* Q3 adj loss/shr $1.04; Street view loss $1.09
* Kmart same-store sales up for first time in four years
* Shares down 3.3 percent (Recasts to reflect falling stock price; adds analyst comment, details)
By Tom Hals
WILMINGTON, Del., Nov 19 (Reuters) - Sears Holdings Corp (SHLD.O) posted a smaller-than-expected quarterly loss on Thursday, but analysts questioned whether the company led by hedge fund manager Edward Lampert was relying too deeply on cost cuts, and its shares fell 3 percent.
Gary Balter, an analyst with Credit Suisse, said the details of the earnings report indicate the stock is "even more overvalued than we previously believed."
He said the results show a company that continues to rely on slashing costs, rather than supporting sales, to drive its business. He forecast earnings before interest, taxes, depreciation and amortization, or EBITDA, would fall for the third straight year in 2009, to $1.3 billion.
"If the trend is your friend, this trend has no friends," wrote Balter.
Analysts even questioned a 0.5 percent rise in sales at Kmart stores open at least a year, or same-store sales. It was only the second increase since 2001 and the first since 2005, the year Lampert merged Kmart and Sears.
Kmart this year took back its shoe operations from Footstar, which operated within the discount chain's stores but used its own inventory and staff. Analysts said that change likely reversed what otherwise might have been a drop in sales.
Kmart's performance was also helped by sales of toys, a product category recently reintroduced at 20 Sears stores.
Sears Holding's net loss for the fiscal third quarter ended Oct. 31 narrowed to $127 million, or $1.09 a share, from $146 million, or $1.16 a share, a year earlier.
The adjusted loss per share was $1.04, according to Thomson Reuters I/B/E/S, compared with analysts' average forecast for a loss of of $1.09.
Quarterly sales fell 4.7 percent to $10.2 billion.
Holding company same-store sales fell 2.3 percent, It was the best quarterly figure since 2005, helped in part by the closing of weaker locations, but it follows several quarters of very weak sales.
"We should start to see some improvement as they optimized their store portfolio and closed some of the weaker stores and focused on stores that resonate with consumers," said Kimberly Picciola, a retail analyst with Morningstar.
Picciola said that despite the positive news for Kmart, it must still compete on price against larger rivals like Wal-Mart Stores Inc (WMT.N), which has laid out an aggressive strategy for discounting during the upcoming holiday season.
Same-store sales at Sears, which depends more on the housing market due to its Craftsman tools and Kenmore appliances, fell 4.6 percent in the quarter.
But it was Sears' best same-store sales performance since the fourth quarter of 2007, and the chain outperformed its home improvement rivals. Home Depot Inc's (HD.N) U.S. same-store sales fell 7.1 percent during the quarter, and Lowe's Cos Inc (LOW.N) posted a drop of 7.5 percent.
Lampert's ESL Investments RBS Partners Fund sold its holdings in Home Depot in the third quarter, according to a regulatory filing.
Sears lowered borrowing costs and increased the amount available under its revolving line of credit, a key source of funding as its builds inventory for the year-end shopping season.
The company said it did so by issuing more commercial paper, a form of unsecured short-term financing usually reserved for companies with high credit ratings. Sears has a "junk" rating from Moody's and Standard & Poor's.
Shares of Sears have risen 17 percent over the past three months. But the stock is trading below where it was when the retailer announced a surprise loss for the second quarter.
The shares were down 3.3 percent at $73.27 in midday trading. (Reporting by Tom Hals; editing by Derek Caney, Dave Zimmerman and John Wallace)