DETROIT – While Kmart executives touted Wednesday’s historic combination with Sears as a story of one-plus-one-equals two, some experts in the retail world wondered if two wrongs can make a right.

As Kmart Holding Corp. prepares to merge with Sears, Roebuck and Co. in the coming months, the underscoring question will be whether the combined company can fix years of problems within both of the retailing icons.

Wall Street gave the deal two thumbs up – driving up both stocks and the stocks of companies doing business with them.

Kmart’s newly minted Chief Executive officer Aylwin Lewis said during a news conference that the retailer has made “great progress” over the past 18 months to improve profits and merchandise. But it reported Wednesday a 13 percent drop in sales for the third quarter ended Oct. 27, indicating that Kmart has not fixed its core retail problems.

The deal could have some impact in the Twin Cities, as there is a Kmart in Auburn and a Sears store in Lewiston.

Some retail observers have long speculated that a merger between Sears and Kmart would happen as Kmart Chairman Edward Lampert held a large stake in both. He is Kmart’s largest shareholder and has about a 14.9 percent stake in Sears.

Jim McTevia, chairman of McTevia & Associates, an Eastpointe, Mich.-based turnaround firm, who predicted the merger two years ago, said he thinks the new retailer will take a chunk of Wal-Mart’s business.

“I think you are going to see Sears become a one-stop shop where people can go to get the high end and the low end,” he said. “I think the new Sears will be the kind of size you need to compete effectively. I think Wal-Mart is having all sorts of problems because of its global structure. I think there is such a thing that you can get so big that you cannot control your destiny.”

Kmart fell into Chapter 11 bankruptcy in January 2002 after a failed effort to compete with Wal-Mart Stores Inc. It has since rebuilt its finances after reorganizing in May 2003, but sales have continued to decline.

And Sears has had its own share of problems competing against other retailers such as Wal-Mart, Target Corp., Home Depot Inc. and Lowe’s. The majority of its 870 stores are in America’s malls, where foot traffic has been drooping for the past 10 years as more people shop off the mall.

The combination of Sears, based in Hoffman Estates, Ill., and Kmart, based in Troy, Mich., under Sears Holding Corp. creates a $55 billion retailer with 2,350 stores plus 1,100 specialty retail stores that Sears operates. But it’s still a fraction of Wal-Mart, with sales of $256 billion a year and smaller than Atlanta-based Home Depot with annual sales of $65 billion.

“This combination makes a ton of sense,” said Lewis, who joined Kmart on Oct. 18 and will become president of Sears Holding and chief executive officer of Sears Retail. “There is no doubt in my mind that we would have had a tremendous winning streak as a standalone company. I think the combination of these two great American retailers will allow us to turbocharge our business.”

The $11 billion deal makes sense from a financial standpoint as the retailers expect to save $500 million annually starting in the third year of the merged entity, but it adds more confusion to the retail strategy of both brands, analysts said. Kmart is best known for its apparel brands such as Jaclyn Smith and home goods from Martha Stewart Everyday. Sears’ biggest brands are in appliances such as Kenmore and hardware like Craftsman.

Sears sales have been stagnant for the last few years, but the company has remained profitable. But in October, Sears reported sales and profit losses for the third quarter – and its stock had fallen 31 percent over the past year.

Sears caters to a middle-class merchandise mix and shopper, while Kmart customers fall into the poorest demographic, said Howard Davidowitz, chairman of Davidowitz & Associates, a national retail consulting and investment banking firm in New York.

“If you are Wal-Mart and Target, you are having a party,” Davidowitz said. “You are taking a company that had a management challenge, and you are making it infinitely more complicated. Competitors don’t believe, from retail point of view, that this is going to work. I think it is more of the same … more cost cuts, more sales of real estate, more sales of divisions.”

Wall Street sent Kmart shares up $7.78 to $109 and Sears stock rose $7.79 to $52.99. Other retailers joined in the rally, including Martha Stewart Living Omnimedia Inc., which rose 6.3 percent to $18.49, and May Department Stores Inc., up by 7.8 percent to close at $30.75.

Companies that could see increased competition from the Sears-Kmart merger posted declines for the day. Wal-Mart fell 1.1 percent to $56.24 and Target Corp. closed down 0.7 percent to $51.02. Lowe’s Cos. Inc. also fell 0.7 percent to $57.67 and Home Depot Inc. dropped 1.67 percent to $42.28.

Kurt Barnard, president of Barnard’s Retail Consulting Group in Nutley, N.J., said he thinks the biggest merger in retail history has a good chance of success.

“This is a great deal made in heaven. First of all, it will create tremendous economies of scale and much bigger price clout with vendors and give Wal-Mart a run for its money,” Barnard said. “Sears and Kmart will look more like Target and Kohl’s and give them a run for their money.”

Lampert, who will become chairman of the new Sears Holding, did not offer specifics about plans for what the new retailer would be like, but did say that the company would sell “nonproductive assets. We want to make sure we stay focused on the biggest opportunities.”

With a stockpile of $3.1 billion in cash, Kmart can buy the time it needs to experiment with new concepts and cross-promotions at both retailers, McTevia said.

While hundreds of Kmart’s 1,430 stores will be converted to the Sears Grand concept, which combines general merchandise with food items, both stores will continue operating as separate brands, Lampert said.