Updated from 10:36 a.m. EST

Kmart

(KM)

reported Monday that its fourth-quarter earnings rose 17%, widely exceeding Wall Street's expectations, as store renovations and new brands appeared to be pushing up margins.

For its fiscal quarter ended Jan. 26, the Troy, Mich.-based discount retailer posted net income of $412 million, or 77 cents a diluted share, compared with net income of $353 million, or 65 cents a share, in the year-earlier period.

The consensus estimate of analysts surveyed by

First Call/Thomson Financial

was for the company to earn 69 cents a share in the latest quarter.

Revenues rose to $11.1 billion in the fourth quarter, from $10.4 billion a year earlier.

Kmart's stock rose 3/16, or 2%, to close at 8 3/4.

Floyd Hall, Kmart's chairman, president and chief executive, said in a statement that sales productivity reached a record level of $233 per square foot after having completed a $1.1 billion store conversion process that updated 1,860 stores to the easier-to-shop Big Kmart prototype.

Same-store sales for the quarter rose 3.7%.

The addition of brand names like Thom McAn, Route 66 and Martha Stewart Everyday home, baby and garden products contributed to higher gross margins for the quarter.

Analysts are now looking at whether the company's new online retail initiative,

Bluelight.com

, will have an impact on earnings going forward.

Kmart hopes to spin off the unit, which Hall expects would allow the retailer to have a greater Web presence without the additional costs of Internet development reducing its near-term profits. Kmart will retain 60% ownership of BlueLight.com.

Some analysts have said that the venture could be what Kmart's disappointed shareholders have been waiting for, because BlueLight.com may eventually have a higher value than Kmart.

Kmart's shares have fallen about 45% over the past year.

The Internet store, started in December, has the backing of

Softbank

of Japan,

Yahoo!

(YHOO)

and

Martha Stewart Living Omnimedia

(MSO)

, among others.