(Department store earnings roundup updated with Saks and Nordstrom third-quarter results)

NEW YORK (TheStreet) -- Department stores were in focus this week, as several key players reported third-quarter earnings results.

Overall, profits came in better-than-expected, but for some department stores investors fear an increase in discounting is eating into gross margins.

Of course, the focus is on the upcoming holiday season, and department stores are already gearing up to compete with big-box retailers, attempting to go head-to-head with the likes of

Wal-Mart

(WMT) - Get Report

and

Target

(TGT) - Get Report

.

Black Friday Department Store Stocks

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Several companies, including J.C. Penney, Sears, Macy's and Kohl's, have turned to

pre-Black Friday sales

to capture market share.

Third-quarter results for the most part are so far promising for the fourth quarter.

Here's a look at how department stores stacked up.

Sears

Sears

(SHLD)

nearly doubled its loss in the third-quarter, as sales for apparel and appliances weakened.

During the quarter the department store lost $218 million, or $1.98 a share, compared with a loss of $127 million, or $1.09 a share. Analysts were calling for a much smaller loss of $1.08 a share.

This is Sears' fifth quarterly loss since the recession began.

Revenue declined 5% to $9.68 billion, also short of Wall Street's forecast of $9.89 billion, while same-store sales fell 4.8%. By division, Sears namesake stores posted an 8.2% plunge in comparable sales, while Kmart saw a slight 0.7% slip.

Gross profit margin also edged down to 26.4% in the quarter from 27.2% a year ago.

Appliance sales have declined considerably since the federal tax credits expired, but Sears saw most of its weakness in October. At the same time, rivals like

Home Depot

(HD) - Get Report

and

Lowe's

(LOW) - Get Report

experienced a boost in sales.

Kmart has been the savior for Sears, but even its business remains lackluster up against some other discounters.

Sears is hoping to regain some of its sale during the holiday season, with plans to open for the first time on Thanksgiving Day. The company has already been offering discounts throughout November at its namesake stores and Kmart chain.

Of course, every other retailer is also stepping up its game, which will make it hard for Sears to see a rebound in the fourth quarter.

Saks

Saks

(SKS)

is yet another example of how the retail recovery is, in fact, taking place from the top down.

The high-end department store reported significantly higher profit, earning $36.3 million, or 20 cents a share, compared with $6.3 million, or 4 cents, in the year-ago period. Excluding items, Saks actually earned 6 cents a share, better than the 3 cents analysts predicted.

Saks sales grew 4.3% to $658.8 million, while same-store sales shot up 5.7%. Gross margin widened to 42.6% from 40.3% from more full-price selling.

Looking ahead to the holiday season, Saks is expecting fourth-quarter sales to grow in the mid-single-digit range.

Saks CEO Steve Sadove told

TheStreet

that Saks' core customer is tied to the performance of Wall Street, and while he believes trends are strong going forward, he is not "euphoric" on the overall economy.

Click here to listen to Sadove discuss his outlook on the high-end consumer.

In an effort to boost profit and reduce costs, Saks shuttered six of its Fifth Avenue stores this year, while opening more of its discount outlet locations.

Saks is also weaning itself off discounts, reducing promotions by about 30% during the first-half of the year, Sadove says. During its Friends and Family event this year it reduced its discounts from 25% off to 20% and excluded some brands.

This recovery has caught the attention of investors, and last month Italian businessman Diego Della Valle raised his stake in Saks to 19%. This prompted yet another flurry of takeover speculation. Sadove declined to comment on the rumors.

Nordstrom

Nordstrom

(JWN) - Get Report

is either not giving itself enough credit, or the market is overly optimistic.

In its third-quarter, the upscale department store earned $119 million, or 53 cents a share, a 43% surge from $83 million, or 38 cents, in the year prior. Revenue grew 11.2% to $2.18 billion from $1.96 billion, while same-store sales grew 5.8%.

Analysts were calling for a profit of 51 cents a share on revenue of $2.07 billion.

"Nordstrom's fresh and appealing merchandise, excellent customer service and ease of multi-channel shopping are contributing to strong sales and greater full-price selling than last year despite the tough economic environment," Stifel Nicolaus analyst Richard Jaffe, wrote in a note.

Still, Nordstrom provided full-year guidance that disappointed Wall Street. The company now predicts 2010 earnings in the range of $2.60 to $2.65 a share, from prior outlook of $2.50 to $2.65. Analysts are calling for earnings of $2.64 a share.

Management expects same-store sales will gain 6% for the full year and its gross margin profit will rise between 1 and 1.5 percentage points.

The company has had some trouble with its discount outlet Nordstrom Rack, which reported an 18% jump in sales in the quarter to $65 million, but same-store sales fell 2.2%. Management did not provide any indication as to when comparable sales at Rack will turn positive.

"We do not anticipate any meaningful change in overall consumer spending over the near term," Chief Financial Officer Michael Koppel on a call to Wall Street.

