Real estate a boon for Kmart

TROY, MICH. — Still staging an impressive turnaround as it recovers from bankruptcy and downsizing, Kmart recorded its third consecutive quarterly profit since emerging from Chapter 11, swinging to a second quarter profit of $155 million from a year-ago loss of $5 million.

Wall Street applauded the news by sending the retailer's stock price soaring more than 17 percent, or $11.15 a share, to $76.05 a share.

Providing a big lift to the bottom line was $72 million the retailer banked on the sale of some of its stores. Kmart is in the process of selling off its real estate to Sears and Home Depot, and did not specify in its 10Q federal filing which sales contributed to the surge in quarterly profits.

On the downside, Kmart sales continued to slide, falling 15.3 percent, to $4.8 billion from $5.7 billion last year. Same-store sales dropped 14.9 percent. The retailer said in its 10Q filing that sales were hobbled by "reductions in promotional events and newspaper advertising, the effect of unseasonably cool weather in the current quarter of summer seasonal products, including lawn and garden merchandise; and a transition in our apparel lines leading up to back-to-school product launches."

Helped by fewer markdowns on promotions and clearance items, average gross margin widened substantially, 420 basis points, or 4.2 percentage points, to 26 percent from 21.8 percent. Costs held steady at 21.7 percent of sales.

Further cheering investors, Kmart is sitting on $2.6 billion in cash, and the company has given its principal shareholder, hedge fund investor Edward Lampert, a green light to invest it as he sees fit.

Lampert's company, ESL Investments Inc., based in Greenwich, Conn., owns about 52.6 percent of Kmart. Lampert is also the single largest investor in Sears, Roebuck, controlling a stake of more than 12 percent.