Payless ShoeSource Inc. (PSS) Friday posted a quarterly profit that blew past Wall Street estimates as better pricing and fewer promotions boosted results, sending the retailer's shares up 17 percent.

Earnings for the third quarter ended on Oct. 30 were $6.6 million, or 10 cents a share, compared with a year-earlier loss of $2.2 million, or 3 cents a share.

Four analysts on average had expected the chain to earn 5 cents a share, according to Reuters Estimates.

Results in the latest quarter included an after-tax restructuring charge of $4.5 million, or 7 cents a share.

Gross margins for the quarter improved to 29.4 percent from 26.8 percent a year earlier.

"Gross margin was better than we had anticipated — quite a bit better," which the company attributed to more favorable initial merchandise margins and surprisingly few markdowns, said John Shanley, footwear and athleticwear industry analyst at Susquehanna Financial Group (search).

"The other benefit they got, which was worth about 2 to 3 cents, was a much lower effective tax rate," Shanley said. Payless reported a tax rate of 31 percent, down from the company's prior estimate of 36.5 percent.

Sales at stores open at least a year, a closely watched measure called same-store sales, fell 3.1 percent for the quarter. Total sales also decreased 3.1 percent, to $687.3 million.

Although Payless said it took fewer markdowns during the quarter, it expects promotional activity to increase. It sees advertising expense for the second half of its fiscal year ending in January to be similar to year-earlier levels.

The company also expects to record restructuring costs of between $33 million and $46 million in the fourth quarter.

Earlier this year, Payless had posted lower quarterly results as it struggled with rising costs due to aggressive promotions and inventory issues.

The company has shown signs of improvement on cost control since July, after its announcements to close 260 Payless Stores, all 181 Parade stores, and exit its operations in Peru and Chile.

Looking ahead, Payless said it expects it will need to ramp up its promotional activity in the fourth quarter versus the third, and that it will boost the frequency of its advertising.

Payless, which operates 5,022 stores in the United States, Canada and overseas, said it expects to complete all restructuring by the end of its fiscal year.

In the latest quarter, Payless said total inventories fell to $375.9 million from $410.7 million, for an 8 percent decline on a per-store basis.

The company also said its first test store in Japan is set to open on Nov 19, although it has halted expansion into new overseas markets.

Payless shares were up $1.86 at $12.93 in New York Stock Exchange (search) trade, where they were the top percentage gainers.