Resist the Bluelight Special on Kmart Stock

Discount chain Kmart's (KM Quote) turnaround hopes are fading, and investors are rightly shedding the stock.

Shares are off more than 55% from their 52-week high of $13.55 reached in early August, as investors have come to realize that any turnaround at this outfit will take longer than anticipated. This week the company reported earnings -- a loss, actually, in this case -- that beat Wall Street estimates, but don't be fooled: the company's 25 cents-a-share loss was less than the 27- cent consensus, but as recently as seven weeks ago analysts expected the company to lose only a dime a share, according to I/B/E/S.

General Electric Jim Cramer and Arne Alsin IBM Joe Bousquin and Glenn Curtis Sprint PCS Tish Williams and Cody Willard Philip Morris Glenn Curtis and Gary B. Smith Microsoft's Xbox Jim Cramer and Jim Seymour

Here is the problem: to great fanfare, earlier this year the company revived its famous Bluelight specials, an in-store campaign that uses flashing blue lights to notify customers that an item is on sale. This was followed by its so-called "Bluelight Always" campaign, which permanently slashed prices on a variety of goods. The aim: to compete with discount giant Wal-Mart(WMT Quote).

But this effort failed -- a familiar retail mantra is that no one competes with Wal-Mart on price and wins -- and Kmart lost market share to its rival, according to most analysts. In the third quarter, for example, Kmart's key same-store sales number, which gauges activity in shops open at least a year, declined 1.5%, while Wal-Mart posted a healthy 6.7% gain.

The company's effort to overhaul its supply chain and cut the cost of procuring goods is moving along -- it took a $94 million charge in the third quarter for this purpose -- but as of yet has not resulted in significantly improved margins.

And the holiday shopping season, which many say will benefit discounters as cash-conscious consumers seek out bargains, appears to be passing Kmart by. Its same-store sales in November are behind plan, the company said this week, which executives blame on a too-drastic cut in advertising.

Some Wall Streeters expect the company's turnaround efforts to finally pay off next year, but investors would be wise to wait for firm signals that a rebound is in effect.