UPDATE 4-Sears tops estimates; some skeptical about turnaround

* Costs fall more sharply than sales; net loss narrows

* Kmart same-store sales drop 3.7 percent

* "We know we still have a lot of work to do," Lampert says

* Shares down nearly 5 percent

Feb 28 (Reuters) - Retailer Sears Holdings Corp reported a higher-than-expected quarterly profit that stemmed mainly from cost cuts, doing little to boost Wall Street's faith in its turnaround and sending its shares down nearly 5 percent on Thursday.

The stakes were high this holiday season for the operator of Sears department stores and the Kmart discount chain. Many on Wall Street were looking at the quarter as a key milestone for the company, which is controlled by hedge fund manager Edward Lampert.

The company's sales have fallen every year since 2005, when Lampert merged two of America's iconic retail chains, Kmart and Sears Roebuck and Co, in an $11 billion deal.

However, Sears Holdings has boosted results in recent quarters by closing stores, managing inventory, selling some real estate and shedding assets.

"So far I am not optimistic on the operations of Sears and of Kmart," said Mary Ross Gilbert, managing director at Imperial Capital. "They really have a cash burn."

On Thursday, Sears reiterated its expectation to generate at least $500 million of liquidity by selling assets over the next 12 months, without specifying what those might be.

"They have to do it," Gilbert said. "It's not like 'this is an opportunity for us to monetize assets and then we can use the cash to pay down debt."'

The news came just weeks after Chairman and largest shareholder Lampert took over as chief executive officer after Louis D'Ambrosio left because of a family member's health issue.

Some on Wall Street saw D'Ambrosio's departure adding to Sears' "turnaround execution risk" and worried about Lampert's lack of merchandising experience at a time when the retailer was trying to turn around its core Sears and Kmart chains.

"The fact is that they don't have strong leadership that can execute," Gilbert said. "If you look at the businesses and the execution of the businesses, it's poor, and that hasn't changed."

Lampert, who has faced criticism in the past for not investing enough in stores, said on Thursday: "Observers have mistakenly concluded that our issues were primarily related to underinvesting in our stores."

Instead, he tied the company's problems to the changing habits of shoppers, who are increasingly buying their goods online or using their mobile phones to make purchases.

Still, he promised to invest in in-store technology, online business and Sears' loyalty program, in sync with a blueprint he laid out last May to boost results.

"We know we still have a lot of work to do," he told investors in a letter made public in a regulatory filing. "It will not be easy at times, but we will take bold actions to get through it."

TIGHT LID ON COSTS

The company, home to the iconic Craftsman tool and Kenmore appliance brands, faces cut-throat competition from the likes of Home Depot Inc, Lowe's Cos Inc, Wal-Mart Stores Inc, Target Corp, Best Buy Co Inc, Macy's Inc and Kohl's Corp.

The company's net loss narrowed to $489 million, or $4.61 a share, in the fourth quarter ended on Feb. 2 from $2.4 billion, or $22.47 a share, a year earlier.

Excluding pension settlements, severance costs, impairment charges and other items, Sears Holdings earned $1.12 a share. Analysts on average were looking for a profit of 98 cents, according to Thomson Reuters I/B/E/S.

Total costs fell 2.2 percent to $12.88 billion in the fourth quarter. Sales declined about 1.8 percent to $12.26 billion, but beat the analysts' average estimate of $11.77 billion.

U.S. sales at stores open at least a year fell 1.6 percent, including a 3.7 percent decline at Kmart that was mostly due to tepid demand for electronic goods.

Same-stores sales rose 0.8 percent at the Sears Domestic unit, helped by demand for apparel, but fell 3.8 percent at Sears Canada.

Rival J.C. Penney Co Inc's woes have helped Sears as the two chains are neighbors in most malls, analysts have said.

Penney's sales at stores open at least a year fell 31.7 percent in the latest quarter.

Sears spun off its Orchard Supply Hardware Stores unit in December 2011. Last year, it announced plans to sell some prime real estate and spin off its Sears Hometown and Outlet businesses and certain hardware stores.

In November, the company trimmed its stake in its Canadian unit from about 95 percent to 51 percent, distributing the stock to Sears Holdings shareholders.

Earlier this week, Sears Canada Inc reported a revenue decline for the 16th straight quarter. Analysts expect Target's push in Canada to hurt that business.

Shares of Sears Holdings were down 4.6 percent at $45.28 in morning trading.