Kmart faces a battle to win back customers

The company, which is hoping to get back into the black next year, said it lost $862m (�513m) in the three months to March.

On the bright side, the company said its margins were improving, with taxes, interest costs, discontinued operations and reorganisation charges accounting for all but $32m of the loss.

And because the loss is less than two thirds the $1.44bn loss recorded in the same period last year, the company's shares - which are concentrated in relatively few hands in the wake of the bankruptcy reorganisation - leapt more than 21%.

But with sales still on the slide, Kmart's future health remains in doubt, analysts said.

"We have to see evidence that Kmart is able to bring back a lot of those consumers who have defected over the years to other stores," said Kurt Barnard, of Barnard's Retail Consulting Group.

"There's nothing (in the numbers) that I can sink my teeth into."

Tough competition

Kmart asked for protection from its creditors in January 2002, as years of decline left it with unsustainable debts.

The final straw was a serious hitch in its relationships with its suppliers, which left its shelves dangerously empty in the run-up to the all-important Christmas season in 2001.

Over the next 15 months, it changed its management, shut 600 of its 2,000 stores and managed to line up $2bn in new financing.

But many of its customers have fled to Wal-Mart and Target, its two larger competitors.