(Reuters) - J.C. Penney Co Inc (>> J C Penney Company Inc) reported better-than-expected quarterly net sales and a smaller-than-expected loss, helped by demand for home products and footwear and a strong performance by the growing number of Sephora beauty shops in its stores.

But the company's shares fell 10 percent in early trading on Friday, highlighting growing concerns about consumer spending.

Data on Friday showed that U.S. retail sales rose just 0.1 percent in October, less than expected, suggesting a slowdown in consumer spending that could dampen expectations of a strong pickup in economic growth in the quarter.

Penney's results capped a volatile week for U.S. department stores ahead of the all-important holiday shopping season, a period that historically has accounted for about a third of their annual sales and almost 40 percent of earnings.

Macy's Inc (>> Macy's, Inc.) and Nordstrom Inc (>> Nordstrom, Inc.), whose customers tend to be more affluent than Penney's, both cut their full-year forecasts this week after reporting disappointing results.

However, Kohl's Corp (>> Kohl's Corporation), which competes more closely for the same shoppers as Penney, reported better-than-expected profit and sales.

Penney maintained its same-store sales forecast for the year despite reporting on Wednesday that its comparable store sales in the quarter were the best in over nine years.

J.C. Penney's gross margin rose by 70 basis points to 37.3 percent, helped by improved clearance and promotional selling margins as well as supply chain efficiencies.

NET LOSS NARROWS

Analysts applauded the results.

"We're encouraged by the disciplined cost management and continued comp momentum in a challenging Q3 environment," Baird analyst Mark Altschwager said in client a note titled "First look-Solid Quarter".

Penney, which last reported a profit in the last quarter of 2013, said its net loss narrowed to $137 million, or 45 cents per share, in the third quarter ended Oct. 31, from $188 million, or 62 cents per share, a year earlier.

Excluding items, the company lost 47 cents per share, compared with the average estimate of 55 cents, according to Thomson Reuters I/B/E/S.

Net sales rose a better-than-expected 4.8 percent to $2.90 billion, helped in part by Sephora, which Chief Executive Marvin Ellison said had performed "exceedingly well."

Sephora, which is popular among "millennials", is owned by luxury giant LVMH (>> LVMH).

Analysts had expected sales of $2.88 billion.

Penney said earlier this week that its same-store sales in the quarter rose a more-than-expected 6.4 percent.

Up to Thursday's close of $8.79, Penney's stock had risen more than 35 percent this year.

(Reporting by Sruthi Ramakrishnan and Siddharth Cavale in Bengaluru; Editing by Savio D'Souza and Ted Kerr)