UPDATE 3-Sears outlook tops Wall Street view; shares surge

(Adds analyst comments, byline)

By Karen Jacobs

ATLANTA, Jan 8 (Reuters) - Department store operator Sears Holdings Corp (SHLD.O) forecast quarterly profit above Wall Street estimates and said it would end its fiscal year with more cash, sending its shares up about 20 percent.

The operator of Kmart and Sears stores also posted same-store sales results that did not decline as sharply as some analysts had feared, even as the worst U.S. holiday shopping season in nearly 40 years was felt during the fourth quarter.

"Not only did (same-store sales) look slightly better than expected but it seems as though Sears was able to hold margins, and that's pretty impressive given the heavy discounting that was going on," said Morningstar analyst Kim Picciola.

The retailer controlled by hedge fund manager Edward Lampert forecast earnings of $2.44 to $3.09 per share for the fourth quarter ending on Jan. 31, down from $3.17 a share a year earlier.

But analysts on average had expected profit of $1.90 a share for the quarter, according to Reuters Estimates.

For the full year, Sears expects to earn $1.27 to $1.90 per share, compared with analysts' estimates of 53 cents.

December sales at stores open at least a year fell 7.3 percent, with Kmart down 1.1 percent and U.S. Sears stores dropping 12.8 percent. For the quarter-to-date through Jan. 3, total same-store sales were off 7.9 percent.

Kmart's performance benefited from increased layaway sales as the company publicized the program to entice cost-conscious shoppers. Sears Holdings also said gross margin rates for the quarter-to-date improved slightly from last year, helped by Kmart.

The response to Sears contrasted sharply with declines for other major U.S. retailers, many of which posted disappointing same-store sales for December and warned on profits. [IDnN08485027] Discounter Wal-Mart Stores Inc (WMT.N) shares slid nearly 8 percent.

MORE CASH, LOWER INVENTORY

The company expects to end the fiscal year with about $1.3 billion of cash and cash equivalents, excluding the impact of any share repurchase activity after Jan. 7. As of Nov. 1, Sears Holdings had $1.2 billion of cash or cash equivalents.

"Sears' greatest strength remains its balance sheet, which if it can convince vendors that it has a reason to exist, is supportive of sustaining the company for awhile," Credit Suisse analyst Gary Balter said in a research note.

Sears expects to end the year with about $8.5 billion of domestic inventory, down from $9.1 billion last year.

Sears "has managed inventories well versus last year. It seems as if that's paid off for them in December," Picciola said. She added that a year ago, Sears took a hit from excess inventory.