J.C. Penney Co. reported a 5 percent drop in fourth-quarter profit after non-cash pension related expense, but results beat expectations and the company said it expects to reverse sales declines in 2010.

Lower operating costs and less post-holiday inventory to be drastically marked down boosted profits. In 2009, Penney and most retailers reduced merchandise levels to match up with lower consumer appetites for discretionary spending.

The Plano-based chain of 1,108 department stores reported profit of $200 million, or 84 cents a share, in the period ended Jan. 30, compared with profit of $211 million, or 95 cents a share a year go.

Sales declined 3.6 percent from the same quarter last year to $5.55 billion. Same-store sales decreased 4.5 percent.

Analysts polled by Thomson Reuters expect J.C. Penney to earn 82 cents per share on sales of $5.53 billion in the fourth quarter.

Adjusted operating income for the fourth quarter, which excludes the impact of the non-cash qualified pension plan expense, was $454 million and increased 27.9 percent compared with $355 million a year ago. Adjusted income, excluding pension expense, was $1.02 a share, an increase of 21.4 percent versus 84 cents in last year's fourth quarter.

Fourth-quarter pension expense was $71 million, or 18 cents a share after-tax compared with a credit of $34 million or 10 cents a share a year ago.

For the full year, Penney reported a 56 percent decline in profit to $251 million, or $1.08 a share, compared with profit of $572 million, or $2.57 a share, in 2008. Revenue declined 5 percent to $17.56 billion from $18.49 billion in 2008. Same-store sales decreased 6.3 percent.

The company also said Friday that store employees will get bonuses for improved customer service levels in 2009 and that merit pay increases will resume in 2010.

In 2010, Penney expects same-store sales to increase in the low single digits and to report profit of $1.55 a share.

Penney has been working on its style offering adding exclusive brands last year and plans more this year. In the fall, it becomes the exclusive seller of Liz Claiborne brands.

The company ended the year with $3 billion in cash and says it plans to spend $500 million opening and upgrading stores, including adding 75 Sephora shops.

“With this strong foundation in place, our focus for fiscal 2010 is driving top-line growth,” said Myron “Mike” Ullman, chairman and chief executive officer. “We intend to deliver positive comparable store sales and market share growth as we leverage our position as a destination for affordable style.”