J.C. PENNEY CO. INC. $32 (New York symbol JCP; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 236.4 million; Market cap: $7.6 billion; Price-to-sales ratio: 0.4; Dividend yield: 2.5%; WSSF Rating: Average) operates 1,100 department stores in the U.S. and Puerto Rico. It also sells goods over the Internet.

In its second quarter, which ended July 31, 2010, J.C. Penney reported sales of $3.9 billion, unchanged from a year earlier. Higher clothing sales offset the lost revenue from the shutdown of J.C. Penney’s catalogue business. On a same-store basis, sales rose 0.9%. Online sales rose 4.0%.

The company earned $14 million, or $0.06 a share, in the latest quarter. That’s much better than the $1 million, or nil per share, it lost a year earlier. J.C. Penney is doing a good job of managing its inventories. That cuts the need for costly clearance sales.

J.C. Penney is renovating about a third of its stores, including building more in-store boutiques devoted to specific brands. For example, J.C. Penney stores with boutiques that sell Sephora beauty and fragrance products tend to have higher sales than the company’s regular stores. By the end of the current fiscal year, which ends January 31, 2011, the company will have 376 stores (34% of the total) with Sephora boutiques.

The shares fell from $87 in 2007 to $14 in March 2009. They have rebounded lately, in part because of share purchases by two investors. Combined, these shareholders own 26% of J.C. Penney. That has prompted it to adopt a shareholder-rights plan.

This plan lets existing shareholders buy new shares at half the market price if a single investor acquires more than 10% the company without the approval of J.C. Penney’s directors. The plan expires in one year.

This plan makes a takeover more difficult. But these shareholders will probably spur J.C. Penney to unlock hidden value by repurchasing shares or selling real estate. Even so, high unemployment will continue to weigh on its earnings.

J.C. Penney is still a hold.