Sears Defies Skeptics

Cynics, however, have pointed out that Sears' same-store sales declines suggest the company is losing customers to its fast-growing rivals like Wal-Mart (WMT) and Target (TGT), and that could hurt the company's value over time, even as it drives profitability in the short-term.

"This is the continuation of a trend at Sears, and people are wondering how long it can continue," says Morningstar analyst Kim Picciola.

While Sears Holdings has yet to reveal its capital expenditures for the first quarter, Picciola notes that it has recently invested much less money back into its business than it has in the past. It also spends less as a percentage of sales than its slow-growth peers in the retail industry, like J.C. Penney (JCP).

Those cost controls and merger synergies boosted profitability despite the sales declines. On a pro forma basis, Sears' operating income more than doubled to $231 million, as selling and administrative costs fell to 22.7% of revenue, from 23.8% a year ago. Gross margin was 27.8%, up from 26.4%.

Sears' preferred financial metric is pro forma adjusted earnings before interest, taxes, depreciation and amortization. That rose to $613 million, or 5.1% of revenue, in the quarter, from $413 million, or 3.2% of revenue, a year ago.

Its cash balance at the end of the quarter was $3.2 billion, up from $1.9 billion one year ago, and it repurchased 3.3 million common shares during the period at a total cost of $413 million.

"With a goal of dramatically improving the customer experience at all of Sears Holdings' touch points, we are starting with the basics and working with our associates to drive the culture shift necessary to become a great retail company," Sears said in a press release.

Separately, Sears said it agreed to pay $215 million to settle a class action suit related to disclosures about Sears Roebuck's credit card business, which was sold in 2003. The company, which didn't admit any wrongdoing, said its cash payment will total about $85 million on a pretax basis after giving effect to insurance proceeds.

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