as Impulse and our Sephora partnership. In Q2, our jewelry business ran plus 12% versus last year. This category heavily penetrates into our Kohl's Card customer and is another category that is often not substitutable. The positive performance in the jewelry business is driven by establishing a destination for accessories in our store, investing in fashion jewelry inventory and continuing to test fine jewelry case lines in 200 stores. We experienced outsized performance in our fashion jewelry business in the quarter. The fine jewelry business continues to be an opportunity for us as we work to find the right assortment and staffing. In addition, we are continuing to invest in white space categories, specifically our Impulse and Sephora businesses. In 2025, we made the commitment to implement 613 additional Impulse queuing lines across our store fleet. And in Q2, we implemented the Impulse queuing lines in over 300 stores and remain on track to complete this rollout by the end of Q3. Impulse sales increased 30% in Q2, driving more units in the basket. In spring, we completed the final phase of our Sephora at Kohl's expansion, adding an additional 105 small format shops. In Q2, Sephora Kohl's grew 3% versus last year and was flat versus prior year on a comparable sales basis. This partnership has delivered exactly as intended, benefiting both companies and has created an inspiring experience for Sephora at Kohl's as a beauty destination. We remain on track to delivering our goal of creating a $2 billion beauty business. The partnership continues to draw a new younger customer with over 1/3 of Sephora shoppers who are also exploring other areas of the store, most notably juniors and Women's, which remain the top cross-shopped categories. As we look ahead, we are excited by the upcoming newness in Sephora that was set earlier this month. This includes brands such as Kerastase hair, Rare Beauty fragrance, miu miu fragrance and Josie Maran Body as well as expansions of successful brands, including Summer Fridays and LANEIGE. Turning to our remaining lines of business. Men's and kids were the softest performing categories in the quarter with both experiencing declines in spring seasonal assortments like shorts and tees. However, this softness was partially offset by stronger performance in opening price point proprietary brands such as Tek Gear and Jumping Beans. Our Footwear business slightly underperformed the company, primarily due to softness in sandals and active footwear. However, this was partially offset by strength in dress casual styles and solid performance in our kids footwear business. Our home business saw strength in home decor as well as in the bedding and bath categories. However, this was partially offset by softness in small electrics. Next, I would like to discuss our second priority, which is reestablishing Kohl's as a leader in value and quality. This priority is centered around delivering more value to our customers, which is particularly important in the current environment we're operating in where value is really resonating with the customer. The first action we are taking to deliver more value to our customers is by elevating our proprietary brands. We aspire for our proprietary brands to deliver trusted quality and relevant style at an incredible value. We know that we have a powerful set of proprietary brands that build customer trust and loyalty. In addition, customers who buy our proprietary brands spend more of their wallet with Kohl's. These proprietary brands play an instrumental role in our value proposition. They allow us to offer quality products at a lower opening price point, which highly resonates with our core loyal customers. As we are investing into our proprietary brands, we have continued to make progressive improvement in sales, which are up 500 basis points from the first quarter, delivering comparable sales down 3% in Q2 with July up low single digits. This outperformance was driven by strength in key brands such as Tek Gear, Simply Vera Vera Wang, Lauren Conrad and FLX. We will continue to explore opportunities to introduce new proprietary brands that serve a clear purpose for our customers while driving productivity across our merchandise portfolio. Recently, we launched 3 new home brands, Mariana, Hotelier and Mingle & Co., which have received a strong initial response, contributing to improved performance in our bedding, bath and tabletop categories. Additionally, this fall, we will expand our successful FLX brand into the kids category, launching in 300 stores and online. We continue to work diligently to find the right balance in our assortment to deliver what our customers expect from their shopping experience at Kohl's. We believe there is a substantial opportunity for us to lean into our value-oriented proprietary brands to offer more relevance and quality at an affordable price point to our customers. The next action we are taking to deliver more value to our customers is by enhancing our promotional strategies. Kohl's