Sears Holdings Corp. (SHLD), the retailer formed when Kmart (search) bought Sears, Roebuck and Co., Thursday reported a 4.5-percent rise in quarterly profit as it slashed spending, and said it would replace its chief executive at the end of the month.

The No. 3 U.S. retailer said Aylwin Lewis would replace current CEO Alan Lacy, who will stay on as vice chairman and focus on merger integration and strategy. Chairman Edward Lampert (search), the hedge fund manager whose ESL Investments owns 39 percent of the company, will oversee marketing and merchandising.

"Lampert signaled a long time ago that he wanted a major role for himself in the actual running of the company," said Kurt Barnard, president of Retail Forecasting Group. "That's apparently what he's doing now."

Shares in Sears Holdings fell 7 percent to $125.40 on the New York Stock Exchange as the company's sales continued to decline.

Lacy had faced Wall Street criticism for failing to revive Sears' sales despite years of turnaround efforts. Sales slumped again in the latest quarter, dropping 7.4 percent at Sears stores open for at least a year. Kmart's comparable-store sales were down just 0.3 percent, and its apparel sales rose.

Sears Holdings said second-quarter net income rose to $161 million from $154 million a year earlier. Earnings per share, however, slid to 98 cents from $1.72 because of a large increase in shares outstanding associated with the merger, which was completed in May.

On a basis that assumes Sears and Kmart had been combined last year instead of in March 2005, earnings rose to $161 million, or 98 cents a share, from $110 million, or 67 cents a share.

Sears Holdings said it was sticking to its strategy of converting hundreds of Kmart stores to a new format called Sears Essentials (search), which pairs Kmart's discounted merchandise with Sears's top-selling exclusive brands like Kenmore appliances and Craftsman tools.

Sears said it had opened 32 Sears Essentials stores as of July 30, and plans to have about 50 open by year end.

The retailer has focused on cutting costs by reducing profit-eroding clearance sales. The company has also closed or sold underperforming stores and cut thousands of jobs.

In the latest quarter, capital spending was $114 million, far below the combined $287 million that Sears and Kmart spent in the same period a year ago.

The efforts have hurt revenue, but left Sears Holdings with a hefty cash pile. Thursday's report showed that cash and cash equivalents fell to $2.0 billion from $2.6 billion a year earlier, although up from $1.6 billion at the end of the first quarter.

Wall Street is anxiously awaiting word on what Lampert intends to do with that money. The company gave no details in Thursday's report, but repeated that its directors have authorized Lampert to invest it as he sees fit.

Lampert's hedge fund has been hugely successful, and many investors bought Sears Holdings shares in the hope of profiting from his money management skills.

Revenues fell 2.1 percent for the quarter on a basis that assumes the merger was completed a year earlier. The company eliminated some clearance sales at Sears, hurting sales.

The retailer said about 20 of its stores and facilities were damaged by Hurricane Katrina (search), but it expected insurance to cover the majority of the losses.