Sears Holdings Corp., the retailer controlled by hedge-fund manager Edward Lampert, tumbled the most in 8 1/2 years after saying it will close as many as 120 stores to reduce costs amid declining sales.

Sears fell 18 percent to $37.65 at 9:42 a.m. in New York, after earlier dropping as much as 20 percent for the biggest intraday decline since April 29, 2003. The shares had fallen 38 percent this year before today.

Closing the Kmart and Sears stores will generate $140 million to $170 million of cash from inventory sales and the leasing or sales of the locations, the Hoffman Estates, Illinois-based company said in a statement. Sears will record total non-cash charges of as much as $2.4 billion in the fourth quarter related to a valuation allowance and goodwill impairment.

Lampert, who along with his hedge fund owns 60 percent of Sears, has presided over 18 consecutive quarters of declining sales. Before today’s announcement, Sears had closed 171 of its large U.S. stores since merging with Kmart in 2005. To revive growth, Lampert has been leasing space to other retailers, accelerating franchising and turning to smaller store formats.

“They are not making the investments in the stores so customers are not coming,” Gary Balter, an analyst with Credit Suisse Group AG in New York, said in a telephone interview today. “There is this philosophy that you don’t need to make as much of an investment in the stores if you have a brand. That has not worked,” said Balter, who rates the shares “underperform.”

Sales Declines

Sears has more than 4,000 stores in the U.S. and Canada. Total same-store sales fell 5.2 percent in the eight weeks ended Dec. 25, according to the statement. Comparable sales at Sears namesake locations dropped 6 percent, driven by declines in consumer electronics and home appliance categories. Sales at Kmart fell 4.4 percent, also hurt by lower demand for electronics, as well as declines in apparel and layaway sales.

As a result, earnings before interest, depreciation and amortization in the fourth quarter will be less than half of last year’s $933 million, Sears said.

“There is not enough value in the real estate to do much with,” Balter said. “Who is going to buy the stores? There are no buyers. There is no one growing in U.S. retail.”

The company plans to reduce fixed costs by $100 million to $200 million, according to the statement.

‘Specialty Stores’

Sears didn’t identify which stores will be closed. In his annual investor letters, Lampert has identified the smaller Hometown and Sears Outlet stores as sources of growth and profit. The company opened 122 of those “specialty” stores last year, he said in his 2011 letter, and now has 945 -- less than a quarter of the total.

The company is allowing other retailers to sell its DieHard, Craftsman and Kenmore products and licensing those brands.

Excluding the effect of the store closures, the company expects to reduce 2012 peak domestic inventory by $300 million. Sears is scheduled to report fourth-quarter earnings on Feb. 23.