offers an incredible product assortment with a mix of national and proprietary brands. Our national brands serve an important role in meeting our customers' needs as they bring awareness, relevance and quality to our product offering. However, over the past few years, we have excluded a large number of these brands from our coupons. This created friction with our customer base as we were not providing the value they were looking for, especially with our loyal customer. Toward the end of Q1, we implemented the first phase of making more brands coupon eligible. This change generated an immediate positive response in our digital channel, where pricing transparency plays a significant role in customer decision-making. As the quarter progressed, we saw the performance improve in our stores as we increased investment in in-store signage and marketing. This resulted in over an 800 basis point increase in the penetration of sales included in the coupon in Q2 when compared to the prior year. Given the success from this change, earlier this month, we made the decision to launch a second wave of brand inclusions for smaller, more digitally native brands. We will continue to analyze the performance from this initiative and make additional decisions as we continue to learn what is resonating with our customers. Now let me turn to our last priority, which is delivering a frictionless experience across our omnichannel platforms. Our goal is to create a simpler, more reliable experience, both in stores and online. To deliver this elevated experience, we're focused on optimizing our store layout, increasing inspiration and restoring trip assurance. We know we currently have an inconsistent in-store experience without a unifying point of view of what we want the customer to feel when they walk in the store. To bring our customer proposition to life in the store, we will be adjusting product flows and adjacencies, including fixture layout and product placement as well as adding brand support, in-store marketing and visual presentation to provide more inspiration to our customers' shopping experience. We are in the early stages of this initiative and have begun making strategic adjustments to our store layout. These changes include establishing a dedicated accessories pad, relocating juniors across from Sephora and moving active back to the men's and Women's departments. The accessories category has shown positive comparable sales, excluding Sephora, since the transition, signaling early success. Our juniors business continues to benefit from its proximity to Sephora, remaining one of the top cross-shop categories among Sephora customers. While the active category has trailed overall, we've seen encouraging growth in key proprietary brands such as Tek Gear and FLX. We're also investing in impactful entry statements to support key seasonal moments, enhanced graphics to highlight value and improve findability and additional fixtures to support in-aisle and queue line placements to drive incremental units per basket. We're also focused on restoring trip assurance for our customers by refining our buying strategies to ensure deeper inventory and improved in-stock levels in our basics and key essentials businesses. An example of these efforts is within our intimates category. In the second quarter, we exited the least productive styles and streamlined choice counts across all brands. At the same time, we invested in inventory depth for key sizes, which significantly improved service levels and reinforced trip assurance. As these actions took effect, intimate sales improved by 300 basis points compared to the Q1 trend and continue to show momentum throughout the remainder of the quarter. The goal for all these efforts is to create a more enjoyable and dependable shopping experience at Kohl's. We're encouraged by the initial results and are confident in our ability to build on this momentum throughout the year as we continue to reposition the business for long-term success. I would also like to take a moment to welcome Arianne Parisi, our new Chief Digital Officer; and Steven Dee, our new Chief Technology Officer at Kohl's. We're excited to have both of these leaders join our team as we increase our focus on the role of our digital channels and our omnichannel model and leverage technology and information platforms to effectively drive key business initiatives. We look forward to their future contributions here at Kohl's. In summary, I would like to reinforce 3 key messages for you. First, we are pleased with our Q2 performance, which came in ahead of our expectations. Second, customers are continuing to be choiceful with their discretionary income and we are working relentlessly to meet their needs by providing quality products at a great value. And last, we are continuing to make good progress against our 2025 initiatives. However, these efforts will continue to take time, and we are focused on showing progressive improvement each quarter. I will now turn the call over to Jill.

