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Originally published Friday, August 10, 2012 at 6:27 PM

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J.C. Penney CEO calms down investors over 2Q earnings disaster

The bleak performance marked the second-straight quarter of severe sales declines since J.C. Penney got rid of most steep, temporary discounts in favor of everyday lower prices.

The Associated Press

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NEW YORK — J.C. Penney Co. CEO Ron Johnson hasn't run out of magic yet, as far as Wall Street is concerned.

The former Apple executive's soothing words drove the retailer's stock higher even after the company offered up grisly details Friday of a terrible second quarter.

The midpriced department-store chain reported a bigger-than-expected loss and plummeting sales. Shoppers are still not buying into a completely new pricing strategy. Penney even withdrew its full-year profit guidance.

After the report, Moody's Investors Services downgraded Penney's rating deeper into junk-bond terrain.

The bleak performance marked the second-straight quarter of severe sales declines since Penney got rid of most steep, temporary discounts in favor of everyday lower prices. The report confirmed it's going to be a hard sell to shoppers who are used to big sale signs and coupons.

Yet, after appearing queasy in premarket trading, investors pushed up Penney's stock price by as much as 9 percent after some reassuring words from Johnson during a 90-minute conference call.

The shares ended up 6 percent, or $1.30, at $23.40 on Friday. The gains show Wall Street still wants to believe the mastermind behind the success of Apple's retail stores and Target's cheap-chic strategy has the magic to deliver.

"The more he sells the hope, the more investors are buying into it," Brian Sozzi, chief equities analyst for research firm NBG Productions.

Johnson shared more details of his vision for creating a new breed of specialty-department stores and said the latest fixes to simplify the pricing plan are resonating with customers.

While admitting to mistakes in pricing and marketing, Johnson told investors, "I am completely convinced that our transformation is on track."

Under Johnson's stewardship, Penney is changing everything from the items it stocks to store design. But the riskiest move has been its pricing. The goal is to offer consumers more predictability so they will visit more often. That will help break the cycle of discounting that has soiled the brand, a laggard behind Macy's Inc. and other competitors.

Penney's stock is beaten up — still down by nearly half since the peak above $42 in the afterglow of Johnson's hiring. And business can't get any worse, said Ron Friedman, head of the retail- and consumer-products group at accounting firm Marcum LLP.

"People are optimistic. They really believe in him," Friedman said. That goodwill means Johnson has at least another year to deliver, he said.

In May, Penney's stock plunged 20 percent, its biggest one-day decline in four decades, after the retailer posted a larger-than expected first-quarter loss and a 20.1 percent drop in revenue because of the poor reception from shoppers. Customer traffic was down 10 percent.

Things got even worse in the second quarter as Penney backpedaled a bit on discounts, withdrew TV advertising and canceled some print-ad campaigns in mid-June as it figured out its new game plan.

Penney on Feb. 1 began using a three-tier pricing with consistently lower daily prices that were 40 percent below last year, deeper monthlong sales on specific items and periodic discounts that are even more generous throughout the year.

But on Aug. 1, Penney eliminated the monthly sales events and increased the frequency of the periodic sales to every Friday. These had been called "Best Price" sales but are now being called "clearance."

Penney is tweaking its advertising to better explain the change. TV ads tout free children's haircuts at stores to draw shoppers.

But Penney is sticking to its "Every Day" low-price guns. Items sold under that pricing represent 70 percent of sales since the company began the new strategy.

Johnson told analysts he's creating a new kind of store — the specialty-department store, which will be carved up with different branded shops to replace the typical sea of clothing racks.

It will also have an area in the middle of the store that will be meeting places for shoppers. At these so-called "Town Squares," which will offer different attractions every two months, shoppers would be able to create greeting cards or take yoga or Pilates classes.

Johnson wants to transform the aisles into lively paths leading to the shops. They will feature lots of mannequins, comfortable seating, coffee and juice bars as well as tables built to include iPads.

The changes extend to the merchandise, which has been seen as tired and lackluster. Starting this fall, almost half the merchandise will change, with brands either new or redesigned. This fall, shoppers will see such names as Betsey Johnson and Vivienne Tam, who are creating affordable versions for the store.

Penney just launched shops for Levi's and its own jeans brand, Arizona. Johnson said the Levi's shop, which has a denim bar, has seen a 25 percent increase in revenue compared with last year.

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