Sears Holdings Corp. (SHLD), the retailer headed by financier Edward Lampert, Tuesday posted lower quarterly profit on sluggish sales, but its shares rose as much as 7 percent as earnings beat Wall Street expectations.

The third-largest U.S. retailer said comparable-store sales fell at both Kmart and Sears. Kmart reported weak demand for electronics and home products, while Sears continued to struggle with poor clothing sales.

It said it plans to scale back 2006 expansion of its Sears Essentials format, which was touted among the reasons for Kmart's purchase of Sears, Roebuck and Co. in March. The stores combine Kmart's discount merchandise with Sears staples such as appliances and tools, but the company said results were mixed.

In a letter dated Tuesday, to shareholders, Lampert said the company was focusing on a strategy called "Sears Inside," which involved adding exclusive brands such as Kenmore appliances and Craftsman tools to existing Kmart stores instead of trying to promote an entirely new format with Sears Essentials.

Net income dropped to $58 million, or 35 cents per share, in the third quarter ended Oct. 29, from $552 million, or $5.45 per share, a year earlier. Last year's results included an $807 million gain from selling Kmart stores.

Analysts, on average, expected 32 cents per share, according to Reuters Estimates. The company does not provide financial forecasts.

"While one can't get too excited about double-digit negative comps (comparable-store sales), results were better than expected, there were surprising signs of strength in appliances and services," Credit Suisse First Boston analyst Gary Balter wrote in a note to clients.

"Stocks move relative to expectations, and these were better," he added.

When adjusted to reflect results from both Kmart and Sears, last year's profit was $150 million, or 93 cents per share.

Lampert, the hedge fund manager who brought Kmart out of bankruptcy in 2003 and orchestrated the takeover of Sears, has been cutting costs and trying to better position the retailer to compete in a cutthroat environment.

The side effect has been slumping sales, as it eliminated some profit-draining promotions and cut back on store investment. Capital spending fell to $153 million in the last quarter from the combined $319 million that Sears and Kmart spent a year earlier.

Cash and cash equivalents dropped to more than $900 million from more than $2 billion at the end of the second quarter. Retailers typically ramp up spending in the third quarter to prepare for the holiday shopping season.

Many investors bought Sears Holdings stock, hoping to cash in on Lampert's hedge fund prowess. He was the industry's highest paid manager last year, taking home $1 billion, according to Institutional Investor's Alpha magazine.

Lampert sold off big chunks of Kmart's real estate last year, sending the stock price up sharply, and many shareholders hoped for the same at Sears. But asset sales in the latest quarter amounted to just $15 million.

His first major move at Sears Holdings came Monday, when he offered $718.5 million to buy the rest of Sears Canada Inc. , surprising some analysts who had expected him to sell the existing 53.8 percent stake instead.

Quarterly revenue jumped to $12.2 billion from the $4.4 billion, largely because last year's results do not include sales from Sears. Adjusted revenue was $12.8 billion in last year's third quarter.

Comparable-store sales fell 10.8 percent at its U.S. Sears stores, and were down 2.8 percent at Kmart.

Sears has had little success with its apparel offerings, and acknowledged "weaker than expected customer response to fashion offerings" in the latest period.

In recent years, the retailer has added brands including Lands' End, Apostrophe and Structure in hopes of luring customers who shop at Sears for appliances or tools but buy clothing elsewhere.

By contrast, Kmart's comparable-store clothing sales rose.

Shares of Sears Holdings, down more than 20 percent over the past six months, jumped $5.21 at $121.92 on Nasdaq, where it was among the most active issues.