Thank you, Michael. For today's call, I will provide additional details on our second quarter results as well as an update on our fiscal year 2025 guidance. Let me begin by providing you with additional color on our Q2 2025 performance. Net sales declined 5.1% in the quarter and 4.6% year-to-date. Comparable sales decreased 4.2% in the second quarter and 4% year-to-date. The decline in Q2 sales was primarily driven by fewer transactions, specifically in stores. However, we did see traffic improve in both channels throughout the quarter with positive traffic in July, helping deliver a flat sales performance to end the quarter. Digital sales outpaced store sales during the quarter, driven by strong conversion rates. The performance of our digital business was further enhanced by the inclusion of additional brands in our coupon offerings, which resonated well with customers and contributed to improved results. We continue to see strong performance from new and non-Kohl's Card customers, delivering another quarter of positive sales growth. In contrast, our Kohl's Card customer segment continued to underperform with sales down in the low teens for the quarter. As Michael outlined, several of our strategic initiatives are specifically focused on regaining share and reengaging our Kohl's Card customer base. Moving down the P&L. Other revenue, which is primarily our credit business, was $199 million in Q2, a 4% decrease versus last year. The decrease was primarily driven by a portion of our credit expenses shifting against other revenue as part of our account servicing to the third party that owns the accounts. Year-to-date, other revenue declined 7%. Gross margin in Q2 was 39.9%, an increase of 28 basis points. The year-over-year increase was driven by category mix benefits, outperformance of proprietary brands and continued strong inventory management. Year-to-date, gross margin was 39.9%, an increase of 33 basis points. SG&A expenses in Q2 decreased 4.1% to $1.2 billion, benefiting from lower spending in stores, marketing as well as the benefit of a portion of the credit expenses shifting into other revenue. Year-to-date, SG&A expenses decreased 5% compared to last year. Depreciation expense was $175 million in the quarter, a decrease of $13 million versus last year. The decrease was driven by lower capital expenditures and the impact from closed locations. Year-to-date, depreciation expense was $350 million, down $26 million to the prior year. Interest expense in Q2 was $78 million. Relative to last year, interest expense decreased $8 million, primarily due to lower lease interest expense from store closures. Year-to-date, interest expense decreased $15 million to $154 million. Our adjusted tax rate was 23% in Q2 and 27% year-to-date. This resulted in adjusted net income for the quarter of $64 million and adjusted earnings per diluted share of $0.56. Year-to-date, adjusted net income was $50 million and adjusted earnings per diluted share of $0.44. In addition, during the quarter, we benefited from the settlement of a credit card interchange fee lawsuit, resulting in a onetime pretax gain of $129 million and diluted earnings per share of $0.87 that was excluded from the numbers previously discussed. Moving to our balance sheet and cash flow. We ended the quarter with $174 million of cash and cash equivalents. Inventory declined 5% compared to last year, reflecting our continued focus on disciplined inventory management with receipts managed down in the mid-teens. Looking ahead, we expect to end the year with inventory levels down in the mid-single digits. Year-to-date, operating cash flow was $506 million, while year-to-date adjusted free cash flow was $270 million. This cash flow generation allowed us to reduce our outstanding balance on the revolver by $470 million from Q1, ending the second quarter with $75 million borrowed. We continue to expect to be fully out of the revolver by the end of the year. In addition to reducing our balance on the revolver, Kohl's was able to further solidify our balance sheet by completing the refinance of our July 2025 maturities by issuing a new private offering for $360 million of 10% senior secured notes due in 2030. Kohl's nearest debt maturity is not due until 2029, and our long-term debt remains at a 10-year low. Capital expenditures year-to-date were $200 million. We expect to spend approximately $400 million of CapEx this year related to the completion of the Sephora rollout, the Impulse Q line rollout to 613 stores and the expansion of one of our next-generation e-commerce fulfillment centers. In Q2, we returned $14 million to shareholders through the dividend. And as previously disclosed, the Board on August 12 declared a quarterly cash dividend of $0.125 per share payable to shareholders on September 24. Next, I would like to provide an update to our 2025 outlook. As you've heard this morning, we've taken a number of actions to strengthen our business. These initiatives are beginning to show early signs of positive impact, reinforcing the momentum we've already started to build and positioning us for continued progress. However, we continue to navigate macroeconomic uncertainty, including challenges related to global trade policy and the difficulty of forecasting its impact on consumer behavior. Additionally, our core customer remains under pressure, becoming increasingly selective with their spending. As a result, we are taking a prudent approach to our financial outlook for the remainder of the year. Based on what we know today and our ongoing mitigation efforts, we believe we are well positioned to achieve the following full year financial guidance. Net sales decline of 5% to 6% compared to our previous guidance of down 5% to 7%; comparable sales decline of down 4% to 5% from down 4% to 6% other revenue down 13% to 14% gross margin expansion of approximately 30 basis points, the low end of our previous guidance of 30 to 50 basis point increase; an SG&A decline of down 4% to down 4.5% from down 3.5% to 5% previously; depreciation of $705 million, down from $730 million; interest expense of $305 million, down from $315 million and adjusted operating profit of 2.5% to 2.7%, up from 2.2% to 2.6%; adjusted diluted earnings per share of $0.50 to $0.80, up from $0.10 to $0.60. Lastly, I want to extend my sincere thanks to our incredible team at Kohl's for your dedication and hard work. As we continue to navigate a challenging environment, your unwavering commitment to our company does not go unnoticed and is deeply appreciated. Thank you for everything you do, both for our organization and our customers. With that, we are happy to take your questions at this time.

