Following a multiyear string of losses, Sears Holdings (OTC:SHLDQ) finally bit the bullet and filed for bankruptcy last October. Despite its long history of sales declines and big losses, Sears has remained adamant about its plans to restructure and eventually emerge from bankruptcy as a smaller, leaner company.

Initially, it seemed highly unlikely that Sears and Kmart could avoid liquidation. Less than two months after the bankruptcy filing, Sears Holdings updated its official forecasts for the holiday season, dramatically slashing its revenue and cash flow estimates. Furthermore, the company reported a massive loss for its third fiscal quarter, which ended in early November. However, a modest improvement in its results in November provides a small spark of hope that Sears Holdings could potentially survive -- albeit as a shadow of its former self.

Financial results improve (slightly) in November

Sears Holdings turned in an ugly performance in the first few weeks after its bankruptcy filing. For the period between Oct. 15 and Nov. 3, gross margin was just 5.7%, far below the 30% to 40% level that most department stores and discounters need to cover their operating expenses and earn a decent profit. This contributed to Sears Holdings' big loss in the third quarter.

Fortunately, profitability improved in November. In a recently filed monthly operating report, Sears Holdings revealed that it brought in $924 million of revenue during the four-week period that ended on Dec. 1. Gross margin improved sequentially to 17.1%. As a result, the company reported a modest operating loss of $50 million.

Of course, a 17.1% gross margin still won't cut it in the long run. However, Sears' recent gross margin results have been negatively impacted by its aggressive downsizing, which has led to the company holding liquidation sales in a substantial proportion of its stores simultaneously.

The exterior of a Sears full-line store.

Sears Holdings' gross margin improved sequentially in November. Image source: Sears Holdings.

Indeed, Sears Holdings closed 46 stores during the month of November. It was also in the midst of liquidating inventory at 142 stores that it decided to close in conjunction with its bankruptcy filing. In the middle of November, the company began to liquidate yet another 40 stores. It's possible (though not certain) that Sears would have been profitable in November excluding the impact of liquidation sales.

Sears Holdings gets a going-concern bid -- will it be enough?

Just a week ago, it seemed possible that even a last-minute improvement in sales and earnings might not be enough to save Sears and Kmart. With a bankruptcy auction deadline approaching, the company didn't attract any going-concern bids until the last moment.

However, Eddie Lampert's ESL Investments -- which is both the controlling shareholder and top lender to Sears Holdings -- eventually came through with a bid for the company's remaining operations. The $4.4 billion offer had a slightly lower value than a $4.6 billion proposal that ESL had circulated earlier in December.

The future of Sears and Kmart hinges on the bankruptcy court approving this offer. But there are several potential pitfalls. For one thing, most of the $4.4 billion value of ESL Investments' offer comes in the form of forgiving loans that ESL previously provided to Sears Holdings. Some of the company's creditors plan to challenge the validity of those loans due to ESL's position as both lender and controlling shareholder. (Lampert was also serving as both chairman and CEO of Sears Holdings when the loans were made.)

Additionally, liquidation firms could potentially offer better terms. Between its real estate, brands, inventory, and other assets, Sears Holdings may be worth more dead than alive.

If Sears survives, it will be much smaller

Even if ESL's bid does succeed, the business it will acquire will be a fraction of Sears Holdings' former size. Just three years ago, the company operated nearly 1,700 stores. That was down to around 1,000 by the beginning of fiscal 2018 and 766 by early November. Nearly a third of the stores that remained as of then were slated to close during the fourth quarter.

By the end of the fiscal year, Sears Holdings is slated to have just over 500 Kmart and full-line Sears stores, plus a handful of small-format stores and stand-alone auto centers. The company will shrink further early in fiscal 2019, as it recently announced plans to shutter another 80 stores in late March.

The likelihood of Sears and Kmart surviving in some form beyond 2019 has improved slightly since the bankruptcy filing. But with both chains already having shrunk to a fraction of their former sizes -- and more store closures possible in 2019 -- it hardly seems to matter anymore.

Check out all our earnings call transcripts.