Edward Lampert, the hedge fund manager, has been called the next Warren Buffett. But Sears, which Lampert won control of three years ago through the merger with Kmart, is proving to be an investors' quagmire unlike any faced by Buffett.

Sears Holdings said that third quarter earnings plummeted 99 percent—the retailer's first back-to-back earnings decline under Lampert's reign.

The company earned $2 million, or 1 cent per share, compared with $196 million, or $1.27 per share, in the quarter a year earlier. Sales slumped 3.3 percent, to $11.5 billion.

Sears attributed the earnings slump largely to a $223 million decline in gross margins. Sales at Sears stores open a year or more fell 4.2 percent in the quarter, while sales at Kmart stores open at least a year fell 5 percent.

"It was a horrible quarter," Scott Rothbort, president of Lakeview Asset Management in Millburn, New Jersey, which holds Sears shares, told Bloomberg News. "They had to take a lot of markdowns to move that apparel."

Sears' chief executive, Aylwin Lewis, said, "We cannot blame our results entirely on the retail and macroeconomic environments. We have much on which to improve and are working hard to do so."

Many retailers have seen their business weaken this fall, as consumer spending slows amid high gasoline prices and woes in housing. For Sears, this quarter follows a 40 percent decline in earnings in the second quarter.

From the beginning of his investment in Kmart, Lampert has had his detractors. He has been criticized for not investing enough in the stores and for not hiring enough experienced retailing executives. Still, Sears stock had soared earlier this year, rising as high as $195 in April. It now trades at about $116.

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