[Operator Instructions] Your first question comes from the line of Mark Altschwager from Baird.

Nice to see the progress here. So you noted progress across several of your strategic initiatives. I was hoping you could unpack in terms of order of magnitude, what you think is having the greatest impact to the top line at this stage. And as we think about the back half of the year versus the first half, where are you most excited about the potential to drive further sequential improvement in the comp trend?

I'll take a shot at that first, and Jill certainly come in. Mark, thanks for the question, and I appreciate the sentiment there. One of the categories that we're most excited about is the emphasis that we've been placing on rebalancing our proprietary brands and bringing those back into focus. It lays nicely against where the consumer is right now in terms of their interest in wanting to focus on value with the spend of the dollars that they have. And so as we've mentioned, proprietary brands have seen sequential improvement as we move through the quarter. We're not done yet in terms of building that inventory, but also the focus that we have on those brands. And we're excited about the opportunity to continue to see those play an increased role as we move through the back half of the year. So that's one of the biggest areas that we'll be focused on. Jill, I don't know if you want to add.

I agree. Obviously, we talked a lot about needing to invest back into our proprietary brands, and you've seen our inventory, although down and well managed, we've really made that pivot to invest back into proprietary, and that's driven that momentum. I mean a key example here is Women's. And Women's is our highest penetrated brand for the company, but it also has the highest exposure to proprietary brands. So we tried to give you that as an example is really as we made that investment in -- it's really resonating with the customer, and it led to significant improvement in that business as the quarter progressed. So I think we can build off that momentum in the back half of the year. The second thing I would say, and Michael mentioned it, is value. We know that the customer hasn't really seen the impact of some of the price changes we've heard about. So as we go into the back half of the year, we want to make sure we're continuing to deliver that value. Proprietary brands is one, but also the way that we're approaching our coupon eligibility, making that move at the end of Q1 with a lot of brands. We had another over 50 brands that we just made the move for August. So we really think we're set up well to continue to deliver that value when it's going to become incredibly important to that customer in the back half and especially holiday.

And maybe as a follow-up, Jill, as we think about the cadence Q3, Q4, I guess the guide implies pretty similar comp in the back half versus the first half, but you mentioned July is positive. I think comparisons ease a little bit in Q3. So just any further color on how you're thinking about the cadence of comps? And then similarly, anything to flag on gross margin with the adjustment that you made to the annual forecast?

Yes. I'm expecting a pretty similar cadence. Obviously, we do have a little bit softer comp in Q3, but we know that there's a lot of uncertainty that the consumer is navigating. We also had some softness in our digital business in Q4. So I think we have some relatable upsides in both quarters. So I don't really differentiate between the 2. I think that's why we gave the guide. Similarly, you saw the front half of the year, our margins were up in that 30 basis point range. I think it gives us enough room to work. The strong inventory management continues to drive growth. Proprietary brands and mix will continue to drive growth. But this gives us some flexibility to really make sure that we're driving that value. And then also, as we've seen our digital business outperform, we know that, that has a little bit more impact to our margins. So we've given ourselves some room for that as well as we want to drive that business.

Your next question comes from the line of Chuck Grom from Gordon Haskett.

Joe, where are you guys in adding back brands to the coupon? I guess maybe how many brands have been added back? How many more still up to go? You just referenced adding 50. And I guess when you add the brands back -- or when you add the coupons back, I guess, how quickly are consumers noticing both online and in-store?

