2nd UPDATE: Macy's 1Q Net Soars As Company Drives Market Share Gains

Macy's Inc.'s (M) fiscal first-quarter earnings rose sharply as the department store continued its drive to gain market share through initiatives including tailoring offerings to local tastes and offering more exclusive merchandise.

The retailer also said it isn't that worried about impact to its business from higher costs as it has run some tests of higher prices and generally seen little resistance.

While the matter is "challenging" and time consuming, "I think the concerns about price inflation have been overstated," Macy's Chief Financial Officer Karen Hoguet told analysts during a conference call.

Still, Hoguet indicated that gross margin will likely be flat this year because of higher costs. "There are so many good things happening that would lead you to believe the margin should go up, but given what's happening with cost inflation I just don't think we can commit to it so I think flattish for the year is still the right answer," Hoguet said.

The comments came after Macy's posted its best first quarter earnings since merging with May Department Stores Co. in 2005.

The retailer's local approach to selling is jelling with compelling mixes of its own brands, exclusive lines and name brands.

While continuing initiatives like expanding its Internet operation, Macy's is also taking steps like broadening its youth-oriented offerings, investing in new businesses like outdoor furniture, and starting to use Apple Inc.'s (AAPL) iPad tablet computers in stores.

"The momentum...is building and bodes very well for our future," Hoguet said.

Macy's results set a high bar for competitors Kohl's Corp. (KSS) and J.C. Penney Co. (JCP) that report later this week and early next week. Major department stores are in the midst of jockeying for consumers who have become more selective and potentially scarce amid higher gasoline prices and greater costs for apparel as the year progresses because of higher cotton prices.

Macy's said its first quarter benefited from strong sales, margin and expense management, better credit performance and lower interest expense. The company raised its full-year guidance while doubling its dividend.

The showing sent shares up 8.4% Wednesday to $28.53, a nearly three-and-a-half-year high.

The first quarter results "will be a critical catalyst for the stock price since they support the view that current strategies at Macy's are still in the early, and not latter, stages of delivering results," Morgan Stanley analyst Michelle Clark said.

"We are still in the early innings of implementation of our current strategies," Chief Executive Terry Lundgren said. "We also are developing and testing a wide range of new ideas and innovations that will allow us to evolve with our customers and continue to improve our performance."

For the quarter ended April 30, Macy's reported a profit of $131 million, or 30 cents a share, up from $23 million, or 5 cents a share, a year earlier. The year-ago quarter included debt-repurchase costs of 4 cents a share. Sales rose 5.7% to $5.89 billion.

Analysts polled by Thomson Reuters had most recently forecast earnings of 18 cents a share on revenue of $5.86 billion.

Gross margin slipped to 39.1% from 39.4%.

Same-store sales rose 5.4% while online sales were up 38%. Online sales positively affected the company's same-store sales by 1.3 percentage points in the first quarter.

The company expects full-year earnings of $2.40 to $2.45 a share on a 4.3% same-store sales increase, up from its February forecast of $2.25 to $2.30 on a 3% same-store sales increase.

Macy's also raised its quarterly dividend to 10 cents from 5 cents, which will cost an additional $86 million a year.

-By Karen Talley, Dow Jones Newswires; 212-416-2196; karen.talley@dowjones.com

--Melodie Warner contributed to this report

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