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Sears’ sales slump worsens, but at least a ton of cash is on the way

June 8, 2015, 3:20 PM UTC
Photo by Spencer Platt—Getty Images

Sears Holdings (SHLD) managed an impressive feat on Monday: despite the better economy that has helped other retailers, the company reported its 12 straight quarterly net loss, along with an astounding 14.5% drop in comparable sales at its namesake department stores.

But while the company, which also operates Kmart, reported a narrower loss in the three months ended May 2, and is clearly still facing a deterioration of its retail business, Sears is about to get a $2.6 billion from the upcoming sale of 235 of its best stores to a real estate investment trust — Seritage Growth Properties — that it has created.

That move, along with the sale last year of assets such as its Lands End apparel business and stake in Sears Canada, as well as recently announced joint ventures with major mall owners and developers such as Simon Property Group (SPG), Macerich (MAC) and General Growth Properties (GGP), has raised billions of dollars for Sears and quieted concerns that its sales erosion could leave Sears Holdings strapped for cash.

As Evercore ISI analyst Matt McGinley put it to Bloomberg: “The operating results for Sears are a heck of a lot less important than the liquidity that spinning Seritage out is going to provide them.”

Still, including Kmart, company comparable sales fell 10.9% (compared to 4.4% in the preceding quarter), despite the closings of many unproductive stores no longer around to weigh down results, underscoring the importance, and urgency, of keeping its coffers full. (Macy’s, J.C. Penney, and Kohl’s, all did much better than Sears in the first-quarter.)

Sears CEO Eddie Lampert, a prominent hedge fund manager and financial engineer extraordinaire, has been saying for eons that his plan is to transform Sears from a big-box store-reliant retailer, into what the company called “a more asset-light, member-centric integrated retailer” centered on its Shop Your Way loyalty program.

And indeed, the company has been turning itself into a retailer taking up less retail space. In the last few years, it has reached deals to lease out space in a number of stores to other retailers such as Dick’s Sporting Goods (DKS) and British fast-fashion chain Primark, saying it can make do with a lot less square-footage. On Monday, Chief Financial Officer Rob Schriesheim pounded that message into investors’ heads again, as he spoke of the strategy to “right- size our store footprints where appropriate and redeploy the excess retail space.”

More: Read about Sears in the latest Fortune 500 list

Amid the sales carnage was one benefit from managing the company to become a smaller business: Sears managed its inventories more effectively, allowing it to offer fewer markdowns on categories such as clothing and appliances, and helping its gross profit margin rise several percentage points.

That, along with the promise of fatter cash cushion on Friday, when the REIT offering is slated to begin is why shares didn’t fall nearly as much as such a dramatic sales decline would warrant. Still, Sears can only go so long with declining sales as it waits for its transformation to pay off before the alarm bells ring again.

“While the liquidity injection would be positive, in and of itself it does not solve Sears’ operational problems,” said Moody’s Senior Credit Officer Scott Tuhy.