Sure. I think right now, we made that move at the end of Q1, and that was with some bigger brands as you walk through the store, including [ I

Okay. That's great to hear. And then just one near-term question. Just any July flat. Any thoughts on back-to-school and maybe how August has trended so far relative to plan?

Yes. As far as August is concerned, we're actually off to a good start here in the first month of the quarter. Some of the back-to- school categories specifically within that performance like backpacks, kids, footwear, fleece are the ones that we're seeing strength in. One of the interesting developments also is in denim. So especially on the fashion side of denim. So anything baggy, wide leg, those types of features in denim are showing strength. We're also seeing proprietary brand strength, as Jill said, in categories and brands like SO, Lauren Conrad and Nine West. And interestingly, from a national brand side of things, Levi's, Women's, in particular, are showing strength. And then Nike from a national brand standpoint, that's one of the brands that's really coming through strongly in kids, Women's and footwear.

Your next question comes from the line of Paul Lejuez from Citigroup.

Can you talk about the comp metrics a little bit more, maybe unpack the drivers, transactions versus ticket within ticket, AUR, UPT? And as you move throughout the quarter, which of those metrics were the drivers of the improvement as you moved into July? And then how are you thinking about the second half drivers, traffic versus -- or transactions versus ticket? And then separate, the tariff impact, maybe could you just talk about how you're thinking about what you've seen thus far and what you expect in the second half? How much is built in? And is there a carryover into next year?

Jill, do you want to take the first, and I'll take a crack at the second.

Sure. I mean the big thing, honestly, for our comp was around traffic, Paul. We are seeing that customer trade-off between ticket or AUR and UPT. So we're seeing our average transaction value relatively flat, and it was maybe slightly down, but it's really about traffic. And I think we -- as we talked about the improvement, the improvement came through traffic as the quarter had progressed. So that's been our opportunity and a lot of what we are looking to do is to bring that customer back in. We talked about jewelry and petites, those were nonsubstitutable. So as we're bringing them back, we're seeing we're gaining that trip back from the customer as well. So that's the biggest factor is how do we continue to bring her in. Getting that core customer who has been underperforming is a keen focus of ours and a lot of initiatives that you heard us lay out today is to really get that traffic back because we lost those trips from that customer, and they found other places to find that jewelry, find petites and find some of the brands that we had exited. So as we bring them back in, we're starting to see it resonate with the customers, but it's really all about trips.

And then, Paul, on the second part of your question around global trade policy. A couple of things to note here. And we mentioned in our last earnings release conference call with you that we have a great merchant team, a great sourcing team, great finance team led by Jill. And they've all been working really hard over the course of the year to make sure that we are assessing as quickly as we can the impact of any changes that are coming there. As we have mentioned before also, we have a diversified sourcing strategy from a country standpoint. We're not heavily reliant on any one particular country, and we have the flexibility and agility to actually move production to other countries if necessary. The other thing that we are doing, obviously, is working with our vendor and supplier community, negotiating when we do understand and get clarity on tariffs to make sure that we're able to continue to provide the value that we need to our customers. And we're also examining what we can do with our proprietary brands from a value engineering standpoint with the product to keep cost of goods in line with the value that we need to offer to our customers. And then lastly, I would say, adjusting our buys based on elasticity. So we have all the modeling in place to be able to understand when and if prices do go up, what does that do to the volume, and we were able to adjust our buys as a result. This continues to be a fluid situation with the uncertainty that still remains. And it's one of the reasons, as Jill mentioned in her comments around the guide on margin that we're giving ourselves enough flexibility to be able to make the changes and make the decisions that we need to in the back half of the year as more clarity comes from the global trade policy discussions. From a pricing standpoint, we're leaning into proprietary brands to provide and that provides a bit of a mix benefit, as you know, as those products carry a higher margin. And we have the ability, like I said, to adjust our buys based on elasticity. We're going to continue to monitor the competition to make sure that we ensure that we stay price competitive. And from a national brand standpoint, we follow the lead of the national brand -- of our national brand partners. And so it's not -- that doesn't provide any sort of disadvantage for us as everyone receives the same pricing. So that's the thought process that we're employing around this issue, and we feel comfortable with where we are right now, and that's captured in the guide that we've shared.

