Sears Defies Skeptics

Updated from 9:53 a.m. EDT

Continued sales declines didn't stop Sears (SHLD) from swinging to a first-quarter profit that blew away Wall Street's expectations.

Hedge fund maven Ed Lampert, who created the company last year when Kmart acquired Sears Roebuck, used his usual prescription of cost controls and share repurchases to boost earnings. Skeptics, though, will be left wondering how long the company's dismal sales performance can continue.

The retailer earned $1.14 a share, or $180 million in the quarter, compared with a charge-laden loss of $9 million, or 7 cents a share, a year ago. Analysts were expecting earnings of 65 cents a share, according to Thomson First Call.

The market responded to the upside by shooting Sears shares up $17.35, or 12.6%, to $155.31.

Sears' net sales rose 58% to $12 billion in the latest period, which included a full three months of Sears' results compared with about a month last year. On a pro-forma basis, which attempts to compare results with last year's performance at both Kmart and Sears, revenue fell 6% to $12.8 billion. Domestic same-store sales fell 4.8% in the period, reflecting declines of 8.4% at Sears and 0.2% at Kmart.

"The decline in Kmart comparable store sales for the quarter was primarily due to lower transaction volumes within home goods, partially offset by increased sales in apparel and within food and other consumable goods categories," the company said. "Sears Domestic comparable-store sales results reflect declines across all categories and formats except within home appliances, which generated a modest comparable-store sales increase."

Consistent with Lampert's blueprint for driving higher returns on investment, the company focused on profitability in the most recent quarter at the expense of sales. Lampert, the company's chairman and major shareholder, has defended the strategy before, noting that sales growth has no value if a company isn't profitable.