Aug. 17 (Bloomberg) -- Sears Holdings Corp., the largest U.S. department-store company, said second-quarter profit rose after it cut selling and administrative expenses.

Net income climbed to $294 million, or $1.88 a share, from $161 million, or 98 cents, a year earlier, Hoffman Estates, Illinois-based Sears said today in a statement distributed by PR Newswire. Revenue in the period ended July 29 fell to $12.8 billion from $13.2 billion.

Chairman Edward Lampert, the hedge-fund manager who arranged Kmart Holdings Corp.'s purchase of Sears, Roebuck & Co., is retooling stores and merchandise to halt declining sales. He has fired workers, closed Kmart's headquarters and cut administrative expenses.

``People already know their sales are going to be slower,'' said Arun Daniel, an analyst at ING Investments LLC in New York, which manages $40 billion in assets including Sears shares. Investors ``are looking for incremental changes.''

Shares of Sears rose $3.80, or 2.6 percent, to $150 yesterday in Nasdaq Stock Market composite trading. The stock has surged 30 percent this year. Federated Department Stores Inc., the second-largest U.S. department-store company, gained 15 percent and J.C. Penney Co., third biggest, jumped 22 percent.

Credit Suisse analyst Gary Balter, who is top-ranked for accuracy by StarMine Corp., estimated profit of $1.69 a share. Balter, based in New York, rates the shares ``outperform.''

The average estimate of five analysts surveyed by Thomson Financial was $1.67. Thomson declines to disclose the basis for its projections to Bloomberg.

Selling More Profitability

While sales may be falling, Lampert is selling merchandise more profitably, said Scott Rothbort, president of Millburn, New Jersey-based Lakeview Asset Management, which counts Sears Holdings among its top investments.

``He's focusing on margins; he's not focusing on absolute sales,'' Rothbort said.

Sears has about 3,900 stores in the U.S. and Canada.

J.C. Penney, which also offers moderately priced merchandise, is winning clothing and home goods shoppers from Sears, Daniel said. Sears is also losing customers for appliances to Home Depot Inc. and Best Buy Co.

``Things are not good for them in that area,'' he said.

Morgan Stanley analyst Gregory Melich estimated in an Aug. 6 report Home Depot and Lowe's Cos. each gained more than 1 percentage point in market share in appliances -- ``a critical category for Sears'' -- during the quarter.

The retailer is losing business to other chains at a time when home improvement sales are weakening, wrote Melich, who is based in Purchase, New York, and rates the shares ``underweight.''

Shuffles Managers

Lampert, 44, combined Sears with Kmart in March 2005 to create the largest U.S. department-store company by sales. He has removed Alan Lacy as chief executive, shuffled managers and hired merchandising executives since taking direct control of the company's operations in September.

He's also reduced spending by firing more than 1,500 workers and closing Kmart's headquarters in Troy, Michigan.

During the quarter, Lampert hired Craig Monaghan as chief financial officer to begin Sept. 1. Monaghan arrives from AutoNation Inc., the largest U.S. retailer of new and used cars, where he is CFO. Lampert is a director of AutoNation and his fund is the company's biggest shareholder, according to Bloomberg data.

Monaghan is adept at cost cutting and worked closely with Lampert and Sears Chief Administrative Officer William Crowley, who is also an AutoNation director, Balter wrote in a July 27 report.

Goldman Sachs

A former risk-arbitrage executive at Goldman Sachs Group Inc., Lampert heads ESL Investments Inc., a hedge-fund company in Greenwich, Connecticut. He has focused on buying undervalued companies and said he's a student of billionaire Warren Buffett's investment philosophy of acquiring assets shunned by others.

Last month, Lacy resigned as vice chairman and chairman of Sears Canada. Lampert had replaced Lacy as CEO in September with Kmart chief Aylwin Lewis.

Lampert has been thwarted in his efforts to buy the 46 percent of Sears Canada the company doesn't already own.

On Aug. 8, the Ontario Securities Commission blocked the company's offer for the shares, saying Lampert gave better terms to two banks and a real estate investor in return for their support. Lampert broke merger rules by failing to disclose the arrangements to all shareholders, the commission said.

Lampert is opposed in the Sears Canada fight by investors including William Ackman, who has said the C$18-a-share offer is too low. Ackman's New York-based hedge fund, Pershing Square Capital Management LP, said the unit should fetch twice that amount.

``I think Sears Canada has taken up a lot of his time,'' Rothbort said, adding he expects Lampert to eventually gain control, perhaps by taking on a partner.

Sears' profit beat analysts' estimates in the three prior quarters. Of seven securities analysts tracked by Bloomberg, five recommend buying Sears shares, one says ``hold'' and one says ``sell.''

To contact the reporter on this story: Lauren Coleman-Lochner in New York at llochner@bloomberg.net.

Last Updated: August 17, 2006 07:41 EDT