Dive Brief:

• Macy's on Wednesday reported first quarter net sales of $5.54 billion, a 3.6% increase over the year-ago period, according to a company press release. Comparable sales rose 3.9% in Q1, Macy's said. The department store retailer's operating income increased nearly 8.7% year over year to $238 million, or about 4.3% of sales. Net income nearly doubled, to $139 million in Q1 from $78 million in the year-ago period.
• The company's stock rose nearly 10% in premarket trading as Macy's blew away many estimates. The retailer's comps were more than three percentage points higher than the FactSet consensus of 0.7%, cited by MarketWatch, and top-line sales were more than $10 million higher than the FactSet consensus of $5.43 billion. At 48 cents, the company's earnings per share were 12 cents higher than the FactSet consensus of 36 cents.
• During the quarter, Macy's also made $24 million in gains on real estate sales and spent $19 million winding down Macy's China. "The company has come to a mutual agreement to end the joint venture with Fung Retailing Limited," the company said in its release, adding that Macy's would remain active on Alibaba's TMall.

Dive Insight:

Macy's this week had a firm answer to some of the gloom on Wall Street around the company and the department store sector as a whole.

Macy's Chairman and CEO Jeff Gennette said in a statement Wednesday that the retailer performed well across all three of its nameplates: Macy's, Bloomingdale's and Bluemercury. "We are maintaining a healthy inventory position, which helped us deliver improved gross margin," he said. "The winning formula for [Macy's] is a healthy brick-and-mortar business, robust e-commerce and a great mobile experience."

He added that the retailer had double-digit growth in its digital business in Q1 and that "our best customer is responding well to the improvements" made in Macy's stores and digital platforms.

Gennette's projected optimism wasn't just rhetorical. The company also raised its earnings guidance for 2018 by 20 cents per share, to between $3.75 and $3.95.

The sunny earnings report follows a week where some analysts voiced pessimism about the sector. Morgan Stanley analysts downgraded Macy's stock last week, writing, "While Macy's has proactively closed stores, ongoing negative store-only comps lead us to question if it is closing them fast enough."

Deutsche Bank analysts also hit a sour note on the sector, writing in a report last week that department stores may already be overvalued by investors, as the "fundamental upside is limited" for the sector. Both reports took a toll on Macy's stock price.

But, for now, Macy's turnaround efforts appear to be bearing fruit as they continue into 2018. In recent weeks, the company acquired the retail concept Story, an acquisition that brought with it a much-talked-about innovator in founder Rachel Shechtman, and also announced it has broadened its loyalty program beyond credit card holders and expanded its off-price Backstage business.

But even as the company posts winning numbers in Q1, there are still unanswered questions hanging over the retailer in the long run.

Neil Saunders, managing director of GlobalData Retail, pointed out in comments emailed to Retail Dive that Macy's in Q1 moved up its popular Friends and Family promotion (which previously came in the second quarter), and was also posting comps that compared favorably to an abysmal sales period in Q1 2017. Further, it has been operating in a friendly economy environment, marked by strong consumer sentiment and spending, he said.

"The future danger is that many of these dynamics will not hold as Macy's moves through the fiscal year," Saunders said, adding that "that performance may well deteriorate" if conditions change. While the company's loyalty program and omnichannel capabilities are strong, Saunders said Macy's still has nagging issues, among them "a store experience that leaves a lot to be desired and many locations where traffic is likely to decline over the medium term. On top of all of this, competition remains tough."