Kmart Holdings (NASDAQ:KMRT) turned in another profitable quarter, earning $93 million for the first quarter of 2004, or $0.94 a share. That marks its fourth straight quarter of improving profitability since it emerged from bankruptcy last year. Shares responded yesterday by jumping nearly 10% to $48.62, significantly higher than the firm's 52-week low of $13.85.

Two months ago, I wrote that same-store sales are not a useful measurement when discussing a turnaround situation. Kmart was a shabby company with shabby stores, and it was losing both money and customers. It had to strengthen the financial position of the company, cut costs, and become more profitable. CEO Julian Day has been doing that.

So while same-store sales are off 13% from last year, selling and administrative costs have continued to decline as a percentage of sales, down to 21% from 23%. Gross margins have continued to climb, growing to 24.6% from 23%. Cash in the bank has also grown to $2.2 billion, a treasure trove the company says it may use to invest in securities, buy back shares, purchase other businesses, or pay dividends.

As good as it sounds, the rosy outlook needs to be tempered by the fact that total sales are off 25% from the first quarter in 2003, a fact blamed on the 316 store closings in the first quarter of last year. There comes a point where you can only massage costs and inventory so much. You eventually have to get customers back in the store.

According to Forrester Research, 79% of Kmart shoppers also shop at Wal-Mart (NYSE:WMT), the No. 1 discounter, which saw same-store sales rise 6.4%. The No. 2 discounter, Target (NYSE:TGT) saw its sales rise 6.6%. So while Kmart is strengthening its balance sheet, it's losing market share to its stronger competitors. It seems now would be a good time for it to begin attracting customers to its stores again.

There's still angry sentiment against Kmart. The company closed more than 600 stores, fired 57,000 workers, and left thousands of shareholders with worthless stock certificates. Burnishing its image from low-rent retailer to discount contender that can compete with the likes of Kohl's (NYSE:KSS), Sears (NYSE:S), Wal-Mart, and Target won't be easy.

It has laid some impressive foundations since it emerged from bankruptcy. Now it needs to build up some inspiring sales figures.

Are you a Fool Community member? Sign up for 30 days free and check out discussion boards on everything from parenting to politics.

Fool contributor Rich Duprey bought bookshelves from Kmart recently but doesn't own any of the companies mentioned in the article.