Discount retail chain Kmart Corp. reported a quarterly loss on lower sales on Tuesday, losing ground to rival Wal-Mart Stores Inc. in the battle to attract bargain-minded shoppers squeezed by the shrinking U.S. economy.

Kmart blamed the sales decline in part on reduced advertising as the company struggled to cut expenses.

Costs from the company's planned overhaul of its method of shipping goods to its stores, including the shuttering of two distribution centers, also contributed to the loss.

Troy, Michigan-based Kmart, the nation's No. 2 discount chain behind Wal-Mart, said its net loss for the fiscal third quarter ended Oct. 31 widened to $224 million, or 45 cents a share, from $67 million, or 14 cents a share, a year earlier.

Excluding special charges of $94 million after taxes for its supply-chain initiatives, Kmart reported a loss of $127 million, or 25 cents a diluted share.

Seventeen Wall Street analysts polled by research firm Thomson Financial/First Call had expected a loss of 12 cents to 33 cents a share, with a mean estimate of 27 cents.

A.G. Edwards retail analyst Robert Buchanan, who rates Kmart a "sell," said in a research note that "...in the wake of this morning's report of a sizeable third-quarter loss, we believe Kmart's sales will remain weak and its margins under pressure...." Buchanan also said he expected Kmart to continue to lose market share.

Rating agency Standard & Poor's cut Kmart's senior debt ratings to its second highest junk grade. It said the slow economy, and competition from Wal-Mart and Target, is hurting Kmart, which needs to show "solid progress" over the next year or two to avoid more cuts.

Shares of Kmart ended down 47 cents, or 6.86 percent, at $6.38 on the New York Stock Exchange, a loss greater than the 1.08 percent decline in the Standard & Poor's index of general merchandisers.

One retail analyst said investors were nervous about the pace of Kmart's effort to improve its competitive position against other discount chains.

"I think people are a little nervous about turnarounds in general," said Eric Beder, a retail analyst with Ladenburg, Thalmann & Co. "This is probably the largest turnaround ever tried in retail and people are impatient."

Kmart is in the first year of a wide-ranging two-year effort to streamline operations and improve its stores' customer service operations and food sales.

Earlier this month Kmart said net sales for the third quarter fell 2.2 percent from a year ago to $8.02 billion. Sales at stores open at least a year -- same-store sales, a key measure of retail growth -- were down 1.5 percent.

During the same period, Wal-Mart posted a 15 percent rise in overall sales and a 6.7 percent gain in same-store sales.

Another retail rival, Target Corp., reported a 12.6 percent increase in sales at its Target discount stores, with same-store sales up 1.5 percent.

Discount chains and stores offering shoppers value have fared better than other retailers as the economy stalls and consumer confidence swoons.

Consumer confidence in November fell for the fifth straight month in November to 82.2, according The Conference Board. The business data group's index of consumer confidence is now at its lowest level in more than seven years.

Advertising Strategy Faulted

Kmart told analysts on a conference call that its sales decline was due in part to cutting the number of pages in its weekly advertising circular, as well as its BlueLight Always campaign, which features permanently lowered prices on some items.

"There's no doubt we made a mistake by cutting too much advertising too fast," chief executive Chuck Conaway told the analysts.

For example, Conaway said, the company trimmed the number of pages in its advertising circular by half in September and October in its effort to cut costs.

In an attempt to woo customers and better compete with Wal-Mart and Target, Kmart has lowered prices on as many as 30,000 everyday items, like soap and toothpaste, since last fall.

But according to a survey by Sanford C. Bernstein retail analyst Emme Kozloff, Kmart's prices on food and other consumable items, like laundry detergent, are still on average about 11 percent higher than those at Wal-Mart. The higher prices make Kmart's struggle to gain market share harder.

"Lack of top-line momentum indicates that the company has yet to prove that it can hold on to its existing customers, let alone lure potential new shoppers," Kozloff wrote in a research note.

But looking ahead, Kmart said sales over the Thanksgiving holiday weekend were encouraging. The retailer also said it was comfortable with Wall Street estimates for the fourth quarter.

A survey of 16 analysts by Thomson Financial/First Call showed a consensus earnings estimate of 48 cents a share. Estimates ranged from 23 cents to 57 cents a share.