(Reuters) - J.C. Penney Co Inc (JCP.N) is seeing early signs of improvement from its overhaul of its stores and pricing policy, giving investors a glimmer of hope after it reported a deeper-than-expected drop in quarterly sales and a big loss.
While traffic was still down in the first several days since the company tweaked a controversial pricing strategy that was blamed for driving away customers, the decline has eased to 7 percent from a 10 percent drop in the second quarter and a 12 percent decline in the first quarter.
Chief Executive Ron Johnson's assurances Friday that the retailer has enough cash to execute its turnaround also cheered investors, Morningstar analyst Paul Swinand.
Penney, which was downgraded by some ratings agencies during the quarter, said it would have $1 billion in cash at the end of the fiscal year.
Shares of J.C. Penney, which includes activist investor William Ackman as a shareholder, rose 10 percent to $24.32 Friday morning, erasing an earlier drop.
Still, sales at stores open at least a year, or same-store sales, fell 21.7 percent in the second quarter ended July 28, steeper than the 17.4 percent drop analysts expected, according to Thomson Reuters.
Total revenues tumbled 22.6 percent to $3.02 billion during the second quarter, also below Wall Street's low expectations.
In February, Penney largely eliminated the use of coupons and discounts in favor of a strategy of everyday low prices. The move cost the 102-year-old retailer many shoppers and led to an 18.9 percent drop in same-store sales in the first quarter.
Last week, Penney debuted the first of its boutiques within a store, the other piece of its transformation that will eventually see each store carved into a collection of 100 spaces for brands such as Levi's, Jonathan Adler, and Betsey Johnson.
Chief Executive Ron Johnson, the man who built up Apple Inc's (AAPL.O) retail chain and the architect of Penney's turnaround strategy, vowed to stay the course.
"While business continues to be softer than anticipated, we are confident the transformation of JCPenney is on track," Johnson said in a statement, adding that Penney is positioned to grow again in 2013.
Faced with a mutiny by customers long trained to look for sales and use coupons, Johnson has backtracked a bit in recent weeks, making concessions like using the word "clearance" to denote items on sale and simplifying pricing to two levels rather than three.
Many experts say Johnson needs to make more concessions on his pricing ahead of the crucial holiday season, as Penney faces pressure from Macy's Inc (M.N) and Kohl's Corp (KSS.N), among others, which still use sales and discounts.
Penney customers are typically more price-sensitive than those of Macy's.
"I am very skeptical as to whether he understands that the J.C. Penney customer is looking for value and perceives value only with couponing," said Walter Loeb, president of Loeb Associates, management consultants to the retail industry.
"As long as Macy's keeps banging away, I don't think he has a ghost of chance."
On Wednesday Macy's reported second-quarter same-store sales were up 3 percent.
A visit to the Levi's shop at the Penney in Manhattan on Tuesday found the store busier than on earlier trips. Employees were armed with iPad computer tablets to ring up shoppers, and clearly marked signs told shoppers what was on sale.
Penney reported a net loss of $147 million, or 67 cents per share, for the second quarter ended July 28, compared with a profit of $14 million, or 7 cents per share, a year before.
Excluding certain items, Penney lost 50 cents per share, compared with analysts' projection for a loss of 25 cents.
The company withdrew its full-year forecast, which it no longer expects to achieve.
Penney's poor sales forced the retailer to mark down unsold items, knocking down its gross margin 5.1 points to 33.2 percent of sales.
Sales also were hurt when it pulled back on advertising in late June and July as it rethought its pricing and marketing for back-to-school - just as business was picking up at Macy's and Kohl's.
But the company, which has laid off hundreds of workers at its headquarters and at stores, said it expects savings to exceed $900 million by the end of the year.
Reporting by Phil Wahba in New York; editing by John Wallace, Gerald E. McCormick, Jeffrey Benkoe and Sofina Mirza-Reid