UPDATE 1-Macy's 3rd-qtr sales disappoint Wall St, but profit beats

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CHICAGO, Nov 9 (Reuters) - Department store chain Macy's Inc reported a bigger-than-expected drop in third-quarter comparable store sales on Thursday, but managed to grow margins and topped earnings estimates by keeping a tight hold on inventory.

Department stores have been struggling with declining mall traffic and tough competition from off-price retailers and Amazon.com Inc. In response, Macy's has closed stores, tightly controlled inventory, built its Backstage discount business and monetized prime real estate properties.

Net income attributable to shareholders rose to $36 million, or 12 cents per share, in the third quarter ended Oct. 28, from $17 million, or 5 cents, a year earlier. Excluding items, Macy's earned 23 cents per share, beating the average analyst estimate of 19 cents.

Shares were up 1.9 percent in premarket trading, having faltered earlier after retailer Kohl's Corp reported a lower-than-expected quarterly profit, dragging the sector down.

Sales at Macy's stores open more than 12 months, including sales in departments licensed to third parties, were down 3.6 percent. The average analyst estimate was for a 2.6 percent decline, according to Thomson Reuters I/B/E/S.

"We believe they have not generated enough newness to attract consumers," Jane Hali, head of a retail investment research firm wrote in a pre-earnings note. "The continued amount of sales and clearance is still very heavy and is only driving lower income consumers to their stores."

Net sales fell 6.1 percent to $5.28 billion, declining for the 11th straight quarter due to fewer stores from a year earlier. The average analyst estimate was $5.31 billion.

Gross margins rose to 39.9 percent from 39.8 percent a year ago. Cost of sales declined to $3.18 billion from $3.39 billion.

Macy's shares traded at $17.90 after closing at $17.57. (Reporting by Richa Naidu in Chicago and Sruthi Ramakrishnan in Bengaluru; Editing by Chizu Nomiyama and Jeffrey Benkoe)