J.C. Penney's profit beats the Street

NEW YORK (CNNMoney.com) -- J.C. Penney on Thursday posted second-quarter profits that topped Wall Street's estimates, driven by strength in back-to-school-related sales and its new private-label clothing brands.

The mid-priced department store chain posted net income of $182 million, or 81 cents a share in the period, compared to $179 million or 76 cents, a year ago.

Its earnings from continuing operations rose to 78 cents, compared to 75 cents a year ago.

Total sales increased 3.6 percent over last year to $4.4 billion, in line with analysts' estimates.

Analysts had forecast a profit of 77 cents a share for the quarter, according to earnings tracker Thomson Financial.

By another measure, sales at Penney stores open at least a year, a key measure of retail performance known as same-store sales, rose 1.9 percent in the quarter. For August, Penney said it expects same-store sales to dip to the low single-digits due to a "calendar shift" that pulled some of early August sales into the last week of July.

However, the company said it expects this month's sales softness to even out later in the third quarter with October same-store sales projected to increase to the mid to-high single-digits.

"The back-to-school selling season is off to a good start. We are also pleased by the positive response we have seen to our new private lingerie brand Gabrielle and our exclusive Liz & Co. and Concepts by Claiborne lines," J.C Penney CEO Myron Ullman said in a statement.

Contrary to the overall downtrend in apparel sales at retailers last month, Penney said sales of basic and fashion clothing, including jeans, performed well in quarter as did some home-related categories. The retailer said this helped to offset weakness in sales of big-ticket items.

Penney's (Charts, Fortune 500) stronger-than-expected results came despite a difficult environment for consumers who are facing a housing downturn, credit woes and higher gas prices.

Wal-Mart (Charts, Fortune 500) and Home Depot (Charts, Fortune 500), two other leading retail chains, earlier this week reported that those same macroeconomic headwinds hurt their sales and profits last quarter. Both retailers also warned for the full year.

In a conference call with analysts to discuss the company's results, Ullman said that although the housing softness poses a challenge to most retailers, "relatively full employment and still low interest rates" are still supporting consumer spending.

That's a good thing for the economy since consumer spending fuels two-thirds of the nation's economic growth.

"Our customers still have jobs. We're not oblivious to the housing market [problems] but we're encouraged by the reaction to [our] back to school merchandise," Ullman said.

What's more, Ullman said he was also confident that the retailer could withstand the same pressures on the consumer in the second-half of the year going into the all-important year-end holiday shopping season.

The November-December months can account for as much as 50 percent of retailers' annual profits and sales.

Penney also raised its full-year guidance to a profit of $5.50 per share, compared to previous guidance of $5.49 per share. Analysts currently expect the retailer to earn $5.48 for the full year.

"We have a very compelling offer [to customers] in terms of great style and quality at a smart price," Ullman said.

Ullman also addressed an analyst's question about rising production costs in China due to an labor shortage in the manufacturing sector and higher energy costs.

"The cost of constructing, commodity costs and wages are all rising in China," Ullman said. "This will make China a market that's not as competitive in terms of holding down costs."

"We have 17 countries where we do our sourcing," he added. "So we can move our sourcing around. We're not unduly worried about [rising] costs in China this year."