Sears Holdings' first profit in three years is equivalent to the facade of a Potemkin village as it's not built on sustainable growth.

Sears Holdings (NASDAQ:SHLDQ) is back in the black. For the first time in three years, the struggling company posted a profit, with second-quarter net earnings of $208 million, a huge turnaround from the $573 million loss it reported last year.

Is CEO Eddie Lampert's magic finally working? Has the financial wizard and Warren Buffett wannabe finally found the elixir to make the company a force again? Yes and no. Lampert did work his magic in the quarter, and it did produce the profit, but it still doesn't mean anything, and the retailer is still spiraling down the drain.

An unraveling thread
Unfortunately for diehard investors, the quarterly profit Sears Holdings posted has nothing to do with more shoppers who are buying more clothes and household goods at its namesake Sears or Kmart stores. Comparable-store sales tumbled 10.8% in the quarter, down 14% at Sears and only marginally better at Kmart, with a 7.3% decline. Its membership loyalty program, Shop Your Way, accounted for 74% of eligible sales in the period, but it's basically scooping up sales in a smaller pond. It's having little actual effect on making consumers loyal to the retailer.

Instead, all of the benefit in the second quarter came from the financial gymnastics Lampert is well known for. He created a real estate investment trust into which he sold some 235 of its 1,800 stores, generating $2.7 billion for the retailer's 50% interest in it.

Just like when the hedge-fund manager was using financial sleight of hand such as total return swaps, stock buybacks, asset sales, and spinoffs to artificially boost results to create the appearance of a healthier Sears Holdings, the REIT is just more of the same. There's no improvement in the underlying business -- it's actually worsening -- and the financial wizardry amounts to little more than rearranging the deck chairs on the Titanic. When you back out the gimmickry and other one-time items, investors suffered a $2.40-per-share loss, hardly any better than the $2.76 loss last year.

The incredible shrinking Sears Holdings. The retailer will be reduced to almost nothing after selling most of its stores to a real estate investment trust. Photo Flickr/Nicholas Eckhart.

Just say "Abracadabra!"
The market doesn't seem to be buying it anymore, either, as shares tumbled 10% last week after the report and are down 30% so far in 2015. They've lost more than half their value after hitting a high of $48 a share last November, when Lampert first announced he was creating the REIT.

Investors in Sears have long maintained that the retailer's real estate holdings were the real underlying value in a business that was not-so-slowly dying. The REIT is simply a gimmick to monetize those assets.

Lampert realized perhaps earlier than most that there was little hope of saving the retailer, so since joining together the two broken brands of Sears and Kmart, he has refused to invest in the stores themselves, all the while stripping the company of its most valuable parts.

Included has been the divestiture of Orchard Supply, Sears Hometown & Outlet Stores (NASDAQ:SHOS), and Lands' End (NASDAQ:LE), as well as its investment in Sears Canada. Sears Automotive may still be on the chopping block, and other than its Diehard battery brand, Kenmore appliances, and Craftsman tools, there is little left worth salvaging.

A wink and a nod
Creating the REIT is perhaps the last move in this elaborate game, and even that holds a lot of risk. The retailer is now on the hook for rental payments on the stores as it leases them back from the REIT, adding more pressure to its finances despite the influx of cash this quarter that bolstered the balance sheet. And there may be fewer channels for financing available because many of the deals it negotiated in the past were predicated on the value of the real estate. As more stores are sold to the REIT, Sears will be bereft of valuable collateral.

Admittedly, the deal bought Lampert and Sears some time to convert the retailer into an asset-light model. Gross margins rose to 23.1% in the second quarter from 21.7% last year, while expenses fell some $424 million from to $1.7 billion. And though total revenues fell to $6.2 billion from $8 billion last year -- not unexpected, considering the sale and closure of stores -- it was up from the $5.9 billion it made in the first quarter.

Smoke and mirrors
When the hope of a turnaround rests on financial gimmickry rather than a growing business, there's little reason for investors to stick around. As one Bloomberg Intelligence analyst put it, Sears "is still trying to outrun the proverbial melting ice cubes," though whether Lampert has enough tricks left up his sleeves to keep the business afloat long enough is the question.

Considering the rate of collapse at which the actual retail business is deteriorating, Sears Holdings may at last be running out of rabbits to pull out of the hat.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.