Prepared remarks
Thank you for being here, and welcome to Kohl's Corporation Second Quarter 2025 Earnings Conference Call. Now, I would like to hand the call over to Trevor Novotny, Director of Investor Relations. Please proceed.
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 So if you are listening to a replay of this call, it is possible that the information discussed is no longer current, and Kohl's undertakes no obligation to update such information.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 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 three 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 is overrepresented 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 deliver our goal of creating a $2 billion beauty business. The partnership continues to draw a new younger customer with over one-third 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 in our proprietary brands, we have continued to make progressive improvements 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 three 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 customers. 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 of 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 for 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 three 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.
Questions and answers
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. We've discussed the need to reinvest in our proprietary brands, and while our inventory is down, it is well-managed. We've shifted our focus to these proprietary brands, which has driven momentum. For instance, Women's is our most penetrated brand and has the greatest exposure to proprietary brands. This investment is resonating with customers and has led to significant improvements in that business as the quarter progressed. I believe we can build on this momentum in the latter half of the year. Additionally, as Michael mentioned, value is crucial. Customers have not fully experienced the effects of some price changes we've talked about. As we head into the second half of the year, we must continue to provide value. Proprietary brands play a part in this, as does our approach to coupon eligibility, which we adjusted at the end of Q1 for many brands. We made changes for over 50 brands just in August. We believe we are well-positioned to deliver the value that will be increasingly important to customers, especially during the holiday season.
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 two. 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 on 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, can you update us on the progress of adding brands back to the coupon? How many brands have been reintroduced and how many more are planned? You mentioned adding 50. When the brands and coupons are restored, how quickly are consumers reacting to these changes 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 IZOD and Hurley and Champion. And then this round, we did this with about 50 brands, mainly in the lighting category, some candle brands, and a lot of digitally native brands that we had as well. And I think we feel good that for the year, we've made the moves we're going to make, and we'll continue to watch what that looks like and see how the customer does react to it. What we do see is an immediate impact to the digital business. And I think that was one of the key drivers for digital outperforming stores in the quarter. As expected, it's very pricing transparent. They can see that value immediately. So we did see a nice pop there. The stores, as the quarter progressed, had improved in those categories as well. But we are making some changes. We're going to have more signage to really notify the customer that it now has coupon eligibility.
So you're going to see more graphics. We're doing some associate training as well so they can help highlight it to the customer. So we do expect that the coupons in store will continue to be a driver in the back half of the year. We are seeing that it does actually benefit our core customer the most. We know that they're mainly the high coupon-sensitive customer. And so as we brought that back, we are seeing them reengage with us. The good news is they hadn't lapsed. They were shopping. They were just giving us less of their share of wallet and fewer of their trips. So this was one of the moments that we had an opportunity to reengage them, and we are seeing that, but the most immediate impact was through the digital channel.
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, and 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 discuss the comparable metrics in more detail, perhaps explaining the drivers such as transactions versus ticket within ticket, average unit retail, and units per transaction? As the quarter progressed, which of these metrics contributed to the improvement as you entered July? Additionally, how do you anticipate the drivers will change in the second half regarding traffic versus transactions versus ticket? Lastly, could you address the impact of tariffs, detailing what you have observed so far and what you expect for the second half? How much of this is already accounted for, and will there be any carryover into next year?
Jill, do you want to take the first, and I'll take a crack at the second.
Sure. The main factor affecting our performance was traffic. We're observing a trade-off for our customers between average ticket size and units per transaction. While our average transaction value remains relatively stable and may have decreased slightly, the focus is on traffic. As we discussed improvements, it became clear that these were driven by increased traffic as the quarter progressed. Our goal is to attract customers back in, particularly those interested in jewelry and petites, which are unique offerings for us. By re-engaging these customers, we are starting to recover their visits. The key challenge is how we continue to draw them in. Retaining our core customers, who have not been performing well, remains a top priority, with numerous initiatives aimed at driving traffic back to us since we lost those visits and customers have sought alternatives for jewelry and petites. Reintroducing them is showing positive responses, but the emphasis is definitely on increasing traffic.
Paul, regarding the second part of your question about global trade policy, there are a few important points to consider. As we mentioned in our previous earnings call, we have an outstanding merchant team, sourcing team, and finance team led by Jill, all working diligently throughout the year to quickly evaluate the impact of any upcoming changes. Our diversified sourcing strategy means we are not overly dependent on any single country, giving us the flexibility to shift production as needed. We are also engaging with our vendors and suppliers to negotiate tariffs once we receive clear information, ensuring we can continue providing value to our customers. Additionally, we are assessing our proprietary brands to maintain cost efficiency in line with the value we aim to deliver. We are adjusting our purchases based on elasticity, utilizing our modeling to assess the potential impacts of price increases on volume, enabling us to adapt our buying strategy.
