updated 3/1/2007 5:34:00 PM ET 2007-03-01T22:34:00

Retailer Sears Holdings Corp. said Thursday its fourth-quarter earnings rose 27 percent, ahead of Wall Street forecasts as margins improved despite weaker sales at established stores.

But the company's stock dipped in early trading after officials at the nation's third-largest retailer said they had less cash on hand — about $3.3 billion in the U.S. — than they hoped because of lower-than-expected January sales.

"It is absolutely clear to me that we had it within our capabilities to overcome the fourth-quarter headwinds, had we executed better within a number of our businesses," Chairman Edward Lampert wrote to shareholders.

During the quarter ending Feb. 3, earnings for the operator of Sears and Kmart stores totaled $820 million, or $5.33 per share, up from $648 million, or $4.03 per share, during the same period last year.

Excluding one-time items, net income totaled $5.36 per share in the latest period.

Revenue edged up 1 percent to $16.3 billion from $16.1 billion a year ago, beating Wall Street estimates.

Analysts polled by Thomson Financial predicted operating profit of $5.18 per share on revenue of nearly $16 billion.

High margins on apparel at Kmart and Sears stores in the U.S., as well as an extra week in the period compared with last year, helped push profits upward, company officials said.

"We are making progress as evidenced by our improved financial performance in fiscal 2006, but recognize we still have much work to do," Aylwin Lewis, president and Chief Executive of the Hoffman Estates-based company, said in a statement.

Morningstar analyst Kim Picciola said improvements in apparel, driven in part by the Land's End brand carried in Sears stores, shows the company is making headway.

"I think we're starting to see some signs of improvement in the Sears apparel business and that's been a big cloud over the company's head," she said.

But the question remains what Lampert will do with the company cash on hand. Counting cash from Sears Canada, the company ended the fiscal year with about $4 billion, down from $4.4 billion last year.

The hedge-fund operator who acquired Kmart in 2003 and Sears, Roebuck and Co. in 2005, said Thursday he wants to expand the company, but gave few clues about his plan, fueling speculation that Sears may begin acquisitions in the future.

"It is certainly our intention to grow Sears Holdings," he wrote. "But before embarking on a growth plan, it is critical to provide a sound base from which to grow. To this end, we have set out to improve the profitability of our business model."

Same-store sales, or sales in stores open at least one year, fell 3.1 percent. Sears domestic same-store sales fell 4.9 percent, while Kmart's same-store sales edged down 0.9 percent. Results were hurt by increased competition, the company said.

Sears also said its home appliance business suffered from a slower housing market and increased competition.

For the year, net income grew 74 percent to $1.49 billion, or $9.57 per share, from $858 million, or $5.59 per share, last year. Net income in 2006 includes a 58-cent charge for an accounting change.

Revenue rose 8 percent to $53 billion, from $49.1 billion last year, even as same-store sales fell 3.7 percent, including a 6.1 percent drop at Sears domestic and a 0.6 percent decline at Kmart.

Sears shares fell $4.18, or 2.32 percent, to $176.07, to close on the Nasdaq Stock Market.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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