Retailer J.C. Penney reported a 50 percent drop in quarterly profit Thursday as weak demand forced it to cut prices to clear unsold merchandise, but the results were better than Wall Street expected.

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The mid-tier department store operator also forecast second-quarter earnings that could surpass current analyst estimates, and its shares rose more than 2 percent to $45.50 before the bell.

Penney's net income was $120 million, or 54 cents per share, for its fiscal first quarter ended May 3, down from $238 million, or $1.04 per share, a year earlier.

Analysts, on average, were expecting it to earn 50 cents per share, according to Reuters Estimates.

Penney's middle-income consumers have been hit hard by the weakened U.S. economy. More of their paychecks are going toward paying for necessities like food and fuel at the same time as their home values are declining and their access to credit has diminished.

Worried about their financial situation, Penney's shoppers have reined in discretionary spending and cut down on trips to the mall, prompting Penney in March to slash its first-quarter earnings forecast to approximately 50 cents per share, down from a previous view of 75 to 80 cents per share.

Sales Slump

Quarterly sales fell about 5 percent to $4.13 billion from $4.35 billion a year earlier. Sales at its stores open at least a year, a key retail gauge known as comparable store sales, fell 7.4 percent.

Speaking to reporters at its analyst meeting in April, Chairman and Chief Executive Myron "Mike" Ullman said the retailer witnessed a "precipitous" drop in store traffic in March, leaving it with unsold Easter holiday merchandise.

"We obviously planned Easter like it was going to happen and, without being too flippant, it didn't," Ullman said at the meeting.

Sales weakness in the quarter was "broad-based," but Penney said the best performing categories were men's apparel and family footwear, with weakness in most home categories and fine jewelry.

Its gross margin decreased by 1.5 percentage points to 40.0 percent of sales as it cut prices to spur sales.

On Thursday, Penney

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[JCP  Loading...      ()   ] said it expects conditions will remain difficult for the remainder of 2008, and it will cut prices on existing merchandise and reduce future orders to keep inventory in line with weaker sales environment.

For its fiscal second quarter, Penney expects total sales to decrease in the low-single digits, and comparable department store sales to fall mid-single digits.

It forecast earnings per share of approximately 38 cents, compared with analysts current estimate of 37 cents per share.

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