Sinking sales could lead to another sinking spell at department stores like Federated Department Stores ( FD).

The company, best known for running the Macy's and Bloomingdales chains, beat Wall Street's earnings expectations Wednesday. But sales were disappointing and the company warned that its top line would continue to be soft for the rest of the year. Other department store chains, such as May Department Stores ( MAY) and J.C. Penney ( JCP), have already said that only an increasing focus on inventory management and cost controls permitted them to hit recent earnings targets.

The group's weakening sales trends could further undercut investor interest in an already weak sector. Many observers say the outlook for the traditional department stores is bleak, considering the pallid economy and the inroads of upstarts such as Kohl's ( KSS) and giant discounters Wal-Mart ( WMT) and Target ( TGT). And as investors well know, gains from cost-cutting can't continue forever.

Federated shares were up 59 cents at $33.10. They're off about 19% on the year.

Cincinnati-based Federated reported earnings of 66 cents per share, up 4 cents from the Wall Street consensus estimate of 62 cents, according to Thomson Financial/First Call. This compares with earnings of 50 cents per share in the year-ago period. Sales were $3.49 billion, flat with a year ago and slightly less than what analysts had been projecting. Same-store sales, which measures activity in shops open at least a year, were down 2.8%.

"While we are disappointed with our sales, especially in recent weeks," said Karen Hoguet, CFO, in a conference call with investors, "we are pleased with our overall results."

The company lowered its guidance for same-store sales growth in the fall to 1% to 3%, from prior expectations of 3%-3.5%. Nevertheless, Federated maintained its earnings guidance. It still expects to report earnings of $2.45 to $2.65 for the remainder of the year, with earnings of 35 cents to 45 cents in the third quarter and $2.05 to $2.20 in the fourth.

Federated, like other department stores, has been trying to reinvent itself. Many observers of the retail scene say department stores are a dying concept, and most are trying to redesign their stores and cut costs. And while many sell-side analysts are recommending the stocks -- in part because they look cheap -- investors have held off, realizing that keeping earnings afloat through margin improvement can last only so long. Eventually, sales must improve.

But with signs that the consumer economy is deteriorating, that doesn't appear likely anytime soon. A number of earnings warnings, from apparel chains and also electronics giant Best Buy ( BBY), along with a drop in consumer confidence, have investors wary of the retail sector.

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