Sears Holdings Corp's quarterly profit plunged 38 percent as sales lost momentum late in the quarter and higher costs and markdowns weighed on margins, pushing its shares down 7.3 percent.

The operator of Sears department stores and Kmart discount stores said sales at U.S. stores open at least a year rose less than they were trending a month ago. Profit came in near the middle of the range the company forecast on April 23.

Sears promoted appliances during the quarter to coincide with the timing of a government stimulus plan for consumers replacing less energy-efficient appliances. While the aggressive stance spurred sales, margin rates declined at Sears, the company's largest chain.

Not being able to show improvement when the macro (environment) is going in their favor should be taken as a worrisome sign for those investors that continue to reward a premium EBITDA multiple to this story, Credit Suisse analyst Gary Balter said in a note. He rates Sears underperform.

The retailer, run by hedge fund manager Edward Lampert, was also hurt by a jump in the Canadian dollar and weakness in its business in Canada.

Sears now owns 90.4 percent of Sears Canada after buying hedge fund manager Bill Ackman's stake in the chain last month. On Tuesday, Sears Canada said its first-quarter profit fell 30 percent.

Sears' net income fell to $16 million, or 14 cents a share, in the first quarter ended May 1, from $26 million, or 21 cents a share, a year earlier. Sears last month forecast a net profit of nil to 31 cents per share.

Adjusted earnings were 16 cents per share.

Shares of Sears were down 7.3 percent at $92.29 in morning trade on Nasdaq. That was steeper than a 2.8 percent decline in the Standard & Poor's 500 index <.SPX> as new data showed a setback to the U.S. labor market recovery.

SALES PRESSURE

Revenue fell slightly to $10.05 billion. Small declines at Kmart and Sears Domestic offset an increase at Sears Canada.

Domestic sales at stores open at least a year rose 1.5 percent, with a 1.7 percent rise at Kmart and a 1.2 percent increase at Sears. The company previously said that through April 21 domestic same-store sales were up 1.7 percent, with a 3.2 percent rise at Kmart and a 0.3 percent increase at Sears.

It was the first quarter in several years that the U.S. Sears chain notched a gain in same-store sales.

While those sales were stronger than they had been as of April 21, that seems to have all been driven by aggressive appliance promotions late in the quarter, Balter said.

Kmart saw strength in categories like apparel, home and toys, while food was weak. At Sears, demand for tools and home electronics was weak.

Earlier this month, Sears rivals as varied as Home Depot , Lowe's , JC Penney and Kohl's posted profit and sales growth even as they contend with the continued concerns shoppers have about spending.

During Sears' May 4 annual meeting, Lampert said the company was in no rush to find a replacement for Bruce Johnson, who has been serving as interim chief executive for more than two years.

Under his leadership, Sears is working on various plans such as improving its online presence. It also plans to expand financial services offerings in certain areas.

(Reporting by Dhanya Skariachan in New York, Shradhha Sharma in Bangalore and Jessica Wohl in Chicago; Editing by Aradhana Aravindan, Dave Zimmerman and John Wallace)

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