Kohl’s has encountered consecutive quarterly declines in sales within its Sephora shop-in-shops, an issue projected to persist throughout the year. As a cornerstone of Kohl’s department store growth, Sephora has now become an area of concern for the retailer.
Financial Performance and Projections
On Wednesday, Kohl’s disclosed a slight decrease in Q2 net sales, which dipped by less than 1% year-on-year to $3.3 billion. Comparable store sales also mirrored this decline. Specifically, sales from Sephora at Kohl’s dropped by 4%, continuing a downward trend seen in Q1. The gross margin, however, experienced a significant improvement, rising by 305 basis points to 43%, buoyed by around $150 million in tariff refunds earmarked for inventory reduction, vendor payments, and price cuts. Despite these positives, net income saw a slight decrease, falling over 1% to $151 million.
Kohl’s has adjusted its financial outlook for the full year, now anticipating that net and comparable sales might remain flat or decrease by up to 1.5% compared to 2025 projections. This marks an optimistic revision from an earlier forecast which predicted a decline of up to 2%. The expected range for adjusted operating margin has been improved to 3.5% to 4%, from a prior estimate of 2.8% to 3.4%.
Challenges at Sephora
Once a booster for Kohl’s growth—accounting for approximately 10% of its topline—Sephora now seems to be contributing to sales declines, according to analysis by Fitch Ratings. Despite an 18-quarter streak of declining comparable store sales, Kohl’s recent performance is its strongest since Q3 2021, with private labels achieving 3% comp growth.
Kohl’s CEO, Michael Bender, attributes the Sephora downturn to a stagnation in product innovation and weakness in certain beauty subcategories. While fragrance, hair care, and makeup have performed well, skin care suffered a challenging quarter. Bender noted continued softness year-to-date as they aim to integrate new brands and combat competitive pressures from major brands’ expanded distribution.
Optimism Amidst Declining Sales
The broader beauty market in the U.S. remains robust, benefiting from the popularity of fragrances, skincare, and self-care products, as per Circana research. In the first half of the year, prestige beauty sales grew by 7% to surpass $17 billion, with mass retail beauty sales also climbing 7% to exceed $39 billion.
Despite current challenges, the prevailing strength of the beauty category is seen as a positive sign for Kohl’s future. Fitch Ratings’ Senior Director, David Silverman, expressed confidence that the beauty sector will continue to contribute to comparable sales, thanks to the inherent strength of the market and the ongoing benefits of the Sephora partnership.
Looking ahead to the holiday season, Sephora at Kohl’s plans to enhance its product range and engage customers with new merchandising strategies. This includes introducing holiday outposts in 130 locations and, by November, adding fragrance towers in 250 stores.
Reporting based on coverage first published by retaildive.com.