J.C. Penney Co Inc reported stronger-than-expected quarterly earnings, helped by tighter cost controls and its expansion of exclusive brands, and forecast improving sales in its current quarter.

But the department store operator also gave a profit forecast that fell short of Wall Street estimates and acknowledged its shoppers were still under pressure in a weak economy.

Its shares were down 1.7 percent at $20.45 in early trading on the New York Stock Exchange.

Penney's got a boost from its expansion of exclusive, more profitable product lines and said those brands would help improve sales going forward.

It expects same-store sales to rise between 2 percent and 3 percent during the current quarter and said back-to-school sales were off to a good start.

Penney reported net income of $14 million, or 6 cents per share, for its second quarter ended July 31, compared to a loss of $1 million, or nil per share, a year earlier.

Overall sales fell 0.1 percent to $3.94 billion, with the drop attributable to the discontinuation of its Big Book catalogs. Internet sales were up 4 percent to $317 million during the quarter.

Analysts had been expecting a profit of 5 cents per share on sales of $4 billion, according to Thomson Reuters I/B/E/S.

Penney expects earnings in the current quarter of between 16 and 20 cents per share, below Wall Street forecasts of 24 cents.

Its full year 2010 profit forecast of $1.40 to $1.50 per share also fell short of estimates of $1.54 per share.

In another sign of tepid consumer demand, a government report showed U.S. retail sales rose in July, but attributed the gain to auto and gasoline sales rather than an improvement in underlying economic momentum.

Penney shares hit a year low earlier this week after rivals Macy's Inc and Kohl's reported strong results and said they were gaining share from other retail rivals.

Penney shares are down nearly 22 percent this year, while Macy's has gained 21 percent and Kohl's has shed 13.8 percent.

Analysts see Penney as particularly vulnerable to weak economic conditions since its shoppers tend to have a lower household income and are more likely to turn to discount chains and dollar stores when budgets are tight.

Last week, Penney reported an unexpected drop in same-store sales, or sales at stores open at least a year, in July as it slashed prices to lure shoppers. Chief Executive Myron Ullman said the spike in discounting was tactical and would have a short-term impact.

For the full quarter, Penney's same-store sales were up 0.9 percent, far below Kohl's 4.6 percent gain and Macy's 4.9 percent increase.

Dillard's Inc , which like Penney caters to a more frugal shopper than Macy's, reported flat same-store sales.

Last week, Penney became the exclusive retailer for Liz Claiborne's namesake brand. It will also open 16 more Sephora cosmetics shops at its stores, and will launch the fast-fashion MNG by Mango shop inside its stores.

(Reporting by Phil Wahba; Editing by Michele Gershberg, Derek Caney, Dave Zimmerman)