Profit up at Sears as sales tumble

Sears Holdings Corp. said Thursday that it more than tripled its third-quarter profit on a big investment gain and the benefits of cost-cutting, but sales at its Kmart and Sears stores spiraled ever lower and the results disappointed Wall Street.

The latest evidence of spending cutbacks and fewer customers comes amid widespread speculation that Chairman Edward Lampert, the hedge fund operator who acquired Kmart Corp. in 2003 and Sears, Roebuck & Co. in 2005, is preparing to acquire another large retailer.

More than half of its Sears’ $196-million profit came from $101 million in investment income, bolstering a war chest of $2.1 billion in cash that investors, who pushed the company’s stock price up more than 25% in three months, suspect will be used for a big purchase.

The speculative rally turned sharply downward Thursday as Sears disclosed that same-store sales, a key barometer of retailers’ health, fell 3% because of increased competition and fewer transactions.

Shares in the company tumbled $9.89, or 5.5%, to $169.26. They remain up 47% this year.

Retail consultant George Shapiro said there was little doubt how Lampert intended to use money gained from the stock’s run-up, because he was not spending it in the stores. “There’s going to be an acquisition of some sort -- the only question is what kind,” he said.

Shapiro, chairman of Chicago-based Leo J. Shapiro & Associates, said the best fit for Sears might be Gap Inc., which operates Old Navy, Gap and Banana Republic stores.

With Lampert avoiding conference calls and no longer issuing quarterly letters to investors, Wall Street is left to speculate. Other retailers he has been said in published reports to be eyeing include Anheuser-Busch Cos., Home Depot Inc. and RadioShack Corp.

Earnings for the July-to-September period amounted to $1.27 a share, up from $58 million, or 35 cents a share, a year earlier.

Excluding certain items, Sears said earnings were 83 cents a share, compared with 48 cents a year earlier. That was 15 cents below the consensus forecast of analysts, although Thomson Financial said it wasn’t immediately clear how many of the analysts it surveyed included investment income in their estimates.

Revenue dropped to $11.9 billion from $12.2 billion, slightly better than Wall Street’s consensus estimate of $11.8 billion. Same-store sales, or those from stores open at least 13 months, declined 4.8% at Sears stores and 0.7% at Kmart.