NEW YORK -- Macy's experienced a drop in both sales and profits during the first quarter as higher costs and financial challenges led to reduced consumer spending.

Despite the downturn, Tuesday's quarterly results surpassed Wall Street's expectations. Macy's, which also operates Bloomingdale's and Bluemercury, reported positive impacts from its turnaround strategies, including closing underperforming stores and upgrading others. Consequently, Macy's raised its annual outlook.

Consumers are still spending but are becoming more selective, often waiting for sales. Retailers, including Macy's, are noticing higher delinquency rates in their credit card businesses.

CEO Tony Spring, who took over in February, noted that all income groups are being more cautious with their spending. For instance, Bloomingdale's saw weaker sales in luxury handbags and shoes as consumers opt for less expensive options.

Spring highlighted that higher-income customers are prioritizing their passions and interests, while lower-income customers are increasingly focused on rent and family obligations.

"I expect the consumer to remain under pressure," Spring said during a call with industry analysts. "We have a big year ahead. Maybe there will be rate cuts, but it’s an uncertain environment, and we must not make assumptions about things beyond our control."

Macy's is accelerating the expansion of its new, small-format stores while closing underperforming locations. The company plans to open 30 small-format locations by fall 2025, nearly tripling its current count to around 42. Macy's believes these smaller stores offer more convenience. Meanwhile, it will close 150 unproductive stores over the next three years, with a third closing by the end of 2024.

Simultaneously, Macy's is upgrading its remaining 350 traditional stores, enhancing fitting areas and shoe departments with more salespeople and visual displays. The company is also focusing more on luxury sales, which have generally remained strong. Macy's plans to open 15 higher-end Bloomingdale's stores and 30 luxury Bluemercury cosmetics locations to cater to customers seeking premium goods and services.

For the quarter ending May 4, Macy's reported earnings of $62 million, or 22 cents per share, down from $155 million, or 56 cents per share, in the same period last year. Adjusted earnings were 27 cents per share, 11 cents above Wall Street expectations, according to FactSet.

Revenue fell 2.7% to $4.85 billion, still exceeding analyst projections of $4.82 billion. Comparable store sales, including online channels and established stores, decreased by 1.2%, excluding licensed businesses like cosmetics and third-party marketplaces. Macy's comparable sales fell by 1.6%, while Bluemercury's jumped 4.3% and Bloomingdale’s increased by 0.8%.

Macy's reported that its first 50 revamped traditional locations achieved a comparable sales gain of 3.3% in the quarter, excluding licensed and third-party businesses. Spring referred to these stores as the "leading indicator" of Macy's future business.

Quarterly credit card revenues declined by $45 million to $117 million, partly due to higher delinquency rates.

Facing pressure from investors to accelerate growth, Macy's appointed two independent directors to its board in April, backed by Arkhouse Management, temporarily ending the activist investor's push to replace most of the board and potentially acquire the department store chain.

Macy's shares fell less than a percent in early trading.

In addition to its restructuring efforts, Macy’s is heavily investing in technology to enhance its e-commerce platform. The company is upgrading its website and mobile app to provide a seamless shopping experience, aiming to capture a larger share of the growing online market. These technological improvements are expected to drive sales and improve customer satisfaction by offering more personalized and efficient services.

Macy's is also focusing on sustainability initiatives to appeal to environmentally conscious consumers. The retailer is increasing its assortment of sustainable products and implementing eco-friendly practices in its operations. These efforts are part of Macy's broader strategy to build a more resilient and forward-thinking business model in an increasingly competitive retail landscape.