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CHICAGO -- When Sears ceo Alan Lacy took to the podium on April 10 and delivered the keynote address to a capacity crowd of investors at the Banc of America Securities conference in New York, the company's stock was enjoying some accolades of its own--most notably hitting a four-year high.

Sears preannounced sales and earnings early for the first quarter of fiscal year 2002, which ended April 6, to coincide with Lacy's presentation. In doing so, the company stunned Wall Street with anticipated earnings per share of more than twice what they were for the comparable period the year before.

The company expects EPS for the first quarter to be $0.93 per share compared to $0.45 the prior year; a 107% increase. Sears released earnings on April 18, but as of press time, the company's early announcement had driven Sears' stock up to $55.20, a four-year high for the retail chain. Sears closed that day at $54.18, up from its 52-week low of $29.90 after Sept. 11.

Management also updated its 2002 outlook and now anticipates EPS to increase approximately 17% from the prior year, compared to previous expectations of a 13% to 15% increase.

In all, the news delivered a pleasant surprise to analysts and investors. "We believe there was some upside to our earnings estimate, but this exceeded even our expectations," said Prudential analyst Wayne Hood. "We believe the bulk of the upside came from better-than-expected expense rate improvement and gross margin rate improvement at the domestic retail stores."

Correct, according to Lacy, Sears is finally enjoying the results of its many operational initiatives. "We are beginning to see some traction on performance improvement initiatives we began last year," he said.

Positive results from these initiatives are now showing up on the bottom line. Top line, or retail sales, however, are still soft. Domestic store revenues for the five weeks ended April 6 were $2.517 billion, down 1.8% from the year before, while comp store sales declined 4.7%.

"A lot of this is really self-inflicted due to exiting certain [unprofitable] product categories and our redeploying resources to other categories," said Lacy. "That is going to continue to have a negative impact on sales."

Since taking the helm at Sears in September 2000, Lacy and his team have been working to reduce the cost structure both at headquarters and in stores in order to more effectively compete with discounters. Unprofitable businesses, such as cosmetics, floor coverings and pest control were exited and the company expanded hard lines departments to better take advantage of Sears' strengths in these core areas.

For past year, Lacy has begun strategically repositioning the company's full-line stores by aggressively addressing merchandising offerings. Look for Sears to roll out a single house label in apparel across the men's, women's and children's departments sometime this fall, according to Lacy. "This gives us critical mass for customer recognition and better advertising [synergies]," he said "We're looking to rationalize brands and labels."

Next up is changing the in-store experience for the customer. "Again, we are trying to move away from the department store experience," he said. "Our customers don't value that anymore." Rather, Sears is moving to a more self-service environment where customers can make fast transactions or have the option of consulting with a sales person, most notably for big-ticket, hard line purchases.

The company will open 15 full-line stores, remodel 50 units this year and another 160 in 2003--all of which will include a centralized checkout system. All the changes at store level this year also will increase cost savings operationally, pointed out Lacy. "As we shift from a department store organizational model to much more of an activity-based model with clear accountabilities [for employees] like inventory stocking, cashiering, etc.," he said.

Lacy also plans to redirect promotional activity to better support the Sears name. "There has been not enough investment behind the Sears brand," compared with store brands, such as Craftsman and Kenmore, he said. "We are looking to take money away from unprofitable promotional activity and apply it to direct marketing [to Sears card holders] and behind the Sears name."

Lacy also highlighted Sears' strengths, such as the continued integration of online services, which are increasingly aiding in-store transactions; the established dominance and continued growth of hard line categories; and a credit business that contributed more than $5.5 billion in revenues the previous fiscal year.

According to Neil Stern, a McMillan/Doolittle analyst, Lacy's plan is proving to be the correct one for Sears. "Given the economy, it's the right plan at the right time," he said. "He said they would cut costs, get a lot more efficient and become profitable. So far he's delivering on that. Nowhere did he say there would be top-line growth.

"If and when we start to go to a robust economic environment, they're going to have to address the issue of growth," he said. "Obviously they need to answer that question, but there's no reason they have to do that today."

For the moment, Sears is basking in the glow of a mission at least partially accomplished. As Lacy told conference attendees, "We are a unique and highly profitable company in the process of restructuring and repositioning our core business."