Discount retailer Kmart Holding (NASDAQ:KMRT) turned in yet another profitable quarter -- its seventh straight quarter since emerging from bankruptcy in 2003. Even as sales fell more than 6% to $5.9 billion, the company posted a 14% rise in net income for the fourth quarter on the strength of asset sales and cost reductions.

Chairman Eddie Lampert is thought to be trying to turn Kmart into a BerkshireHathaway-style holding company. When Warren Buffett acquired his textile company, it was a money-losing proposition that soon had little to do with selling cloth. Instead of trying to mend the fabric maker, Buffett changed course and sold off its mills, using the cash to invest in or acquire other companies. Beginning with National Indemnity, an insurance company, it soon owned newspapers, banks, candy makers, furniture stores, and various consumer brands, and today it has huge stakes in Coca-Cola, Gillette, and TheWashington Post. Some see Kmart on a similar path.

The company has been in dogged competition with Target (NYSE:TGT), Wal-Mart (NYSE:WMT), and Costco (NASDAQ:COST) -- and losing. Rather than trying to hold back the incoming tide, Kmart has instead been selling off its most unprofitable stores. It recently sold as many as 68 stores to Home Depot (NYSE:HD) and Sears (NYSE:S), the latter another troubled discounter with which it will soon merge in an $11 billion deal, creating the nation's third-largest retailer. Indeed, sales apparently are a secondary consideration for the company; comparables fell another 4.5% in the quarter, though the decline is less than the 13% and 15% declines realized in the two previous quarters.

As Kmart owner Lampert pares away its valuable real estate and streamlines remaining stores under the Sears banner -- the deal is set to close later this month -- he is accumulating a significant cash hoard, a bank account big enough to start making other acquisitions. At the end of fiscal 2004, it had $3.4 billion in the bank, 50% more than it had at the end of 2003 and $200 million more than it had anticipated.

Having touted the impending end to poor sales performance ever since its emergence from bankruptcy, the company is slowly slipping away. Some 400 Kmart stores, or about 20% of the total, will change their signs to Sears when the merger is complete. A vote by shareholders is scheduled for March 24, and Institutional Shareholder Services, the world's largest proxy-vote advisor, has given its stamp of approval to the deal. More important to Kmart has been the shedding of unproductive stores, a move that has reduced costs (they fell 9% for the quarter as a result of having fewer stores), and helped prepare for the merger. Soon, perhaps, the name Kmart will be remembered only as the quaint originator of the "blue light special."

With a streamlined company in place, a cash hoard in the bank, and deal-making CEO Aylwin Lewis leading the venture, Kmart (or will it be Sears?) is poised to begin a new era as a huge conglomerate. Throw in a stock price that has nearly tripled over the past year, and one realizes it also has new, valuable cachet to make deals. Maybe we'll just rechristen the company Kmart Hathaway.

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Motley Fool contributor Rich Duprey hordes Krispy Kreme doughnuts for the winter. He owns shares in Wal-Mart, but he does not own any of the other stocks mentioned in this article. The Fool has a disclosure policy.