J.C. Penney Co Inc's efforts to remake itself as a more fashionable chain and raise profitability by shedding weak units paid off in the first quarter and the retailer raised its full-year profit forecast.

Its shares rose 1.7 percent after earlier hitting their highest level since the 2008 stock market meltdown.

Penney in recent years has pushed to land more exclusive lines, such as Liz Claiborne clothing, and lure younger shoppers with stores-within-its-stores for brands such as cosmetics seller Sephora and Spain's fast-fashion chain Mango.

Penney's also eased fears that its shoppers, considered more vulnerable to the economy's vagaries than those of Macy's Inc , would pull back because of higher gasoline prices.

It gives encouragement that they can weather the storms, Morningstar analyst Paul Swinand told Reuters. But Swinand said Penney has squeezed much of the benefit it will from its initiatives.

Penney is also changing the way it manages inventory, closing poor performers such as its catalog operations and weak stores.

Penney, which operates 1,100 U.S. department stores, said first-quarter net income rose 6.7 percent to $64 million, or 28 cents per share, from $60 million, or 25 cents a share, a year earlier. That beat analysts' average estimate of 24 cents a share, according to Thomson Reuters I/B/E/S.

Penney Chief Executive Myron Ullman said that the benefits of the company's cost-cutting efforts would continue to significantly accelerate profitability, leading Penney to return to historically high operating profit margins by 2014, as per the chain's five-year plan announced last year.

Penney is eyeing a profit of $5 per share by 2014, compared with $1.59 for the fiscal year that ended in January.

Much of the improvement in first-quarter profit came from lower pension expenses. On an adjusted basis, which strips out the effect of that expense, net income fell to 33 cents per share from 40 cents.

Penney shares rose 64 cents to $39.08 in morning trading, after going as high as $41, the highest level since September 2008. The shares have more than doubled since their 52-week low of $19.44 last August.


Ullman told analysts on a conference call that there has been no price adversity from customers as Penney has raised prices on its higher-end items because of higher cotton costs.

Exclusive lines such as the Claiborne clothes are giving Penney greater ability to set pricing and protect its margins as it prepares for more price increases later this summer due to higher cotton costs.

As reported earlier this month, Penney's sales at stores open at least one year rose 3.8 percent during the quarter, which ended on April 30.

Total net sales rose just 0.4 percent to $3.9 billion as its exit from the catalog business dampened growth.

Penney said it expects same-store sales to rise between 3 percent and 4 percent in the current quarter.

For the full year, Penney raised its profit-per-share forecast 15 cents, to a range of $2.15 to $2.25, above Wall Street forecasts. Some of that increase stems from planned share repurchases.

Penney said it expects cost savings of as much as $30 million in 2012 as it exits the catalog business, and for better supply chain management to yield savings of up to $15 million in 2012 and $30 million in 2013.

Penney's upbeat forecast echoed those of Macy's Inc and Kohl's Corp last week, suggesting that middle-class shoppers who frequent department stores were feeling more confident.

Penney, whose largest shareholder is billionaire investor William Ackman's Pershing Square Capital Management, said gross margin slid 0.9 percentage point to 40.5 percent in the first quarter, in part because of free shipping offered to online shoppers.

(Reporting by Phil Wahba; editing by John Wallace and Maureen Bavdek)