Same Old Story at Sears

The retailer's sales continue to decline, and Lampert remains mum.
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Updated from 7:58 a.m. EST

Staying the course may be an unpopular idea around Washington D.C., but it seems to be the way things are done at

Sears Holdings

(SHLD)

.

The retailer again reported a big jump in earnings for its third quarter, but sales at its Sears and Kmart stores continue to slide as the company follows Chairman Ed Lampert's doctrine on focusing on profitability over top line growth.

The company earned $196 million, or $1.27 a share, for the quarter ended Oct. 28, up from the year-ago $58 million, or 35 cents a share. The results were boosted by $101 million in investment gains related to derivative instruments called total return swaps.

Excluding the swaps and certain other items, latest-quarter earnings were 83 cents a share, well below analysts' forecast of 98 cents, according to Thomson First Call.

Revenue slipped to $11.94 billion from $12.2 billion, missing analysts' forecast of $12.38 billion.

The company said the improved results reflect increased operating income, driven primarily by reduced expenses across all of its businesses and increased gross margins at Sears stores.

Operating results at both Sears Domestic and Sears Canada improved compared with a year ago, but operating results at Kmart declined due to lower sales levels and gross margins, partially offset by reduced expenses.

Lampert, the hedge fund operator who orchestrated the creation of the retail conglomerate, has been criticized by some industry analysts for letting same-store sales fall in favor of improving profit margins. And same-store sales were indeed down in the most recent quarter.

Domestic same-store sales declined 3% in the aggregate, with Sears U.S. same-store sales falling 4.8% and Kmart domestic same-store sales declining 0.7%. The comparable-store sales declines at both Kmart and Sears Domestic reflect the impact of increased competition and lower transaction volumes, the company said.

When asked for comment on the same-sales decline, a Sears Holdings spokesman pointed to Lampert's March message to shareholders, where the hedge fund operator said comps were important, "but vastly overrated."

"It's a very profitable model," says Richard Hastings, retail sector analyst at Smyth-Bernard Sands. "They are force in the industry and they are always an acquisition threat. There is no ego trip going on here, there is no illusion going on here. It's a very grounded and rational approach to inventory and margin risk and they have proven over and over their commitment to profitability and the naysayers always get blown away."

At Kmart, same-store sales declined across a number of categories, including home goods, hardlines, food and consumables, and general merchandise, partially offset by increased same-store sales within apparel and pharmacy. At Sears, same-store sales declined across most categories and formats, with more pronounced sales drops within both the home fashion and lawn and garden categories.

These declines were partially offset by sales increases in women's apparel, reflecting what the company said it believes are improved assortments in this business relative to last year.

"From a retail point of view, it looks like they've improved somewhat," says Scott Rothbort, founder of LakeView Asset Management and a contributor to

TheStreet.com

sister site

Street Insight

. "The decline in same-store sales seems to be improving, margins have improved, and it also looks like they've made some headway in terms of apparel. The home and garden stuff seems a little weaker, but that isn't Sears-specific, as we saw the same thing happen with

Home Depot

(HD) - Get Report

."

In Sears Holdings' last earnings report, Lampert hinted that the company may be looking at potential acquisition targets, prompting rumors that he was looking to buy companies ranging from

Anheuser-Busch

(BUD) - Get Report

to even

General Motors

(GM) - Get Report

. But Lampert had not even a quote in the company's Thursday earnings release.

Hastings saw nothing wrong with the silence.

"It's consistent with their policy of saying only what they need to say," he says. "When they do issue their quarterly reports, their disclosures are thorough and contain many valuable details about their segments. I never feel as if there were something missing."

Meanwhile, Sears Holdings' sales may face even more trouble in the holiday season given

Wal-Mart's

(WMT) - Get Report

aggressive price-cutting.

While Kmart competes with Wal-Mart, Rothbort says he isn't sure a Sears shopper was the same as a Wal-Mart shopper. He noted that Sears tends to be an anchor store like

J. C. Penney

(JCP) - Get Report

, which has seen strength lately.

Shares of Sears dropped $9.89, or 5.5%, to $169.26 Thursday.