Macy’s Inc. (M Quick QuoteM - Free Report) came up with the fourth straight quarter of positive earnings surprise, as it reported second-quarter fiscal 2016 results. The company posted adjusted earnings of 54 cents a share that beat the Zacks Consensus Estimate of 40 cents. This Cincinnati, OH-based company generated net sales of $5,866 million that also surpassed the Zacks Consensus Estimate of $5,749 million.

Macy’s pointed that favorable weather, promotional events, marginal reduction in tourist spending, and ‘Black Friday in July’ event positively impacted the quarter. Shares of this Zacks Rank #3 (Hold) company surged roughly 14% during pre-market trading hours.

However, management failed to check the decline in the bottom line that fell 15.6% year over year following a 28.6% drop in the preceding quarter. Second-quarter earnings were hurt by a 3.9% decline in the top line and subdued margins. Comparable sales (comps) on an owned plus licensed basis dipped 2%, while on an owned basis comparable sales fell 2.6%.

In an attempt to augment sales, profitability and cash flows, the company has been taking steps such as cost containment, integration of operations as well as developing its eCommerce business and Macy’s Backstage off-price business, along with the expansion of Bluemercury and online order fulfillment centers.

Moreover, as a part of store rationalization program, the company plans to shut down nearly 100 Macy’s full-line stores to focus on better performing locations. The company is planning to close most of the stores in the early part of 2017. These are seen as a part of the company’s endeavors to better withstand competitive pressure from both brick-and-mortar discount stores and online retailers, such as Amazon.com, Inc. (AMZN Quick QuoteAMZN - Free Report) .

Coming back to results, gross profit in the quarter declined 3.8% year over year to $2,398 million, whereas gross profit margin remained flat at 40.9%. Adjusted operating income plunged 14.7% to $372 million, while adjusted operating margin shriveled 70 basis points to 6.4%.

Store Update

During the quarter under review, the company opened 7 Bluemercury freestanding specialty outlets. In the fall season, stores scheduled for openings include a Macy’s in Kapolei, HI, one Macy’s Backstage freestanding store in San Antonio, one Bloomingdale's Outlet in Orange, CA, and 10 additional Bluemercury freestanding specialty outlets.

The company opened 8 Macy’s Backstage and 7 Bluemercury shops inside Macy’s stores in the quarter, and plans to open additional 5 in-store Macy’s Backstage and 7 in-store Bluemercury shops in the fall season. In the third quarter, Macy’s is shuttering outlets in North Hollywood, CA, and West Valley City, UT.

Other Financial Aspects

Macy’s ended the quarter with cash and cash equivalents of $1,000 million, long-term debt of $6,688 million, and shareholders’ equity of $4,046 million, excluding non-controlling interest of $4 million.

During the quarter, the company did not buyback any shares. The company suspended its buyback program following the first quarter results, and expects to recommence the same in the second half of 2016, only if the current sales trends sustain. As of Jul 30, 2016, the company still had $1.9 billion remaining under its share buyback program.

Guidance

Macy’s continues to project comps on an owned plus licensed basis to decline in the band of 3–4% during fiscal 2016, while on an owned basis, comps are expected to be roughly 50 basis points below. Management also reiterated its fiscal 2016 earnings guidance of $3.15–$3.40 per share. The current Zacks Consensus Estimate now stands at $3.25.

Other Stocks to Consider

Better-ranked stocks in the retail sector include American Eagle Outfitters, Inc. (AEO Quick QuoteAEO - Free Report) and The Children's Place, Inc. (PLCE Quick QuotePLCE - Free Report) both carrying a Zacks Rank #2 (Buy).

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>