A closer look at the retail operations shows a 5 percent decline in comparable store sales. Consolidated gross margin for the same 13-week period fell to 39.1 percent of sales versus 40.4 percent a year ago. In comparison, the retailer managed to increase its retail gross margin in the first quarter despite a comparable-store decrease of 2 percent.

“The retail gross margin performance was essentially flat compared to the prior year second quarter in men’s apparel and accessories and decreased slightly in cosmetics and juniors’ and children’s apparel,” the company said. “Moderate gross margin decreases were noted in shoes, ladies’ accessories and lingerie, home and furniture, and ladies’ apparel.”

Dillard’s said that inventory levels were “essentially unchanged” at the end of the quarter versus year-ago levels. Dillard’s has made inventory control a priority for several years now.

“We are disappointed with our weak performance in the second quarter. While the consumer environment remained challenged, our expenses were up, squeezing our profitability,” the retailer’s CEO William T. Dillard, II, said. “We are working to address this. We ended the quarter with over $1 billion in cash and short-term investments.”

A look at the balance sheet showed consolidated operating expenses of $433.6 million for the quarter, or 29.1 percent of sales, versus $412.6 million or 26.3 percent of sales, in the year ago quarter. The company said the increase was due primarily to increased payroll expenses and that it is working to “better align expenses to sales performance.”

Dana Telsey, chief investment officer at Telsey Advisory Group, said the $4.59 in earnings per share for the quarter was “well below” the consensus forecast of $5.97. “Better-than-expected expense deleverage was not enough to offset greater gross margin pressure and a weaker topline,” she said.

UBS retail analyst Mauricio Serna has a “Sell” rating on shares of Dillard’s.

“We think structural market share losses against other retail channels with more appealing value propositions should pressure Dillard’s sales and margins,” he said. Serna added that despite relatively lean inventories. “we believe higher markdowns should incrementally pressure Dillard’s gross margin.”

Serna doesn’t think Dillard’s position is strong enough to gain share in the brick-and-mortar space. “We model higher online sales, but believe this growth will not offset declining store revenues,” he said.

Overall, Serna said the UBS outlook for department stores includes an expectation that the channel’s share loss will continue due a a “lack of a compelling value-for-money proposition to compete against other channels like online pureplay, off-price, and brands’ own stores and websites.”