Kohl's Sales Decline Moderates in 2025, but High Leverage and Leadership Risks Undercut Turnaround Progress

What happened

Kohl's reported a -1.7% comparable store sales decline in Q3 2025, its best result since 2021, indicating a potential stabilization in its business. The company updated its full-year guidance to a range of -2.5% to -3% comps, an improvement from initial expectations of -4% to -6%, suggesting management sees some traction in its strategies. This sales improvement is expected to bolster operating margins by reducing SG&A expenses as a percentage of revenue, offering a modest financial uplift. However, the DeepValue report highlights persistent challenges, including elevated leverage with a net debt to EBITDA ratio of 5.97x and interest coverage of only 1.85x, alongside leadership instability from recent CEO turnover. The turnaround relies on execution of initiatives like the Sephora partnership and owned brand relaunches, but these remain unproven at scale against ongoing off-price competition and soft discretionary demand.

Implication

The improved comp sales and guidance hint that Kohl's Sephora rollout and other initiatives may be gaining some momentum, potentially attracting new customers. However, the company's high leverage and thin interest coverage constrain financial flexibility, increasing vulnerability to further sales downturns. Leadership instability adds execution risk, complicating the delivery of cost savings and strategic milestones critical for the turnaround. Investors must closely monitor comp trends for sustained inflection, as consecutive positive quarters could upgrade the thesis, but deterioration would heighten sell pressures. Until leverage improves and management stabilizes, the stock's elevated valuation relative to a DCF base of $7.97 offers limited downside protection, warranting a wait-and-see approach.

Thesis delta

The slowing sales decline provides a glimmer of hope that Kohl's turnaround strategies are beginning to work, but it does not fundamentally shift the thesis due to persistent high leverage and leadership risks. The HOLD rating remains justified until more consistent positive comps and financial improvements are demonstrated, aligning with the report's watch items on comp inflection and deleveraging.