Kohl's Turns a Corner: Tariff Refunds Fund a Long-Awaited Comeback

Q2 comps improve, gross margin soars on $150M in refunds, and the company resumes buybacks for the first time since 2022.

KSS · Earnings Call · 2026-08-26

The quarter that changed the narrative

Kohl's second quarter earnings were supposed to be just another step in a slow grind back to growth. Instead, management delivered a handful of signals that suggest the retailer's turnaround has real momentum. Comparable sales declined only 0.9%, an improvement from the first half, and the company's core store payroll investment – aimed at improving customer service – is already showing up in better traffic trends. "Our second quarter performance reflects the continued progress we are making against our key initiatives, leading to another improvement in our comparable sales trend," said CEO Michael Bender. The gross margin story was even more striking: “Gross margin improved 305 basis points in the second quarter and 162 basis points year-to-date. In Q2, we received approximately $150 million of tariff refunds” — Jill Timm, Chief Financial Officer · 2026-08-26 – a windfall that funded a roughly $100 million benefit to cost of goods sold and gave management the confidence to reinvest in value and inventory. This is not just a one-off bump. The refunds – part of a global theme across many retailers this quarter – are being used strategically. CFO Jill Timm noted, “We are deploying this capital to uphold our commitment to value while simultaneously strengthening our inventory position to support our opening price point brands.” — Jill Timm, Chief Financial Officer · 2026-08-26 That renewed focus on proprietary brands is paying off: proprietary brand sales rose 3%, and the company is investing in inventory depth to improve in-stock positions. The operating margin, while still just 1.5% on a trailing basis, is up from the mid-single-digit depths of 2023, and the trajectory is what matters.

Balance sheet and capital returns

Perhaps the clearest signal of a turnaround is the balance sheet. Cash and equivalents reached $821 million, with no borrowings on the ABL facility. That allowed management to make a long-awaited move: resuming share repurchases after a three-year hiatus.

driven by our strong balance sheet and the confidence in our path forward, we are pleased to increase our capital returns to our shareholders. Under our existing $3 billion Board authorization, we are resuming our share repurchase program with plans to buy back approximately $100 million in stock in 2026.
Jill Timm, Chief Financial Officer · 2026-08-26

This is the first buyback since 2022, and it signals that the company believes the worst is behind it. The effective net cash position also improved year-over-year, with debt at its lowest level since 2007. Free cash flow guidance of roughly $600 million for the year – after capex – gives ample room to fund buybacks and dividends. Prior quarters hinted at this inflection. In the May 2026 call, CFO Jill Timm had already pointed to cost discipline as a durable advantage: “We have a history, I think, of managing our business with good cost discipline.” — Jill Timm, Chief Financial Officer · 2025-11-25 And in the November 2025 call, Michael Bender had laid out the path to growth: “We've shown in October ... we have the ability to get to a positive growth trajectory.” — Michael Bender, Chief Executive Officer · 2025-11-25 That trajectory is now becoming visible in the numbers.

Riding the tariff refund wave

Kohl's is not alone in benefiting from tariff refunds – the theme appears across recent earnings calls from companies like A, ANF, and BBWI. But Kohl's is using the windfall more aggressively than most, investing it directly into small electrics and home decor, categories that had been constrained last year. "We anticipate further opportunity in this category in the back half of the year as we have strong receipt flow this year after being limited in our buys last year due to tariff pressures," Bender explained. The stock has responded, up 26.7% over the last 90 days, though it remains a far cry from its 2018 peak. The risk is that these refunds are non-recurring – management's guidance excludes any future refunds – and the underlying consumer remains under pressure. But for now, Kohl's has bought itself time, capital, and a reason for investors to revisit the story.