(MONEY Magazine) – You wouldn't impulsively buy a new washing machine just because it's cheap. But, if you were shopping for a retail stock right now, Sears Roebuck (S) might look tempting. It boasts a sharp new CEO, it trades at a bargain P/E of 7, it's having a strong year and the Fed has stopped raising rates, which usually bodes well for retailers. Sounds great? Take a closer look.

Wall Street analysts say recently named CEO Alan Lacy--who previously served as CFO under chief Arthur Martinez and ran credit and services--is smart and well liked by the troops. And he was instrumental in shoring up Sears' credit and service businesses. But many of the analysts are taking a wait-and-see approach toward the new regime and the stock, and you should too.

Sears has been outperforming its peers this year, which is sort of like Seinfeld's Kramer beating eight-year-olds at karate. It's up 8% at $33.83, while Standard & Poor's retail index is down 19%. Strong market share in appliances and improving credit-card profits--the two businesses Lacy helped revive--are pushing it up.

But its price/earnings multiple is stuck at less than a fourth of Wal-Mart's because investors can't grasp what the company really is.

Sears is a modern curiosity, says consultant Wendy Liebmann of WSL Strategic Retail--not a discount store like Wal-Mart, not a "big box" specialty retailer like Home Depot. In a retail era when consumers reward selection, discounts and size, Sears must prove that a growing market exists for its mid-price mix of appliances, home furnishings and clothes. "Can they leverage what they're well recognized for but broaden that to include some newer shoppers?" asks Liebmann.

It's a vexing question, most acutely in apparel. The company's vaunted "softer side" marketing campaign was aimed at attracting women to buy clothes, but it didn't work. Analysts describe Sears' adult apparel as a series of "fashion misses"--styles that simply didn't catch on and took up a lot of floor space. "Lacy has to come to grips with how to get women to come into the stores," says Bear Stearns analyst Steve Kernkraut.

And he has to draw women while cutting overhead. Sears' operating margins, while improving, remain a liability. Banc of America Securities analyst Tom Tashjian says a perfect Sears would have operating profits from its retail and service businesses of 5.5%. Last quarter, Tashjian's numbers showed this profit at 2.9%. Lacy has scant merchandising experience--he declined to talk to MONEY so that he could cram before meeting with analysts at a store prototype--and the stock will probably idle until he discloses a plan to lift margins.

He can't move too soon, especially since discounters Home Depot and Wal-Mart started selling appliances this year. Retail consultant Kurt Barnard sniffs that Home Depot draws contractors and Wal-Mart attracts the bargain hunters. But those aggressive chains could hinder Sears' growth efforts.

By contrast, things are moving nicely in the areas where Lacy has expertise. Sears sells 38% of all appliances in the U.S. now, and its credit-card business lowered write-offs to 5% this quarter from 7% a year ago. Its profit grew by 42% last year, and it beat earnings estimates for two of the past three quarters. And retail consultants like its new Great Indoors stores, which look like mock suburban homes. Liebmann calls them a smart blend of hard goods, electronics and furniture.

Lacy also has new irons in the fire. Earlier this year Sears formed GlobalNetXchange, an online marketplace for goods, with supermarket chain Kroger and three overseas retailers. Sears management reports that the exchange could cut 60[cents] a share from the company's purchasing costs, says Tashjian. Then there's a deal with America Online (which is buying Time Warner, publisher of MONEY) to promote Sears.com. Robertson Stephens analyst Bill Dreher sees this as an area where Sears can lead. "There are tremendous barriers to delivering appliances online, and they've already got that down," he says.

But for all these encouraging signs, Lacy inherits daunting challenges. When Martinez arrived eight years ago, Sears reported its first loss since the Depression and owned a confusing grab bag of companies, ranging from Allstate to Dean Witter to primordial online service provider Prodigy. Martinez rescued it, says Barnard, by focusing on home goods and cleaning up Sears' credit-card portfolio. He left the apparel and branding riddle to Lacy, who now must reform a retailing business that he has never run.

There is hope. Barnard says Sears' reputation for service will help it stand out, and Tashjian expects a sales boost from the Great Indoors and credit initiatives next summer. Not bad. But the unknowns loom too large to demand your investment now. Even at bargain-basement prices.

--ALEC APPELBAUM