An improvement in sales at Kmart and cost-cutting overall helped Sears Holdings Corp. (SHLD) show better results in the third quarter.

The parent of Sears and Kmart stores posted a net loss of $127 million, less than the $146 million it posted the same time last year. That translates to $1.09 per share, or 80 cents per share after factoring out some one-time items, beating Wall Street's forecast of $1.09 per share.

The company's comparable store sales in the U.S. dropped 2.3%, with sales up 0.5% at Kmart, but down 4.6% at Sears. Kmart's sales rose thanks to better sales of toys and home items, while Sears was hurt by slow sales of appliances, lawn and garden items, tools and electronics.
"We saw some encouraging signs of progress in the third quarter," said Sears Holdings' interim CEO W. Bruce Johnson.

Besides the sales increase at Kmart, he noted that Sears's sales losses were smaller during the quarter, the company increased its profit margin rates and reduced expenses by $101 million. The margin improvements came mainly from better inventory management, which led to lower markdowns on spring and summer apparel and home products and higher margins on home appliances, he said.

For Kmart, the quarter's improved sales were a slight vindication of its strategy to replace Martha Stewart Everyday, which used to be its flagship home brand. The domestic diva -- whose contract expires at he end of the year -- recently disparaged Kmart stores and Sears Holdings management in interviews, saying Kmart was undercutting her line. For its part, Kmart concentrated on beefing up its other home lines to make up for the wind-down of Stewart's line, which at its peak sold $1.6 billion in products at Kmart stores.

However, weakness in tools and appliances is a bad sign for Sears, whose Kenmore and Craftsman brands are leaders in those two segments. The department store is getting increased competition in appliances from Home Depot Inc. (HD) and Lowe's Cos. (LOW), which are aggressively pursuing that area, offering free delivery and repair services.

Johnson's statement said the company is prepared for the holidays, but Sears Holdings is facing strong headwinds this season. Wal-Mart Stores (WMT) and Target Corp. (TGT) have both vowed to keep the pressure on prices, which will squeeze the third player in the discount segment, namely Kmart. Meanwhile, J.C. Penney (JCP) and Kohl's Corp. (KSS) plan to target the home and apparel area, which will squeeze the third player in the mid-price department store -- Sears. It will be a hard-fought holiday on all fronts.

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