(Reuters) - J.C. Penney Co Inc's (JCP.N) promising launch of Levi's stores within its department stores has shown signs of stanching the chain's sales hemorrhage and improving shopper traffic, executives said on Friday, boosting the share price even as the company posted a big quarterly loss and deep drop in sales.
Since Penney simplified its pricing and explained it better to shoppers, its slowdown in customer traffic moderated in early August. The number of shoppers coming into stores was down 7 percent in the first few days of the month compared to double-digit drops in the first two quarters of 2012.
Sales of Levi's products at Penney were up 25 percent in the first days of the Levi's Denim Bar, the first new store in Chief Executive Ron Johnson's plan to turn each store into a "mall within a mall" by 2016.
"Our new message is getting through, we have more traffic in the stores, people are buying more," Johnson told analysts at a meeting on Friday in New York that was webcast. "I am completely convinced that our transformation is on track."
Shares of J.C. Penney, whose biggest investor is activist William Ackman, rose 4 percent to $22.98 Friday afternoon. They remain nearly 50 percent lower than they were in February, with a lot of investors shorting the stock, or betting it will fall.
Penney is the 11th most shorted stock in the S&P 500, with 58.8 percent of shares available being sold short, according to Data Explorers research.
Penney said that sales at stores open at least a year fell 21.7 percent in the second quarter ended July 28, steeper than the 17.4 percent drop in same-store sales that analysts expected, according to Thomson Reuters.
Penney also posted a loss and withdrew its full-year forecast after saying it could not meet its goals.
But company assurances that Penney has enough cash to keep rolling out new store-in-stores cheered Wall Street. Penney expects to have $1 billion in cash at the end of the year.
"It gives them breathing room," said independent equities analyst Marie Driscoll. "Now they're doing something everyone understands."
Penney will add a few shops every month. Some shops the works include space for brands Jonathan Adler, Betsey Johnson and Joe Fresh.
OLD HABITS DIE HARD
In February, Penney largely eliminated the use of coupons and discounts in favor of a strategy of everyday low prices, which ultimately led to an 18.9 percent drop in same-store sales in the first quarter.
Faced with a mutiny by customers long trained to seek out coupons, Johnson has backtracked in recent weeks, making concessions like using the word "clearance" to denote items on sale, simplifying pricing to two levels rather than three and halting advertising critics said was too sleek and not focused enough on what shopper can find at a Penney store.
Penney has also introduce price-matching and cut prices on many items.
Johnson said that during weeks when rivals were ramping up discounts, same-store sales were down 30 percent or more. But he also noted that recent focus groups showed shoppers have a better grasp now of how Penney's pricing works.
Many experts say Johnson, who built up Apple Inc's retail chain before become Penney CEO last year, needs to make even more concessions on pricing ahead of the crucial holiday season.
Penney rivals, including Macy's Inc (M.N) and Kohl's Corp (KSS.N), still use discounts.
"The most important thing is to offer values specials, that is meaningful," 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."
Analysts have said Penney must do more to attract shoppers in the absence of coupons. Many applauded a promotion of free children's haircuts in August, which has so far found 500,000 takers.
Total revenues during the second quarter tumbled 22.6 percent to $3.02 billion, below Wall Street's low expectations.
Penney reported a net loss of $147 million, or 67 cents per share, compared with profit of $14 million, or 7 cents per share, in the second quarter last year.
Excluding certain items, Penney lost 50 cents per share, compared with analysts' projection for a loss of 25 cents.
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.