What happened 

Shares of Dillard's Inc. (NYSE:DDS) were taking a spill after the department store chain issued its second-quarter earnings report this morning. Though the headline numbers actually beat analyst estimates, the stock still sold off, following a pattern set by Macy's yesterday as the market seems to be souring on department store stocks. 

Dillard's stock was down 14.3% as of 11:58 a.m. EDT.

A blurry image of dozens of shoppers going up and down an escalator inside a mall.

Image source: Getty Images.

So what 

Dillard's results themselves were decent as comparable sales ticked up 1%, and overall revenue increased 2% to $1.5 billion, topping estimates at $1.47 billion.

Gross margin also improved 163 basis points to 30.7% in the period, a sign that the business is getting more efficient. As a result, Dillard's pre-tax income improved 32%, and its bottom-line per-share loss narrowed from -$0.58 a year ago to -$0.10.  

CEO William T. Dillard II said, "While we are not happy with a loss for the quarter, our 32% improvement in year-to-date pre-tax income is a positive. We believe this reflects the continued strength of our customers and their interest in our merchandise selections, and it is encouraging as we head into the important back half of the year."

Now what

Dillard's did not issue guidance in its press release. Given the better-than-expected results, the sell-off is a little puzzling, but there are a number of different possible explanations behind it.

First, department store stocks have already run up considerably this year, and Dillard's is no exception. Prior to the sell-off over the last two days, the Arkansas-based department store chain had gained more than 50% this year, so investors may have been feeling that the sector was overbought. 

Also, overall retail sales have been so strong, up 6% over the last year, that 1% comparable sales growth looks relatively weak. Investors may be expecting sales to slide again once the economy weakens, especially for a retailer that just posted a quarterly loss. 

While Dillard's is still profitable on an annual basis, the market is likely to remain skeptical of the sector until department stores show they can fully adapt to the e-commerce era.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.