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By Phil Wahba and Siddharth Cavale
Oct 8 (Reuters) - J.C. Penney Co Inc on Tuesday told investors for the second time in less than two weeks that sales trends are improving, seeking to quell fears about its turnaround that have pummeled the retailer's shares.
Penney, urgently trying to lure back shoppers this year after a failed attempt to go upmarket in 2012 led to a 25 percent drop in sales, reported a smaller decline in same-store sales for September than for August, sending shares up as much as 6.9 percent in regular trading.
The U.S. retailer again said it expected improvements in business to continue for the remainder of the year, repeating an assertion it made on Sept. 26, hours before it announced it was issuing 84 million new shares to build its war chest.
Penney has been dogged by countless downgrades of late on growing fears that the return to deep discounting and merchandise favored by long-time shoppers was taking longer than expected to revive sales.
On Tuesday, Sterne Agee analyst Charles Grom, one of the few optimists left on Wall Street about Penney, downgraded his recommendation to "neutral from buy." Last week, credit rating agency Fitch downgraded Penney deeper into "junk" territory.
Shares have fallen 40 percent since August 20, when Penney reported its second quarter earnings, and on Monday hit their lowest levels since 1981.
A Penney spokeswoman said the company had issued the update to give investors a more detailed account of its progress given market speculation surrounding its turnaround.
Unscheduled updates, even with good news, can instead stoke negative sentiment about Penney, said Brian Sozzi, chief equities strategist of research firm Belus Capital Advisors.
"Penney is trying to inject some facts into the market place, but this is just driving confusion and uncertainty," Sozzi said.
Penney is creating the expectation of more regular updates between quarterly reports, the absence of which will lead to even more speculation, he said.
The company stopped reporting sales on a monthly basis in early 2012, when former CEO Ron Johnson began his now abandoned attempt to transform Penney. A spokeswoman said Penney is evaluating whether it might resume such monthly reports.
Some 32.5 percent of shares are held short by investors betting against the company, according to Thomson Reuters data, making the stock particularly volatile.
Penney said that September sales at stores open at least a year fell 4 percent over the same month last year, compared to a 9.8 percent decline in August. In the second quarter, they fell 11.9 percent. It also said its online sales rose 25.8 percent last month.
"It's reassuring, at least, that they're limiting the (sales) decline," Atlantic Equities analyst Daniela Nedialkova said, adding that it was in line with her expectations.
On September 26, Penney had said it expected positive comparable-store sales results coming out of the third quarter and throughout the fourth, which includes the holiday season.
Sales of women's apparel, Penney's largest business, rose in September, the company said. Men's clothing, jewelry and women's accessories were also among its better performers.
The company said inventories of higher-margin private brands such as St. John's Bay and Stafford and its assortment of basic apparel were in sufficient stock to meet holiday season demand.
Levi Strauss Chief Executive Chip Bergh told Reuters last week that sales of Levi's products at Penney had risen by a double-digit percentage last quarter.
But Penney's home goods section continued to languish despite store remodelings and new merchandise earlier this year that have failed to attract shoppers. Penney is bringing back lower-price basics and re-organizing the home section by product category, rather than brand.
Penney reiterated that it would end the year with more than $2 billion in cash, after taking into account proceeds of $785 million from a recent stock sale.
Penney shares were up 3.4 percent at $7.97 in afternoon trading on the New York Stock Exchange. (Reporting by Siddharth Cavale and Maria Ajit Thomas in Bangalore and Phil Wahba in New York; Editing by Anthony Kurian, Ted Kerr and Andrew Hay)