Sears Holdings 3Q Profit Plunges 99 Pct

Sears Holdings Corp. reported a 99 percent drop in third-quarter profit Thursday on weak sales at its Sears and Kmart department stores and continuing investment losses under hedge-fund manager Chairman Eddie Lampert. Its stock plummeted.

It was the worst quarter since Lampert formed the company by combining Sears and Kmart in March 2005, heightening questions among investors about Lampert's strategy for reviving two faded chains. The company signaled little hope for improvement in the near future.

Sears shares tumbled $16.09, or 13.8 percent, to $100.25 in morning trading - down by nearly half from their peak of $195.18 in April.

The Hoffman Estates, Ill.-based company, which earlier this week said it may buy out the rest of retro-themed retailer Restoration Hardware Inc. (nasdaq: RSTO - news - people ), reported net income declined to $2 million, or a penny per share, from $196 million, or $1.27 per share, a year ago when results were padded by $64 million in investment gains.

Sales for the quarter ended Nov. 3 slipped 3 percent to $11.5 billion from $11.9 billion in the fiscal 2006 period.

A surveyed by Thomson Financial predicted profits of 50 cents per share. Two analysts had forecast revenue of $11.61 billion.

"We are very disappointed in our performance for the third quarter. We cannot blame our results entirely on the retail and macro-economic environments. We have much on which to improve and are working hard to do so," said Aylwin Lewis, Sears Holdings (nasdaq: SHLD - news - people )' chief executive and president.

Investors who once thought Lampert could turn Sears into a profit machine are having second thoughts.

"That was worse than even we thought," Morgan Stanley (nyse: MS - news - people ) analyst Gregory Melich said in a research note. He said Sears has become "a poster child" of financial engineering at a difficult time in the credit markets.

Comparable sales, or those from stores open at least 13 months, declined 4.2 percent for the quarter at Sears stores and 5 percent at Kmart, with notable declines in clothing and lawn and garden at both.

Sears blamed the weaker sales on increased competition, less consumer spending because of the weak housing market and growing credit concerns and unseasonably warm weather, which hurt sales of apparel and other seasonal merchandise.

Investment income had initially carried the company to higher profits under Lampert but that trend has long stopped, leaving it with no buffer for weak sales. Sears had $30 million in interest and investment losses for the quarter, pushing its losses for the year in that category to $112 million.

Cash and cash equivalents declined to $1.5 billion at the end of the quarter, down from $2.1 billion a year ago and $4 billion on Feb. 3. Gross margin declined 90 basis points to 27.4 percent, hurt by markdowns taken to clear seasonal merchandise and higher inventory levels due to lower sales.

Sears, which has 3,800 stores, also warned it expects difficult economic conditions to persist in the near-term, with sales and gross margin likely continuing to be pressured through the rest of the year.

For the first three quarters, profits were $394 million, or $2.66 per share, down from $670 million, or $4.29 per share, a year earlier. Revenue declined 3 percent to $35.5 billion from $36.7 billion.