But most are still certain the stock is a buy.

"We believe the company is being very conservative with their sales guidance considering its impeccable performance to date," wrote analyst Jennifer Black, of the firm bearing her name.

J.C. Penney

J.C. Penney

(JCP) - Get Report

failed to impress investors, as increased discounting led to a decline in margins.

During the quarter, J.C. Penney earned $44 million, or 19 cents a share, a 63% jump from $27 million, or 11 cents, last year. Analysts were calling for a profit of 17 cents a share.

Gross margin fell to 39% from 40.6%.

Sales edged up 0.2% to $4.19 billion, while same-store sales grew 1.9%.

Looking ahead, J.C. Penney forecasts fourth-quarter earnings in the range of 90 cents to $1 a share, on revenue growth of 1.5% to 2.5%. Management expects same-store sales to increase between 3% and 4%. Analysts are calling for a profit of 94 cents on revenue of $5.64 billion, which would be a 2% uptick.

J.C. Penney has been trying to reinvent itself, with new exclusive brand introductions like

Liz Claiborne

( LIZ) and MNG by Mango, as well as its Sephora shop.

The company announced on Thursday that it's launching two online platforms this summer, which it expects will boost sales. The new divisions -- CLAD, an online menswear retail outlet, and Gifting Grace, a Web site offering year-round gift ideas to female shoppers -- will operate separately from its core business.

J.C. Penney caught activist investor William Ackman's attention in October, as the hedge fund manager of

Pershing Square Capital Management

purchased a 16.6% stake in the company. This makes Ackman J.C. Penney's largest shareholder, surpassing

Vornado Realty

, which owns 9.9% of shares.

Ackman's move incited J.C. Penney to adopt a shareholder rights plan to protect against a hostile takeover. The poison pill will last one year, and dilute Pershing or Vornado's stake if either attempt to acquire more shares.

Dillard's

Dillard's

(DDS) - Get Report

stock is surging, reaching a new high Friday morning, after the department store reported an 80% surge in third-quarter profit.

During the quarter, Dillard's earned $14.4 million, or 22 cents a share, compared with $8 million, or 11 cents, in the year-ago period.

The company attributed the significant boost in profit to lower advertising, selling, administrative and general expenses to $398.5 million from $402.1 million. Inventory at stores opened at least a year also slipped 2%. As a result, Dillard's saw a 1.5 percentage point increase in gross margins.

Revenue slipped 1% to $1.37 billion from $1.39 billion.

Shares of Dillard's are spiking 11.3% to $31.25 in afternoon trading.

Kohl's

Kohl's

(KSS) - Get Report

quarterly results weren't much to write home about, but its announcement of a buyback program and new store openings caught investors' attention.

During the quarter, income remained flat at $194 million, or 63 cents a share, in-line with analysts' estimates. Revenue rose 4.2% to $4.22 billion, while same-store sales rose 1.8%.

Earlier in the month, management said its third-quarter results would come in at the low end of its guidance due to errors in its accounting for leased properties. It originally said this charge would be about $25 million, or 5 cents a share, but now expects it to be as high as $75 million, or 15 cents. The errors occurred over a number of years, but the charge will not impact previously reported quarters.

Kohl's reiterated its fourth-quarter guidance in the range of $1.51 to $1.59 a share and foresees same-store sales will rise between 2% and 4% during the holiday season.

The value-priced department store said it entered into an agreement to buy back $1 billion of its common stock on an accelerated basis. The buyback could add a few pennies to the fourth quarter and about 23 cents a share on an annualized basis, Jeffries & Co. analyst Daniel Binder, wrote in a note.

Kohl's also said it will accelerate the opening of new stores, with plans to roll out 40 locations in 2011, compared with prior estimates of 30 new stores.

Many of these locations will be smaller-format -- about 64,000 square feet compared with 90,000 -- which Kohl's will be testing in urban markets. One of these stores will open in Edgewater, N.J. next year. Currently, about 100 of Kohl's stores are in the smaller format.

Kohl's cited the ramp up in store openings to more favorable conditions and the availability of commercial real estate.

Macy's

Macy's

(M) - Get Report

continues to be the standout of the department-store sector.

The company swung into profit in its third-quarter from a loss last year, as sales rose. During the quarter, Macy's earned $10 million, or 2 cents a share, compared with a loss of $35 million, or 8 cents, in the year-ago period. Excluding items, the department store actually earned 8 cents a share, better than the 3 cents analysts expected.

Macy's sales grew 6.5% to $5.62 billion from $5.27 billion last year, while same-store sales rose 3.9%. Analysts were calling for revenue of $5.55 billion.

Last week, Macy's upped its outlook for the second-half of the year, and now expects earnings between $1.50 and $1.55 a share, from a prior outlook of $1.45 to $1.50 a share. For the year, Macy's is calling for a profit of between $1.94 and $1.99 a share, compared with a previous outlook of $1.89 to $1.94 a share.

--Written by Jeanine Poggi in New York.

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