J.C. Penney Co Inc reported a sharper-than-expected decline in quarterly sales at stores open at least a year as shoppers continued to snub the retailer after it got rid of most coupons and sales earlier this year.

The company, which is in the early stages of a multiyear turnaround, said on Friday that same-store sales had fallen 26.1 percent, while analysts had expected a decrease of 17.9 percent. Shares of the department store chain dropped 7 percent to $20.18 in premarket trading.

Penney has eliminated most coupons and sales events and plans to transform about 700 of its 1,100 stores into a collection of 100 boutiques, such as Levi's Denim Bar, by 2015.

There have been signs that the first few shops, which also include Izod and Liz Claiborne, have won over customers, but they still only represent a small fraction of sales.

Penney customers, who are more price-sensitive than those at Macy's Inc , have balked at the absence of coupons, and the sharp drop in visits by shoppers has decimated sales in the three quarters since the strategy was put in place in February.

In a statement, Chief Executive Officer Ron Johnson, who took the reins a year ago and is the architect of the turnaround, said this was a "tale of two companies," with the old Penney still struggling and the new stores "surpassing" his expectations.

But Walter Loeb, president of retail management consultant Loeb Associates, expressed concern about Penney's performance during the upcoming holiday shopping season.

"I expect a big drop in sales" Loeb said. "(Johnson) must generate traffic. I think he has to be more promotional."

Penney made some concessions during the latest quarter. Last month it offered a $10 "gift" coupon and recently held 30 percent off clearance promotions, but Loeb said it needed to do much more.

Penney said its net loss had narrowed to $123 million, or 56 cents per share, in the third quarter ended October 27 from $143 million, or 67 cents per share, a year earlier.

Excluding the gain from the sale of noncore assets and other items, Penney said it had lost 93 cents a share.

Overall sales fell 26.6 percent to $2.93 billion. (Reporting by Phil Wahba in New York; Editing by Lisa Von Ahn)