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* 3rd-qtr same-store sales down 26.1 pct
* Sales off 26.6 percent to $2.93 billion.
* CFO says enough cash to execute plan
* Shares fall 4.8 percent
By Phil Wahba
NEW YORK, Nov 9 (Reuters) - J.C. Penney Co Inc Chief Executive Ron Johnson has two key weapons in his arsenal as he tries to weather plunging sales while radically transforming the aged retailer - the backing of its top investor, and cash.
Those two assets help Johnson exude confidence on days like Friday, when the retailer reported its worst drop yet in same-store sales since he began his radical transformation of the department store chain earlier this year.
Same-store sales fell 26.1 percent in the latest quarter, ended Oct. 27, while analysts had expected a decrease of 17.9 percent. It was a far more pronounced drop than in each of the first two quarters of the transformation.
Sales in the quarter were again abysmal at what Johnson called the "old JCP," as the elimination of coupons and most sales this year kept away shoppers, trained for decades to look for promotions. Business at recently opened boutiques like Levi's and its jcp brand were far better.
"It is really becoming a tale of two companies," Johnson told investors and Wall Street analysts at a meeting in New York, even as he said he was "100 percent committed" to his plan for the century-old retailer.
The boutiques were called out by activist investor William Ackman, whose Pershing Square Capital Management is J.C. Penney's top investor and who has repeatedly said he is giving the turnaround several years.
"It's about the shops. That's the future of the company," Ackman told Reuters at Friday's presentation.
Pershing Square owns 17.8 percent of shares, according to Thomson Reuters data, and has the right to buy another 8.3 percent.
At the 10 boutiques, including the eight opened in August and September, the company is generating sales at an annual rate of $269 per square foot, compared with $139 in the old parts of its stores. The boutiques still represent only 11 percent of the company's selling space. But they do bolster Johnson's argument.
What's more, prominent brands like Martha Stewart and Joe Fresh will open their stores in the spring, giving the retailer a critical mass of boutiques likely to draw more shoppers, independent retail stock analyst Marie Driscoll said. And sales comparisons will be easier next year after the abysmal results in 2012.
"If by July investors are not seeing tangible results, they might well start pushing for a change in strategy," Driscoll said, predicting investors will be patient for a bit longer because of how radical Johnson's strategy is.
Penney's plan calls for the conversion by 2015 of 700 of its 1,100 stores into collections of 100 boutiques, which now include Levi's Denim Bar, PVH Corp's Izod and upgraded Liz Claiborne areas.
By this time next year, Penney stores will have 40 shops, then another 30 in by November 2014, before completing the project in 36 months.
J.C. Penney shares fell as much as 9.6 percent after the company released its results. It closed down 4.8 percent at $20.64 on the New York Stock Exchange.
But for the time being, the company needs to stanch the bleeding at the so-called "Old JCP".
"That is the engine of cash growth to fund the new jpc," Johnson said.
At the meeting, Penney executive took concerns about its liquidity head on and said that at fiscal year end, in January, it would have a warchest of $2.5 billion, including $1 billion in cash as well as a credit line.
Chief Finance Officer Ken Hannah told the meeting that Penney had enough money to see the project through on schedule and that Penney could finance the transformation through cash generated by its operations.
Earlier this year, Penney laid off thousands of employees as one part of an effort to save $900 million a year. The company has also brought down its inventory 23 percent during the quarter, easing pressure on its finances.
Penney made some concessions on its pricing strategy during the third quarter, such as offering a $10 gift coupon last month and a recent "30 percent off" clearance promotion.
Looking ahead to the holiday season, which typically generates 40 percent of a department store's annual profit, Penney will have its only sale of the year on Black Friday, the day after U.S. Thanksgiving, a major day for holiday shopping.
Walter Loeb, president of retail management consultant Loeb Associates, expressed concern about Penney's performance during the upcoming holiday shopping season giving its difficulty in getting shoppers into its doors.
"I expect a big drop in sales" Loeb said. "(Johnson) must generate traffic. I think he has to be more promotional."
Kohl's Corp on Thursday warned of "a very promotional Christmas" for retailers.
Penney said its net loss narrowed to $123 million, or 56 cents per share, in the third quarter from $143 million, or 67 cents per share, a year earlier.
Excluding a gain from the sale of noncore assets and other one-time items, Penney said it lost 93 cents a share.
Sales fell 26.6 percent to $2.93 billion, hurt by big markdowns on "Old JCP" merchandise that it had to clear.