I appreciate that. But I guess after all those mitigation efforts, do you build in a net impact from tariffs in the back half?

Yes. And I think, Paul, that's why you saw us take our margin down. We were doing 30% to 50%. We brought it to the low end. I mean a lot of the merchant efforts and the sourcing team efforts have helped us mitigate that. And we talked about that when the tariffs first came out. And so as they've been changing, the teams have adjusted incredibly well to help us find ways to offset that. As we lean into proprietary brands, obviously, there is a mix benefit for us as well, and we're seeing that have an outsized sales impact in the quarter. So we're planning that, that is one of the ways that we can continue to expand margin. But we did bring the margin down to the low end given the fact that we know we have to navigate through tariffs. And quite honestly, we want to make sure that we're going to stay competitive from a pricing perspective. Particularly as we go into the holiday period, we know that it's going to be competitive. We know it's always an incredibly promotional time of year. And so with the guide we gave, we're able to have that flexibility to make sure that we're driving price and value for the customer.

Your next question comes from the line of Oliver Chen from TD Securities.

A lot of exciting initiatives ahead. A simpler question, but a harder question. What do you think it takes to positive comp and timing? And in that lens, perhaps you might be able to rank these initiatives in terms of materiality of positive revenue growth and positive comps and also a second dimension of what might be sooner versus longer in terms of longer -- shorter to achieve a lower-hanging fruit versus more difficult?

Oliver, I'll take a crack at it first. And again, Jill, please be -- share. I don't like to put a timing on it to be able to say by x date, we'll be back in positive comps. We know that our route to long-term success for this business is to get back to growth. And everything that we've talked about and everything you've heard from us certainly is directed at that intention. What I would tell you in terms of the kinds of things that we're focused on right now, this addition of adding categories back like jewelry and accessories and others certainly is a big part of winning back the customers that to Jill's point have not lapsed, but have given us less of their wallet recently. I think the focus also on proprietary brands and achieving this proper mix between proprietary brands and national brands is a big driver of our success going forward. But retail is, as you know, it's a push every day in terms of grinding your way to getting the sales and earning it from the customers that you have. And that's where our focus is right now.

Yes. I would agree. I think some of the category changes, Oliver, that we've made are quick wins. We just really investing back into the proprietary brands. It's taken us a little bit of time, and we came out of last year, Q3, we were down substantially. Our inventory is still down on a 2-year stack basis in proprietary brands, but it's up versus last year. And so that -- it's taken a little bit of time, but I would say that's probably going to have more of an immediate impact, particularly in the back half of the year. Some of our key growth categories like Sephora, our Impulse queuing lines, we now have 300 additional doors from Q2. We have another about 300 doors going in Q3. That's just an actual item -- actual unit in the basket in stores that we're getting. So if we think about those comp components, that's just another add that we're seeing come in. And we're really seeing newness in that category work well, novelty cleaning. Michael and I had the opportunity to walk with our merchants and just see some of the newness that they're bringing in on a pretty frequent basis. And it's a new muscle for Kohl's to have that here in a whole new category. So those are places I think you're going to see some of that immediate impact. I think longer term, it's still determining really that value equation, having that right balance both for our new customers and our non-Kohl's customers, which are doing incredibly well and positive comping, but making sure that we can get that core customer back and understanding that true value that we have delivered to them in the past and how they can feel like they're getting that back from us going forward. So I think that's going to be a little bit longer term for us. So the good news is we have some short-term metrics. We did get to a flat comp in July. So that does give you a little bit of a data point on how they are starting to work. We feel good with the momentum that we're building in the back half. It really comes down to the fact that we're also navigating a lot of uncertainty in the macro environment. And we know our consumer, particularly the middle and lower-income customer, remain under pressure. And so we're going to have to fight for every dollar in the back half.

