Recent results at 100-year-old J.C. Penney (NYSE:JCP) suggest that the company has remembered that merchandising matters.

After a strong consumer response to the department-store chain's jewelry, women's apparel, and accessories, to name a few product areas, Penney's has logged a couple of years of positive same-store growth. It's also looking to grow its store base toward more off-mall locations. After a strong run, the stock is near its 52-week highs, but it could be set for further upside.

Penney's reported solid second-quarter results, with total department-store sales increasing 7.1% and same-store sales advancing 6.6%. Diluted earnings per share grew a jaw-dropping 52%, because of the sales growth, margin improvements, and fewer shares outstanding, after the company repurchased $530 million worth of its common shares.

The only knock I have against the reported results is that free cash flow was negative for the six-month period, as capex exceeded operating cash flow. This also occurred during the comparable period last year. This is understandable, since the company has invested in revitalizing existing stores and opening new ones. Eventually, though, I'd like to see free cash generation, since Penney's is a mature department store.

Nonetheless, Penney's 2000-2005 turnaround plan appears to have worked wonders, and it's still paying dividends, as witnessed by the strong quarter. As I noted in an overview of the company's first-quarter results, the stock now trades for more than four times the $15 levels it fetched back in 2003. I also noted that sales growth had fallen about 10% each year over the past five years, but I neglected to add that if you strip out the Eckerd drugstore chain sold by Penney's back in 2004, sales have advanced approximately 5% per year. Five percent is clearly better than negative 10%, but it still suggests that J.C. Penney's best days of expansion are behind it.

I'm still sticking with my thesis that investors don't have to pay a much higher multiple of earnings to invest in faster-growing competitors such as Target (NYSE:TGT) or Wal-Mart (NYSE:WMT). Target's prospects are still strong, and although Wal-Mart is not growing as fast as it used to, either, it retains better historical and expected future growth.

But after J.C. Penney's solid quarter and greatly enhanced growth profile, it may be worth a closer look. I would definitely pick Penney's over traditional competitors such as Dillards (NYSE:DDS), SearsHoldings (NASDAQ:SHLD), or Federated (NYSE:FD). Penney's is experiencing the strongest recovery out of this group, but all appear to have found ways to compete by either revitalizing stores or improving their merchandise mix. Industry consolidation is also a welcome trend, since it rationalizes store count and can improve overall profitability. That's supposedly helped Kohl's (NYSE:KSS) kick-start same-store sales as well.

Perhaps these developments are creating a more level playing field, where Target and Wal-Mart are no longer hogging an outsized share of industry growth. Someday, they'll have to rely on growing their bottom lines without rapid store expansion; maybe they'll even have to look to Penney's, since it seems to have figured out how to keep growing even after a century in existence. For current shareholders' sake, let's hope the magic is here to stay.

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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.