Department store operator Macy's has reported a second quarter that was "below expectations" after being hit by May merger integration costs of $97m, but says sales trends are improving at former May Company stores.

Profit slumped 77% to $74m, or 16 cents per share, from $317m, or 57 cents per share in the same period a year ago.

This is within the company's guidance for earnings of 20 cents to 30 cents per share excluding merger integration costs, Macy's said.

Sales in the second quarter totalled $5.89bn, a decrease of 1.7% compared to sales of $5.99bn in the same period last year. On a same-store basis, second quarter sales were down 2.6%.

The second quarter of 2006 included merger integration costs and related merchandise inventory adjustments of $177m as well as gains on the sale of credit receivables of $191m.

In addition, last year's second quarter benefited from a tax refund that reduced income tax expense by approximately $80m and interest expense by approximately $17m, the retailer said.

For the first half of 2007, Macy's reported diluted earnings per share from continuing operations of 27 cents per share, compared with 37 cents per share in the first half of 2006.

Excluding May Company merger integration costs of $133m, diluted earnings per share from continuing operations were 45 cents in the first half.

Terry J Lundgren, Macy's chairman, president and chief executive officer, said: "While the second quarter was below our initial expectations, we did see improving sales trends through the quarter in former May Company stores and in home-related merchandise categories.

"We are optimistic that our business can and will improve in the second half of the year, despite what appears to be a more challenging economic environment."

Macy's expects same-store sales in the range of down 1% to up 1% in the third quarter of 2007, and flat to up 2% in the fourth quarter of 2007. For fiscal 2007 as a whole, same-store sales are expected in the range of down 1% to up 0.5%.

For fiscal 2007 as a whole, total sales are expected to be $26.5bn to $26.8bn.