This situation remains fluid due to ongoing uncertainties, which is why, as Jill mentioned regarding our margin guidance, we are allowing ourselves the necessary flexibility to adapt as we gain more clarity from global trade discussions. On pricing, we are focusing on proprietary brands that offer a mix benefit through higher margins and will remain vigilant in monitoring our competition to maintain price competitiveness. As for national brands, we align with our partners, ensuring we are not at a disadvantage since everyone is subject to the same pricing. This is our approach to the current situation, and we feel confident about our position, as reflected in our guidance.
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.
We have many exciting initiatives coming up. A straightforward yet challenging question is what you believe it takes to achieve positive comparable sales and timing. In that context, could you rank these initiatives based on their potential impact on revenue growth and comparable sales, as well as the timeframe for achieving them, distinguishing between those that are easier and those that are more difficult?
Oliver, I'll take a crack at it first. And again, Jill, please 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.
I agree. Some of the category changes we've implemented are quick wins, and we're focused on investing back into our proprietary brands. Although it has taken some time, we finished last year, particularly in the third quarter, with significant declines. Our inventory in proprietary brands is still down compared to two years ago, but it has improved compared to last year. This progress may lead to immediate impacts, especially in the latter half of the year. In key growth areas like Sephora and our impulse queuing lines, we have added 300 new stores since Q2 and expect another 300 in Q3, which contributes positively to our sales. We're seeing success with new items in these categories, including novelty cleaning products. Michael and I walked through new offerings with our merchants, and it’s exciting to see such innovation at Kohl's in a new category. These efforts should yield immediate results.
Long-term, we need to solidify the value we offer to both new and existing customers while also focusing on our core customer base, ensuring they recognize the value we've provided in the past. This will take more time. On a positive note, we achieved flat comparable sales in July, which is encouraging as we build momentum for the second half. However, we are aware of the uncertainties in the macro environment, particularly affecting middle and lower-income consumers. We're prepared to compete for every dollar in the latter half of the year.
I would like to emphasize that one of the long-term impacts on the business will be our commitment to listening to customers and understanding their interest in a more curated assortment at Kohl's. This will provide them with inspiration regarding what we offer in our stores. Over time, you'll notice changes in our stores, such as the reintroduction of mannequins to display outfits rather than just individual items on racks, which will enhance the shopping experience by introducing new elements while also ensuring we maintain the trip assurance we discussed earlier. We have a variety of initiatives underway, some aimed at delivering immediate benefits, but ultimately, we recognize that achieving growth is our main goal moving forward.
Okay. We've been on this journey for a while now. What makes this time different with private label and value? Jill, you've noted that customers have been focused on value for a long time. Also, do you plan to keep the racetrack? It seems like you're making customer-centric changes physically. Sometimes small adjustments can lead to unexpected risks, so I would appreciate any additional insights on that. Lastly, are there specific product categories that are underperforming or have significant improvement opportunities? Are women's dresses or juniors among those?
I'll start and let Michael add in as well. Regarding proprietary brands, we've closely monitored this area. Historically, Kohl's has fluctuated between over 50% and under 30% in proprietary brands based on customer preferences. In recent years, we deviated from this approach by replacing some proprietary brands with market brands, which did not resonate with our customers who had grown fond of specific styles, fits, and value offered by our proprietary brands. The market brands lacked familiarity, were not competitively priced, and often weren't eligible for coupons. As a result, we lost touch with our customers' desires, and our sales reflected that. Now, as we reintroduce these categories, we're being deliberate about listening to our customers and curating an edited assortment. We will focus on key essentials that customers expect from Kohl's, like the SO brand, which they appreciate for its depth and value.
Additionally, we want to enhance our fashion offerings thoughtfully to introduce more newness. Over time, we've broadened our portfolio of proprietary brands and are confident in the choices we're backing. For instance, our juniors segment is currently undergoing significant changes by moving away from many market brands and refocusing on SO, which has proven successful. We're also revamping our denim offerings in the Sonoma line based on customer preferences. We're careful to avoid disappointment by ensuring depth in our offerings instead of a wide array of choices without substance. I'm optimistic about how we're approaching the reintroduction of proprietary brands and reinforcing the core brands our customers value, using them as entry points to deliver greater value through a well-curated mix of basics and fashion. While we're committed to enhancing our dress offerings, we've recognized the need to adjust our strategy there as we may have overextended.
We're repositioning that space for more productive items, as evidenced by the success of brands like Lauren Conrad and Nine West. In parallel, we see significant potential in our kids' business, which has been underperforming. We plan to focus on pricing strategies to strengthen this segment. Women’s clothing is on an upward trend, and our home category has seen promising growth with new brands, especially in soft home and bedding. Overall, I believe kids represent the biggest opportunity for improvement within our business.
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 two 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.
And that concludes our question-and-answer session and also concludes today's conference call. Thank you for your participation, and you may now disconnect.