Episode Details

Kohl's Corporation (KSS) Q2 FY2026 — Shares gapped 5.8% lower at the open on the print, were marked 9.4% down intraday, then turned and closed +1.47% at $17.94 - and three sessions later they sit at $17.50, -1.02% against the pre-print close. Kohl's raised its full-year adjusted EPS guidance by $0.80 at BOTH ends of the range, restarted its buyback, and reported a 303 bp gross margin expansion. Approximately $150M of tariff refunds landed in the quarter, of which approximately $100M ran through gross margin - that alone is 301 basis points on $3.3B of net sales, or 99% of the entire improvement in the rate. Strip it out and operating income is $161M, the identical figure Kohl's posted as ADJUSTED operating income a year ago, and the gross margin rate is 39.9% against 39.9%. The raised full-year guide implies $0.62 to $1.22 for the second half against $1.18 delivered last year - -22.0% at the midpoint. We rate KSS a HOLD at a fair value of $20.68 against $17.50. THE CALL: HOLD (3/5, MODERATE) — base-case value ~$20.68 vs ~$17.5 today. KEY METRICS: - Net sales $3.318B, -0.9% YoY; comparable sales -0.9% - a small MISS vs the $3.323B estimate - Diluted EPS $1.28 vs a $0.583 consensus - a beat of $0.70. No adjusting items, so GAAP = adjusted - Tariff refunds of ~$150M received; ~$100M flowed through gross margin (company disclosed) - That $100M is 301 bp on net sales - 99% of the ENTIRE gross margin expansion - Ex-refund gross margin 39.9% vs 39.9% a year ago - flat within 2 bp - Operating income $261M reported; $161M ex-refund vs $161M ADJUSTED a year ago - identical - Refund is worth $0.65 to $0.97 per diluted share after tax - the beat was $0.70 - FY2026 adjusted EPS guide raised to $1.80-$2.40 from $1.00-$1.60: $0.80 at BOTH ends - Operating margin guide 3.5%-4.0% from 2.8%-3.4% = $100M more operating income vs a $100M refund - Remove the raise and the midpoint is $1.30 - exactly the OLD midpoint of $1.30 - Implied 2H EPS $0.62-$1.22 vs $1.18 delivered in 2H last year: -22.0% at the midpoint - Buyback restarted at $100M for 2026 under a $3.0B authorization; dividend costs $57M/yr - Those two together are $157M - versus a $150M refund cheque - Net debt $504M from $1,421M; cash $821M from $174M; revolver at zero - Depreciation $700M/yr vs guided capex $375M - spending is 54% of the charge - Normalized levered FCF $409M (20.6% yield); on a maintenance basis $84M (4.2%) - Fair value $20.68: DCF $20.56, 4.5x EV/EBITDA $21.25, 0.55x book $20.22 - all above the $17.50 close - Bear $13.47 to bull $34.29 - a 2.55x range; Street median $16.50 is BELOW the price What to watch: Second-half adjusted EPS clearing the $1.18 delivered a year ago, the gross margin rate widening past 39.9% with no refund in it, or capital spending rising toward the $700M depreciation charge with cash flow held, would each break our thesis Also on YouTube: @ChargedAlpha DISCLAIMER: For informational and educational purposes only. Not financial advice. Do your own research before any investment decision.