Sears Increases Quarterly Profits

Fourth-quarter earnings rise amid improved margins.
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Sears Holdings

(SHLD)

, the retail empire cobbled together by hedge fund guru Ed Lampert, posted a 27% jump in fourth-quarter earnings as it continued to squeeze higher profit margins out of declining same-store sales.

The company, which owns the Sears and Kmart retail chains, posted earnings of $820 million, or $5.33 a share, up from the $648 million, or $4.03 a share, it recorded for the same period a year ago.

Excluding a bevy of one-time items, the retailer reported earnings of $5.36 a share on revenue of $16.29 billion, up 1% from last year's $16.09 billion.

Those results beat Wall Street's expectations for an operating profit of $5.18 a share on revenue of $15.95 billion, according to consensus estimates reported by Thomson First Call.

Shares of Sears Holdings were recently down $4.75, or 2.6%, to $175.50 amid a broader selloff in the stock market. The stock has been volatile, as investors have long been fixated on the underlying value of the company's real estate assets as well as Lampert's ability to invest its cash pile elsewhere.

Work in Progress

"We are making progress as evidenced by our improved financial performance in fiscal 2006, but recognize we still have much work to do," said the company in a statement.

In an indication of challenges its chains face amid competitive pressure from the likes of

Wal-Mart

(WMT) - Get Report

and

Target

(TGT) - Get Report

, same-store sales continued their long, steady decline at both Sears and Kmart.

Same-store sales, or comps, are a closely watched retail gauge measuring sales at stores open for at least a year. At Sears, comps declined 4.9% for the quarter in the U.S., while they dropped 0.9% at Kmart. Overall, the company's comps were down 3.1%, due to a lower number of transactions.

For the year, net income grew 74% to $1.49 billion. Revenue rose 8% to $53 billion, even as same-store sales fell 3.7%. U.S. comps for the year were down 6.1% at Sears and 0.6% at Kmart.

Lampert and his team have slashed costs at both chains, reined in capital spending and managed inventories to maximize profit margins even at the expense of market share.

At the end of the quarter, Sears Holdings said it held $4 billion in cash, up $1.9 billion from the $2.1 billion balance it reported at the end of the third quarter. It attributed the gain to operating cash flows generated from sales during the holiday selling season.

For the year, the company spent $816 million on share repurchases, $474 million on capital expenditures, $318 million on pension contributions, $282 million on additional interests in Sears Canada and $250 million on debt payments net of new borrowing.

In 2006, it recorded $74 million in pretax income from investing in total return swaps, or derivative contracts that "are highly concentrated and involve substantial risks."

Those trades reflect Lampert's mandate to invest Sears Holdings' cash in other securities, but the hedge fund manager of ESL Investments disputed the widespread perception that he is shrinking its retail chains and morphing the company into a publicly traded investment vehicle such as

Berkshire Hathaway

(BRKA)

.

"Some commentators have asserted that we want to shrink the company, but that is simply not so," said Lampert in his annual letter to shareholders. "No great company would aspire to become smaller, and we certainly do not. But before embarking on a growth plan, it is critical to provide a sound base from which to grow. To this end, we have set out to improve the profitability of our business model.

"Our objective is disciplined growth. We do not want to grow simply for the sake of becoming bigger. Rather, our aim is to become more profitable, and as such we need to ensure that any revenue growth occurs at an appropriate level of profitability."