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UPDATE 2-J.C. Penney shares surge as loss halves, sales still falling

(Adds details on company's struggles, background, CEO quote; updates shares)

Aug 15 (Reuters) - J.C. Penney Co Inc posted a smaller-than-expected quarterly loss on Thursday, as the struggling department store operator's efforts to cut costs and shutter unprofitable businesses paid off, sending its shares up 12%.

The 117-year old retailer, one of the worst hit by the surge in online shopping in the past decade, reaffirmed it expected to have positive free cash flow this year and would have funds of around $1.5 billion available at the end of 2019.

Last month, Reuters reported that the company had hired advisers to explore debt restructuring options.

The retailer also gave a forecast for 2019, the first full-year outlook it has given since withdrawing its 2018 expectations in November to give new Chief Executive Officer Jill Soltau time to settle in at the helm.

Penney's sales continue to fall, down 9% in the quarter, and it forecast comparable sales drop in 2019 between 7% and 8%, worse than current analysts' expectations, according to Refinitiv data.

But the company's net loss has more than halved - to $48 million - compared to the same period a year ago and Soltau said the company was benefiting from a reduction in excess inventory and a reining in of permanent price markdowns.

"While we still have work to do on our topline, I strongly believe that growing sales in an unprofitable way is simply not an option," she said.

Last week, the New York Stock Exchange said Penney had 6 months to get its stock price above $1 or it could be de-listed from the exchange.

To stem the company's falling sales and boost margins on merchandise, Soltau has been striving to reduce inventory at stores and closing underperforming outlets. She also made the big choice earlier this year to cease selling major appliances and furniture in store in order to focus on its main business of selling mid-priced clothing to middle-class families.

On Thursday, J.C. Penney said it was partnering with secondhand women's clothing and handbag retailer thredUP.

In the second quarter ended Aug 3, the company's selling, general and administrative expenses rose to 34.7% of sales from 31.9% a year earlier.

The cost of goods sold, however, fell to 63.2% from 66.3% a year earlier, as a percentage of sales.

Excluding items, J.C. Penney posted a loss of 18 cents per share, lower than estimates of 31 cents.

The retailer ended the quarter with liquidity of about $1.70 billion.

Shares in the company had fallen 45% this year as of Wednesday's close. (Reporting by Aishwarya Venugopal in Bengaluru; Editing by Shinjini Ganguli)

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