Department store operator J.C. Penney Co Inc reported a higher-than-expected quarterly profit and said same-store sales would improve during 2010, sending its shares up nearly 7 percent.

Penney also forecast full-year earnings ahead of Wall Street estimates. The company, which has lagged rivals like Macy's in growth, said it expects same-store sales to be flat in the first quarter and up in the low-single digits for the full fiscal year.

As has been the case for most U.S. department stores in the past year, Penney kept inventories tight to avoid having to slash prices to clear merchandise. That has boosted profits even as sales lagged.

Gross margins at Penney rose 3.6 percentage points during the fourth quarter to reach what the company said was their highest levels ever.

Still, the company has underperformed several of its main competitors. Its same-store sales -- sales at stores open at least a year -- fell 3.8 percent in December and 4.6 percent in January, even as rivals such as Kohl's Corp and Nordstrom Inc saw their sales shoot up.

Last year there was a lot of concern around the fact that they were focusing on gross margins rather than growing sales and market share, which was the opposite strategy of Kohl's. So the fact that they say they can get positive comp sales this year is significant, said Erika Maschmeyer, a senior research analyst with Robert W. Baird & Co.

J.C. Penney has been a laggard as a stock and on the comp performance side, so a little bit of this is sort of catch-up.

Department store stocks have fallen since October after a 7-month rally. But Penney fell further than its rivals, setting it up for the bounce seen today, Maschmeyer said.

Since October 19 Penney has fallen 29 percent, while Macy's is down nearly 10 percent and Kohl's lost more than 14 percent.

PROFIT BEATS, SALES FALL

Penney's net profit the fourth quarter ended January 30 fell 5.2 percent to $200 million, or 84 cents a share, from $211 million, or 94 cents a share, a year earlier.

Excluding discontinued operations but including a non-cash qualified pension plan expense, it earned 84 cents per share. Analysts were expecting 82 cents per share on revenue of $5.54 billion, according to Thomson Reuters I/B/E/S.

Sales during the quarter fell 3.6 percent to $5.55 billion, while same-store sales fell 4.5 percent.

On a conference call, Chief Executive Myron Ullman said he expects the economy to remain difficult this year.

The best performers in the quarter were women's apparel and shoes, while the weakest was the home goods division.

Penney has been hit by a higher exposure to malls, where traffic suffered during the downturn. The company has also been slower to improve profit margins, though analysts say that gives it more upside for improvement in 2010.

Penney forecast fiscal 2010 earnings of $1.55 per share, while analysts expect $1.45. In the first quarter, it expects 16 cents to 20 cents per share, while analysts expect 18 cents.

Department store operators have also sought to boost their line-up of exclusive merchandise to help sales. In December, Penney signed a deal to be the exclusive U.S.-based department store retailer for Spanish fashion chain Mango. In October, Liz Claiborne said its namesake sportswear would be sold only at Penney.

On the conference call, Ullman said the company plans to open 75 new locations of beauty products retailer Sephora at its stores in 2010. He also said Penney expects to have 600 Mango locations by the end of 2011.

Penney operates about 1,100 stores in the United States and Puerto Rico and plans to open two more in early 2010.

Penney shares rose 6.2 percent to $27.58 on the New York Stock Exchange at mid-afternoon.

(Reporting by Phil Wahba; Editing by John Wallace and Richard Chang)

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