Macy's (NYSE:M) made significant progress in its turnaround last year, posting comparable-store sales growth in all four quarters and returning to earnings growth. However, its sales and earnings momentum started to fade in the fourth quarter of fiscal 2018.

As a result, investors have become skeptical about its prospects over the past several months. Indeed, Macy's shares have lost more than a quarter of their value since the beginning of January and recently touched a 52-week low.

M Chart

Macy's year-to-date performance data by YCharts.

Fortunately, the retailer achieved better-than-expected results last quarter. That should give investors confidence that the company's turnaround plan remains on track. With the stock still trading for just seven times forward earnings, this could be a good opportunity for long-term investors to buy up shares of this iconic chain.

Solid first-quarter earnings in the face of headwinds

U.S. retail sales started the year on the wrong foot, but trends improved beginning in March. As a result, Macy's was able to log a sixth consecutive quarter of positive comps in its first fiscal quarter, which roughly lines up with the months of February, March, and April. Comps rose 0.7% -- including sales in licensed departments -- while total sales slipped to $5.5 billion from $5.54 billion a year earlier, due to store closures.

Adjusted earnings per share fell to $0.44 from $0.48 in the prior-year period, but this easily beat the analyst consensus of $0.33.

To be fair, Macy's benefited from a $19 million year-over-year increase in asset-sale gains last quarter (before tax), as well as a lower tax rate due to one-time items. Excluding asset sale gains and special items, operating income fell 31% to $161 million. That said, Macy's generates a small fraction of its annual profit in the first quarter, so modest fluctuations in profitability can have an outsized impact on its earnings, as seen last quarter.

Macy's also burned $302 million of cash in the first quarter, whereas it produced $132 million of free cash flow in the same period a year ago. CFO Paula Price attributed the cash flow decline to the timing of inventory purchases and capital expenditure payments. Still, investors should keep an eye on this aspect of Macy's performance in the quarters ahead.

The exterior of the Macy's flagship store in Manhattan

Macy's flagship store in Manhattan. The company posted better-than-expected earnings but weak cash flow last quarter. Image source: Macy's.

Digging into Macy's performance

Gross margin weakness drove most of Macy's margin deterioration last quarter. Part of this stemmed from the company ordering a little too much inventory for the first half of fiscal 2019. Nevertheless, its merchandise margin -- which measures how much it paid to acquire its inventory as a percentage of the selling price of that inventory -- was flat year over year.

Instead, the main headwind to gross margin was a perk introduced in late 2017 that allows Macy's best customers to receive free shipping with no minimum purchase for online orders. Management believes the increased shipping costs are a worthwhile investment to boost sales and improve customer loyalty.

Macy's also provided encouraging updates on some of its other growth initiatives. Last year, the company rolled out upgrades to 50 high-performing stores. Sales growth continued to accelerate at those locations last quarter, with comps gains roughly 4.5 percentage points ahead of similar stores that haven't been upgraded yet. That's a promising sign, given that Macy's plans to expand the Growth50 program to another 100 stores later this year.

Finally, the rollout of Backstage off-price shops within Macy's stores, the addition of online-only inventory shipped directly from vendors, improvements to the company's mobile apps, and an increased focus on Macy's strongest "destination" businesses are all contributing to sales improvement.

The outlook is fine -- for now

In conjunction with its earnings report, Macy's reaffirmed its full-year guidance. It continues to expect comps growth between 0% and 1%, which seems very achievable given that its first-quarter comps were in the upper half of that range despite a slow start to the year. If anything, the company could outperform its sales guidance if its growth initiatives pay off as expected.

Macy's also still expects full-year adjusted EPS between $3.05 and $3.25, including a roughly $0.25 benefit from asset sale gains. That would be down from $4.18 in fiscal 2018, which included a $0.92 benefit from asset sale gains. The guidance includes the potential impact of recently enacted tariffs, although CEO Jeff Gennette warned that if further tariffs are imposed later this year, they would have a bigger effect on Macy's business.

Management has been clear that 2019 will be another investment year for the business. However, it's encouraging that the company continues to post comps growth, despite some challenges in the external environment.

Over the next few years, Macy's growth initiatives should continue to gain steam -- despite the headwinds facing mall-focused retailers -- while its cost savings will gain traction. This will hopefully allow the company to achieve durable earnings growth. By contrast, Macy's stock is priced for earnings to keep falling in perpetuity. That presents an intriguing opportunity for investors. As Macy's returns to earnings growth, the stock could fly much higher.