NEW YORK (CNN/Money) - After filing the largest retail bankruptcy in U.S. history, Kmart has made a remarkable comeback.

Shares of Kmart (Research) have gone through the roof, rising nearly sevenfold since the company exited bankruptcy in May 2003.

The discount retailer reported its first quarterly profit in 3 years in April and followed that up with profits in the second and third quarters.

Many credit the recovery to Kmart's chairman, Edward Lampert, the majority shareholder. He has helped the company streamline its inventories and clean up its balance sheet. The once cash-strapped retailer now has about $2.6 billion in cash.

Still, the company has had trouble gaining market share from rival competitors Target (Research) and Wal-Mart Stores (Research). Kmart also continues to be hurt by a dowdy image and many stores are desperately in need of a makeover, analysts say.

And now Lampert faces his greatest challenge. On Nov. 17, Kmart offered to buy Sears, Roebuck & Co (Research), another retailer that has struggled lately.

The merger, if approved, will make the combined company the third largest retailer in the United States, behind Wal-Mart and Home Depot Inc. (Research), with annual revenue of about $56 billion from nearly 3,800 locations -- assuming no store closures. (It would be the No. 2 discount chain.)

The new company's success, analysts believe, will depend largely on whether the combined company can cut enough in costs while at the same time making the necessary investments to modernize stores.

Wall Street is skeptical. Kmart's stock has slipped about 5 percent since the merger was announced. So do the shares belong in the bargain bin? Find out in our Stock Spotlight»