And Oliver, I would add to just one of the things that will probably be a longer-term impact on the business is our interest in wanting to -- as we've listened to customers, understanding their interest in Kohl's curating -- spending time curating a bit more of the assortment for them so that they have some inspiration, if you will, around what we offer in our stores. And so you'll see some changes taking place over time in stores that bringing back, for example, manikins to be able to show an item and an outfit, not just an item hanging on a rack and actually enhancing that store experience so that there's newness, but also that focus on trip assurance that we spoke about earlier. So we have a broad range of initiatives in place, some that will deliver short-term gains. But over the long haul, we know that growth is where we need to get back to, and that's the focus for us.

Okay. And we've been on the journey for a while. I guess what's different this time with private label and value? Because, Jill, you've been well aware that customers have been focused on value for a decade. And then I would love -- do you intend to keep the racetrack? It sounds like you're making changes that are very customer-centric physically. Sometimes making small changes can have unintended consequences to risk, but would love any incremental thoughts there. And lastly, there's a lot of green shoots, which product categories are not doing well or have the biggest chunk of improvement opportunity? Is that Women's dresses or juniors?

Okay. So I'll start, and I'll let Michael pop in here is on the proprietary brands, I mean, you've been on the cycle with me, Oliver. We watch this a lot. And I think we let the customer really tell us where we want to be. And in the history of Kohl's, we've been over 50% in proprietary brands. We've been under 30% in proprietary brands. But really, we try to follow where the customer is. I think over the last couple of years, we didn't necessarily follow that. We pulled out some of the brands and we replaced it with market brands. And when we did that, they had come to love certain styles, certain silhouettes, certain fits and the opening price point value that were provided by our proprietary brands. When we replaced them with market brands, they were not a brand that they knew, they were not opening price point and a lot of them were not coupon-eligible. So the things that they loved about that offering, we really took away from them without listening to what they're looking at, and they voted and they voted on the sales numbers, and we saw that. So as we're moving back into those categories, we're being really thoughtful. We're going back. We're listening to the customers. We're being really thoughtful on what we're bringing back in. And we're bringing it back in with an edited assortment. We're going to have depth in key essentials. There are certain things like the SO [indiscernible] people want it in depth. That is what they've come to know Kohl's for. And so we're going to buy into that. But then we're going to be much more thoughtful on the side of fashion and what we're bringing in, and that should be where you see a lot more newness come in. Also, over time, Oliver, we've extended the number of brands we've had in proprietary brands, and we brought them back. I think we feel really good with the brands we have and what we're standing behind. I'm going to use juniors, for example. Right now, they're probably under the most disruption of exiting out of a lot of those market brands, and they're leaning into SO. SO has been around for a long time. And the more that they bring in from a so perspective, the more sales we're seeing come through that customer. They love it. It's opening price point. It has great fashion, but it has those key basics. We're doing some things with denim in Sonoma, and we know like what they want for silhouettes and what they want for fashion. And so we're setting that, I believe, in September. So really being thoughtful and listening to where the customer was and bringing it in and then owning it because the other thing we did is we went with a lot of choices and not a lot of depth. So they came in and were disappointed when they couldn't find what they were looking for. So I actually feel very good with the process that we're taking in terms of how we're going back into proprietary brands. We're leveraging the core brands that are meaningful to our customer. We're utilizing them as opening price point brands to bring in value, and we're curating a great assortment through basics and fashion really on a relevant pyramid, which we had kind of lost some focus on. I think in terms of the conversation around dresses, we think it's great. We're still going to be investing in it. We maybe just went a little too deep on dresses. We had a white space opportunity, and I think we overinvested there and the merchants are all over that and they're resizing that and they're taking that space back for other productive pieces that we just spoke to, and we're seeing that through Lauren Conrad and Nine West, both being brands that we called out for outperforming. So I think if I look at that portfolio, I feel good with that. The biggest opportunity, and I'll let Michael weigh in here for me as well is I think we've seen our kids business lagging. And we've done a couple of things with pricing and clarity. So we have some room here to, I think, bring back our kids business a little bit stronger. I think Women's is on a great trajectory. Home has done some great things. We have some new brands coming in there. Soft home and bedding, particularly doing well for us as they've invested in that side of the business. But I would say kids for us probably is the biggest opportunity is that's a laggard.

