Between selling its stores to a real estate investment trust and closing underperforming locations, Sears' value has been diminished as sales continue to fall. Photo: Nicholas Eckhart

The real estate investment trust that was supposed to transform Sears Holdings (SHLDQ) is finally doing its thing. However, it's not happening the way investors imagined when the idea was first revealed and the retailer's stock was sent soaring by the value that was about to be unlocked.

A zombie business
Instead, it's more apparent than ever that Sears is an empty shell of its former self. Without the real estate around to prop up its value, what's left is an aging retailer with clothes and household goods no one wants to buy. Comparable store sales at its namesake Sears stores were down nearly 10% in the third quarter, while those at its Kmart chain were down 7.5%, though that's a story investors are all too familiar with. Adjusted losses worsened to $305 million, or $2.86 per share, compared to an adjusted loss of $288 million, or $2.71 per share in the same period last year.

It's been something of a tenet of faith among long-suffering shareholders that the chain's real estate was the biggest upside of this declining business. Having watched chairman and CEO Eddie Lampert dismantle the company bit by bit over the years -- selling off an asset here or spinning off a valuable brand there -- it became a situation where the real estate really was the only thing holding it all together. Other than the few brands like Diehard, Kenmore, and Craftsman, it was Sears' land and buildings that still had value.

And now they're going, too.

Nothing left but bricks and mortar
When Lampert created the Seritage Growth Properties (SRG -0.21%) REIT, he seeded it with over 260 stores that he then leased back, generating some $2.5 billion for the retailer. He also cobbled together deals with mall operators General Growth Properties, Simon Property Group, and Macerich that raised another $3 billion.

He has used part of the proceeds to pay down some of Sears' substantial debt, and at the end of the current quarter, debt levels stood at just over $2.1 billion, down from $3.1 billion at the start of the year, but it ended the period with $294 million in cash and $963 million in immediately available credit.

According to Lampert, "Through deliberate strategic actions, notably with respect to our promotional design and marketing spend, we have made meaningful progress in our transformation and reported a fifth consecutive quarter of improved year-over-year results."

I guess it all depends upon your perspective. Lampert says he's trying to move the retailer toward a membership model through its Shop Your Way loyalty program, which represented three-quarters of Sears' eligible sales. He's also trying to downsize the space Sears operates in, subletting space in his stores to other retailers who would likely make better use of it. These stores within a store may even bring more foot traffic into remaining Sears locations to help boost sales, though that's a dubious outcome based more on hope than anything.

Customers have proved to be scarce at both Sears and Kmart stores, and it's not getting any better or easier over time. Photo: Mike Mozart

Pulling on the thread
What we do have is a retailer that can't sell the goods it has and is burning through cash. It has yet to figure out how it will reverse the consistent decline in sales it's been experiencing. Sales fell by another $1.5 billion in the third quarter, though a large part of that can be attributed to the 144 stores it shuttered as it aggressively tries to minimize the impact of underperforming locations.

But even those stores that remain can't attract customers. While rivals like Wal-Mart and Target also struggle to regain their footing, they were at least able to notch higher comps for the period. They also have made significant investments in an omnichannel model.

Wal-Mart reported over 25 million people accessed its website on Black Friday alone and had so many visitors -- traffic volumes were more than double its busiest day ever -- that service slowed to a crawl. Not helpful when you're trying to improve sales, but it's a problem Sears wishes it had.

The fact is, Sears Holdings can barely compete against its rivals in the brick-and-mortar space, let alone in the digital world. Having neglected his stores for so long and waiting an eternity before trying to monetize them, CEO Lampert has left the chain bereft of any real value. His reliance upon one-time financial gimmicks to prop up the stock has caused a massive void to appear when there are no more rabbits to pull out of the hat.

Even those investors who have stuck around through thick and thin (or more like thin and thin with Sears) are now abandoning the retailer. There's not much left worth salvaging, and brave talk about positioning the company for a profitable future is just that -- and not many are believing it anymore.