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Sears reports a profit for once. Hold the champagne

Sears Holdings (SHLD) on Thursday reported good financial news of the kind the retailer hadn’t doled out since early 2013: a quarterly profit.

But hold off on shouting victory for the struggling company: the owner of the Sears and Kmart chains pulled that rabbit out of its hat thanks to the sale of some assets, primarily valuable stores to Seritage Growth Properties, the real estate investment trust that Sears spun off in July. Excluding that, and other minor items, Sears would have had a loss of $256 million. (Its net income, which adds up everything, including one-time items, was $208 million, breaking a 12-quarter losing streak.)

Sears’ core retail business continued to deteriorate: overall sales fell again, something to be expected given the hundreds of stores it has closed. But even stripping that out, Sears and Kmart are in rough shape, with comparable sales (sales at stores open for at least a year and e-commerce) fell by 14% and 7.3%, respectively. To be fair, some of that had to do with the retailers’ shift away from low-margin categories like electronics.

But those are alarming declines, and things will only get rougher as competitors from Macy’s (M) to Walmart (WMT) to Kohl’s (KSS) are likely to fight aggressively for market share in a tight retail environment.

 

Still, there were some positive signs: Sears Holdings’ gross margin continued to improve, helped by fewer markdowns at Sears and some improvement in grocery and electronics sales at Kmart.

Sears CEO Eddie Lampert—a hedge fund manager who owns almost half the company and engineered the merger of then-bankrupt Kmart and Sears in 2005 with a promise of revolutionizing retail—said the company was making progress in transforming Sears Holdings into a membership-based company, rich with data that will enable it to sell more targeted merchandise to its customers, but less reliant on physical big-box stores.

“During the quarter we completed many of the objectives we laid out to transform Holdings from a traditional, store-network based retail business model to a more asset-light, member-centric integrated,” Lampert said in a statement.

Sears has raised billions in the last two years by selling off some its best assets, from stores to its Lands’ End apparel brand, to stave off a cash crunch.

Despite some green shoots in the second-quarter numbers, Lampert is in a race against time to carry out that transformation.

As Noel Hebert, a Bloomberg Intelligence analyst, said: “The company is still trying to outrun the proverbial melting ice cube, which will mean more asset sales down the road to fund losses until it can find the right store base to support its asset-lite goals.”

But it has only so many assets left to sell to keep pulling off that trick.