Kmart's Holiday Cheer

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Today's news release from comeback retailer Kmart (Nasdaq: KMRT) might ring a bell. The numbers look a lot like those Fool Mathew Emmert described when looking at the company back in June. Kmart is smaller, and its revenues and same-store sales continue to slide. So, why were the back-from-bankruptcy company's shares up sharply in morning trading?

Because of one simple word: profit. Kmart projects $200 million in net profit before a gain on a real estate sale for November and December, the first two months of its fiscal third quarter. This can only be good news, especially as the company's income statements have been mostly printed in red ink for years now. Executives pointed to better inventory management and a reduction in damaging promotions as driving the numbers.

It's true that Kmart, as both Mathew and subsequently LouAnn Lofton have written, still faces severe challenges. Foremost among them is the competitive positioning -- especially relative to Wal-Mart (NYSE: WMT) and Target (NYSE: TGT) -- that bedeviled it last time around. Operationally, it lags its peers, as it does in the brand department.

So, while it may be unreasonable to expect Kmart to challenge for a dominant spot in American retail, there's no reason this company can't make money and generate free cash flow. There are, after all, more than two retailers in this country the last time we checked -- and some well-run ones to boot. Family Dollar (NYSE: FDO) comes to mind.

Kmart management is still evaluating its store base and watching the balance sheet closely, with an eye on further change to its real estate portfolio. It also has lowered the ceiling on its credit facility. The attention to detail the company is hinting at now bodes well for the future.

Shopped a Kmart lately? Share your experience on our Kmart discussion board. Dave Marino-Nachison can be reached at dmarnach@fool.com .