Despite a drop in same-store sales, Sears (NASDAQ:SHLD) projected fourth-quarter profits on Tuesday that would blow Wall Street’s expectations away, sparking a 7% rally in the retailer’s stock.

The parent of its namesake store and Kmart said it sees fourth-quarter earnings of $370 million to $450 million, or $3.39 to $4.12 a share. Even the low end of that range would easily surpass the Street’s view of $3.09. For fiscal 2011, Sears forecasted EPS of $1.16 to $1.88, compared with calls for just 91 cents.

Sears said its companywide U.S. same-store sales declined 1.7% in December. Sears stores posted a 6% drop in domestic same-store sales, compared with a 2.3% fall in Kmart sales.

Sears blamed the decline in its domestic sales on its hardlines category and drops in sales of consumer electronics like appliances and tools.

The stronger-than-expected earnings guidance sent shares of Sears soaring 7.31% to $70.60 ahead of the opening bell. Before Tuesday’s rally, it had been a rocky start to 2011 for the retailer’s stock, which was off more than 4% on the year.