Yes. The only other thing I would add to what Jill said from a category standpoint would be perhaps men's and the opportunity there to continue to build that business, both on the casual side and the dress side as well. But Jill, I think you covered it. The comment that you had, Oliver, about the racetrack, and I think, again, Jill's word thoughtful comes to mind when I think about that. We are not going to be pulling lots of product into the racetrack and disrupting the flow of what goes on from a consumer standpoint. But we'll be making thoughtful choices about how to use the racetrack smartly to showcase items. Jewelry tables is a good example of what we've done recently there that has really helped to improve the sales there. We look at certain item and price at certain time periods to be able to bring out into the racetrack to bring customers into focus on an item that we want them to focus on that they've told us that they want. So we'll continue to do that. The other thing that you'll see evolve, and I had a chance we all did recently to take a look at holiday these seasonal elements and making sure that when a customer walks into the store that they know what time of year it is and that we actually focus product efforts and promotional efforts and marketing efforts and signage around the season is a really important part that, particularly from a store standpoint that we'll be focused on as well. So whether it's Halloween coming up holiday later on, we move into '26 in the spring, you'll see Kohl's show up a little bit differently in that regard as well.

Your next question comes from the line of Michael Binetti from Evercore.

This is Carson on for Michael. I wanted to build off of Paul's question from earlier. Is there a significant difference in the gross margin year-over-year change for 3Q versus 4Q? Some of the brands have called out that pressures from tariffs really pick up in the fourth quarter. And I know you touched on tariffs briefly, and I know you have proprietary brands mixing higher. Is it fair to assume that the proprietary brand mix benefit carries into the back half or maybe even accelerates and that's the key offset? And then how should we think about the other gross margin inputs like adding brands to the coupon?

Sure. So I would say is from a proprietary brand perspective, we do expect the benefit to accelerate. I think we had mentioned the fact that we're investing back in that inventory. And as we saw our business improve throughout the quarter, a key driver of that was our proprietary brand. So as you know, for every 100 basis points of penetration we gain in proprietary brands, it's 10 to 15 basis points of improvement to our gross margin line. So it's definitely a key driver. The other thing we have to be thoughtful of is our strong inventory management. Our inventory was down 5%, but our receipts were down mid-teens. We're looking to improve our turn. And I think one of the basic fundamentals on retail is when you improve your turn, you get margin wins, you get sales wins. So that is definitely going to be a key driver as well. And then we continue to look at paths and ways to offset it. I would say, as the tariffs do come through, there is going to be a weight in the back half of the year. But I think we have ways based on how we see that penetration change to offset it. So I'd say it's pretty balanced between the 2 quarters, Q3 and Q4 in terms of how we see the margin coming in. But again, that's why we took it to the low end of the range. We had thought there was definitely some more upside here as we obviously guided 30% to 50% earlier in the year. But now given the changes that we've seen, we've brought the margin down so we can navigate it so we can still ensure that we are being competitive in pricing and that we can drive value to the consumer in the back half of the year. But I really don't see a lot of change in that margin structure between Q3 and Q4 in terms of how it ends. I think there's pieces within it that we may benefit more from in one quarter than the other to help offset some of those pressures.

Your final question comes from the line of Lorraine Hutchinson from Bank of America.

I wanted to ask about the other revenue line. It came in a bit better in the second quarter, but it looks like the guidance downticked a little bit. I was just wondering if you could give us a state of the union on what's happening with the credit income.

Sure. I think for the quarter, we were a little bit better in credit revenue. As you know, we launched our co-brand card last September. So the front half of the year, we really benefited from having that co-brand revenue. We start comping that in the back half of the year, Lorraine, which is where you start seeing that step down happening. In addition to that, we called out that our core credit customer is down mid-teens. That unfortunately has been a trend over the last several quarters. So that has really had an impact on our AR balances. So we're not seeing a build in AR. We're not seeing those accounts revolve then. And so we're seeing a little bit less from a top line. So with the co-brand offset now comping, that's where you're going to see the step down in the back half of the year from a credit perspective.