Investors cheered Sears Holdings ( SHLD) Wednesday, bidding up its shares as the company squeezed better-than-expected profits out of weakening revenue in its holiday quarter.

The retail behemoth cobbled together by hedge fund manager Ed Lampert reported that its fourth-quarter earnings more than doubled from a year ago, but those results came from skewed comparisons from the merger of Kmart and Sears that formed the holding company one year ago.

Allowing for the merger, Sears Holdings reported that its quarterly earnings on a pro forma basis rose 10%, while its sales dropped 4.5%. Its overall same-store sales for the year fell 5.3%, and the retailer warned of threats from competitors as it faces increasing pressure from the likes of Wal-Mart ( WMT) and Target ( TGT).

"The company continues to face market share pressure as competitors open additional locations and engage in heavy promotional activity," Sears said. "The company expects these trends to continue in the foreseeable future, and these trends may negatively affect the company's future sales performance and results of operations."

On a reported basis, Sears Holdings earned $648 million, or $4.03 a share, in the fourth quarter, up from $309 million, or $3.09 a share, last year. Sales rose to $16.1 billion from $5.9 billion a year earlier. Analysts surveyed by Thomson First Call were predicting average earnings of $3.62 a share on sales of $16 billion.

Its pro forma results, which attempt to combine last year's results from Kmart and Sears, were less impressive but provide a more realistic picture of the retailer's progress. On that basis, the company's earnings were up 10% from last year's pro forma earnings of $589 million, or $3.62 a share. Its top line fell from the pro forma revenue of $16.8 billion last year.

Shares of Sears Holdings recently were up $13.43, or 11.4%, to $130.70.

Same-store sales at the company's Sears division dropped 12.2% during the key holiday quarter, which the company attributed to its decision to forgo costly promotions. The chain also saw weaker-than-usual results from its apparel business, where same-store sales fell 13.8%. The company said it expects comparable-store sales declines at Sears to moderate in fiscal 2006. Kmart stores registered a 0.9% same-store sales increase, their first since the second quarter of 2001.

In a wide-ranging letter to shareholders, Lampert expressed skepticism about the market's proclivity to use same-store sales as a chief measure for a retailer's performance. Same-store sales gauge sales at stores that have been open for at least a year, and investors use it to measure a retailer's competitive performance, factoring out its new store growth. But Lampert said the maturing process of new stores over several years can sometimes distort the metric, and it often discounts the importance of how much capital a company is spending in order to generate same-store sales gains.

"In our case, starting with Kmart three years ago, we had many stores that were operating with low levels of profit or at a loss," Lampert said. "If we had attempted to sustain our sales levels, it would have been difficult to improve our store and company profitability. By changing the objective from maintaining sales to growing profit, we were able to make a substantial improvement in our company's profitability. No longer are we carrying excessive inventories, spending excessive amounts on marketing, and scheduling excessive labor dollars all in the pursuit of a given level of sales."

Still, Lampert expressed disappointment with Sears' performance, but he said the overall company has cleared a big hurdle.

"For the most part, the process of effecting the integration of Sears and Kmart is behind us," Lampert said in his letter. "This is significant, because the integration process is a difficult one in all mergers, and many companies stumble at this threshold stage."

Now, he views Sears Holdings as a "$55 billion revenue, 350,000 person start-up," allowing the company to try new strategies. For instance, Sears is experimenting with various ways of transforming Kmart locations into a Sears format. Recently, it abandoned its Sears Essentials in favor of the Sears Grand nameplate, which is more of a big-box store that includes grocery and drugstore items.

"One of the great advantages of having approximately 2,300 large-format stores at Sears Holdings is that we can test concepts in a few stores before undertaking the risk and capital associated with rolling out the concept to a larger number of stores or to the entire chain," Lampert said.

On the acquisition front, Sears made no changes to its offer to buy the remaining 46% of Sears Canada, after independent directors at the company urged shareholders to reject its $720 million bid on grounds that it was too low. The bid is open for acceptance until Friday.

At the end of its fiscal year, Sears said it had completed almost $600 million of $1 billion repurchase program. Lampert compared Sears' buybacks to those of Warren Buffett's Berkshire Hathaway ( BRK.A), saying his goal was to increase the per-share value of the company.

Meanwhile, Sears announced that Michael Miles and Julian Day won't seek re-election to its board of directors. The company said Miles plans to devote more time to personal matters, and Day will pursue other business interests. Day was replaced as CEO of Sears Holdings last year by the former CEO of Kmart, Aylwin Lewis.

Lampert said the two will not be replaced and the board's size will reduce to nine directors from 11. He also said the company its focused on finding new talent.

"My goal is to see Sears Holdings become a great company whose greatness is sustainable for generations to come," he said.