Macy's Inc posted improved quarterly results on Wednesday as the department store operator benefited from a strong recovery in consumer spending and efforts to cater merchandise to local tastes.

Macy's also received a boost from tighter inventory management, which has reduced the need for profit-eating discounting, and strong cost control. These in turn raised the retailer's profit margins, which analysts said appeared to be sustainable.

They are doing a good job of keeping expenses under control, said Edward Jones analyst Matt Arnold.

Gross margins rose 1.3 percentage points to 39.4 percent, while selling and administrative costs as a percentage of sales fell 1.8 percentage points to 35.8 percent.

On a call with analysts, Chief Financial Officer Karen Hoguet said margins in the second quarter should also be up.

Hoguet also touted the retailer's My Macy's program that gives individual stores more leeway in choosing and ordering merchandise that caters to local tastes, which she said helped the chain's smaller stores have the strongest sales growth.

Inventory levels at the end of the quarter were down about 2 percent from a year ago and Hoguet said inventory levels would be about flat later in the year.

Macy's, based in Cincinnati, said net income in the first quarter that ended May 1 was $23 million, or 5 cents per share, in line with analyst forecasts. That compares with a loss of $88 million, or 21 cents per share, a year earlier.

Overall sales rose 7.2 percent to $5.57 billion, buoyed by a 5.5 percent increase in sales at its stores open at least year during the quarter. The men's and home categories were the strongest performers, Hoguet said.

The sales growth came from more foot traffic in stores, she said, but more than made up for a small average transaction size.

Analysts, on average, had forecast sales of $5.54 billion, according to Thomson Reuters I/B/E/S.

Macy's shares were up 40 cents, or 1.7 percent, at $24.30 in midday trading on the New York Stock Exchange.

A NOTE OF CAUTION

Despite the return to profit and its improving sales, the company maintained its outlook for 2010 sales and profits and sounded a note of caution, saying it was premature to raise its outlook again for now given the macro-economic uncertainty.

Macy's Chief Executive Terry Lundgren suggested that sales growth would have to come at the expense of other department store chains.

While the direction of the overall economy remains unclear, we believe we are well-positioned to continue to gain market share, Lundgren said in a statement.

At its analyst day meeting in late April, Macy's raised its 2010 earnings forecast to between $1.75 and $1.80 per share, and its full-year same-store sales expectations to between 3 and 5 percent. Analysts are expecting a full-year profit of $1.87 per share.

Lundgren said sales at Macy's upscale Bloomingdale's chain, which opened a store in Dubai during the quarter, had performed very well during the quarter.

In the fall, Bloomingdale's will open its first outlet stores with four locations, as the chain seeks to ward off competition from such chains as Nordstrom Inc and Saks Inc which are also ramping up their off-price chains.

Department stores have been lining up exclusive deals with top designers in a bid to differentiate themselves and benefit from the higher margins. Macy's announced last week that it will be the only department store to sell Sean John's men's sportswear collection beginning next year.

Macy's said it also got a boost from online sales, which rose 34 percent during the quarter.

Macy's operates about 850 department stores in North America under the Macy's and Bloomingdale's names.

(Reporting by Phil Wahba, editing by Maureen Bavdek, Dave Zimmerman and Matthew Lewis)

Retail