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Image Source: Dillard's. 

What happened

Shares of Dillard's, Inc. (NYSE:DDS) were climbing last month, up 17% according to S&P Global Market Intelligence as the company reported third-quarter results and rode a bullish wave in the department store sector. The chart below tells the tale.

DDS Chart

DDS data by YCharts

So what

Dillard's surged despite reporting weak results in its third-quarter report. Comparable sales dipped 4%, and overall revenue fell 4.5% to $1.41 billion, edging out expectations of $1.4 billion. On the bottom line, earnings per share compressed from $1.03 to $0.67, missing estimates at $0.77. 

CEO William Dillard II summed up the quarter, saying, "Our sales decline continued to weigh heavily on profitability during the third quarter. As we work through this tough time, we are focused on improving customer experience through attracting and maintaining premium brands while providing exceptional service."

Dillard's stock rose as a number of department store chains like Kohl's and Nordstrom reported better-than-expected results, and that was enough to turn industry sentiment bullish heading into the holiday season, as even stocks like J.C. Penney, which had a weak quarter, still rose.

Now what 

Dillard's has been spending aggressively on share buybacks, reducing its outstanding stock by 13% in the past year. That's helped prop up declining earnings per share, but the company may be better off using that money to invest in the business rather than returning it to shareholders. Dillard's had net income of just $22.8 million in the previous quarter, but repurchased $53.1 million of stock, a trend that is simply not sustainable, especially since it only has $80 million in cash on its balance sheet.

The holiday quarter is a big one for department stores, but I'd consider selling Dillard's after last month's gain as the sales slide is going to be hard to reverse and the company is throwing away much-needed cash on buybacks.

Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends Nordstrom. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.