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'Another bad quarter' coming from Sears, but the struggling retailer is expected to hold on

Banners hang from Sears' flagship store in the Loop in Chicago, Illinois.
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Banners hang from Sears' flagship store in the Loop in Chicago, Illinois.

Executives are abandoning ship during the critical holiday season. The latest round of store closures is in the works. And a key apparel account just recorded another quarterly sales decline.

Yet despite the slew of negative headlines leading into Sears' fiscal third-quarter earnings report Thursday, the department store chain has reason — and likely, the resources — to hang on after the holidays and through early 2017, when retail bankruptcies are typically filed.

As CEO Eddie Lampert continues to inject funds into the company, the chain has been able to purchase inventory for its stores, while garnering returns for his hedge fund ESL. The company also has roughly 250 unencumbered Kmart and Sears stores that it could sell off, potentially generating some $2.4 billion in proceeds, according to Fitch Ratings.

While such maneuvers are seen by many as temporary ways to plug the hole in Sears' operating losses, they should continue to buy it time. At a national real estate conference in New York City this week, chatter swirled that late 2017 would be the earliest date Sears would file for bankruptcy in order to protect the $2.7 billion in assets it sold to Seritage Growth Properties and through joint venture deals last year.

Those people formed this thesis upon a piece of the U.S. bankruptcy law called "fraudulent conveyance," which would give Sears shareholders a two-year window to go after Seritage's assets if the department store chain were to file for bankruptcy. The two-year anniversary of that spinoff falls this summer. In the short time Seritage has been a publicly traded entity, its shares and market capitalization have already surpassed those of Sears.

"There isn't anything right now ... that says it's going to be any different than what people are expecting it to be, which is just another bad quarter," Philip Emma, head of North America research at Debtwire Analytics, told CNBC.

Caution flags ahead of earnings

Indeed, the Thomson Reuters consensus forecast, which culls data from just one analyst, predicts Sears' top line will contract by $803 million during the three months ended in October, to $4.9 billion.

Meanwhile, the department store chain is widely expected to report another quarterly decline in same-store sales. That metric has not been positive for the retailer since the first quarter of 2010. Aside from that one reporting period, it hasn't happened in more than a decade. Sears has also reported just two profitable quarters since April 2012.

"There isn't anyone that's going to be surprised if the numbers are really, really bad on Thursday," Emma said.

A look at Lands' End's quarterly results is another sign of trouble. That brand, which generated 89 percent of its retail sales from Sears stores in 2015, said last week that net revenue in that segment fell 15.6 percent, to $39.3 million, during its fiscal third quarter. Sears spun off Lands' End in 2014, but continues to carry the brand in more than 200 stores.

"[We] have continued to see weak traffic trends within malls and more specifically within our Sears locations," Jim Gooch, Lands' End's co-interim CEO, told investors on the company's earnings call.

Meanwhile, the Sears' executive shuffle continues to march on. Former Executive Vice President Jeffrey Balagna exited the company Nov. 30 to "focus on his other business interests and pursue other career opportunities," according to an SEC filing.

And Joelle Maher, who served as Sears president and chief member officer for that store format, left the company last week after about a year and a half. When contacted by CNBC, Sears did not provide additional context as to the reason for her departure, but said it appreciated her service. Robert Schriesheim also stepped down earlier this year from his post as Sears CFO.

"It certainly doesn't help the challenges they have in the business to have that kind of a constant turnover, but it is not atypical for them," Emma said.

Where Sears can go from here

Regardless of whether Sears' challenges are typical or not, it will eventually run out of options if it doesn't turn around its fundamental business, analysts contend.

In a note explaining its view on the company last month, Fitch Ratings said it expects Sears to burn through between $1.6 billion and $1.8 billion in cash in 2016. To fund its inventory for the holiday season, the ratings agency pegged Sears' working capital needs at $500 million to $650 million. Sears had $467 million in total liquidity as of July 30, Fitch said.

The firm concluded that Sears should be able to fund its holiday inventory through borrowings on its credit facility, but said its restructuring risk remains "high" over the next 12 to 24 months. As of the second quarter, Sears had $3.5 billion in long-term debt, according to Moody's.

Sears raised nearly $10 billion in liquidity from 2012 to 2015. And despite its shrinking asset pool, it still has plenty of ways to fund what Lampert has repeatedly promised will lead to eventual profitability. At the top of that list is its real estate, which could bring in more than $2 billion if sold, according to Fitch.

The company is also working to sell off its Kenmore and Craftsman brands, and said in August that it had received interest from a "variety of potential partners." However, some have speculated that interested parties might try to wait for a potential bankruptcy filing so they could scoop up those brands at a lower cost.

If a deal were to go through, Fitch says those proceeds would likely be used to pay down pension plans as opposed to funding Sears' operations.

Several people in the real estate industry, who are monitoring Sears' performance from the perspective of potentially needing to fill up large, vacant spaces, are keeping an eye on 2017. They contend that because Sears spun off more than 200 properties to Seritage last July, creditors could go after Seritage's assets in the event of a Sears bankruptcy until that transaction hits its two-year anniversary.

At that two-year mark, the statute of limitations would run out on that transaction. However, Chuck Tatelbaum, director of the Tripp Scott law firm and chair of the bankruptcy and creditors' rights department, said that wouldn't necessarily be the case for Sears. Individual states have longer statutes of limitations on that piece of the bankruptcy code. Therefore, if Sears were to file for bankruptcy its home state of Illinois or in Delaware, the statute of limitations would extend another two years.

The company will face additional pressure next summer, as all of Sears secured loans and bonds mature in a three-year window beginning in July.

Fixing the foundation

Analysts agree that for Sears to truly execute change, it needs to fix its fundamental business. Recently, the company announced several initiatives to try to inject life in its sales, including a partnership with Uber that it expanded on Wednesday. But those efforts haven't yet showed up on the company's top line, Emma said.

Despite the closure of more than 1,000 stores over the past five years, its comparable-sales trends continue to slide. That's even as a "significant number" of Kmart's 700-plus stores are profitable, and "have been profitable for many years," Lampert said in an October blog post responding to rumors Kmart might shut down.

The retailer's updated store count, to be released in its third-quarter earnings report, will include the closure of 68 Kmart stores and most of the 10 Sears locations that were announced in April. It will not include the 64 more Kmart stores it will close in mid-December, or any other locations that could be shuttered during the current quarter.

But as the company shrinks its footprint and inventories to lower costs, it will become harder to turn around its sales, analysts said.

"The environment hasn't gotten better, it's more competitive, and it makes it that much more difficult to operate from a weaker position in the market," Moody's analyst Christina Boni said.

Moody's expects Sears to report a $1.5 billion loss in operating cash flow this year.

Correction: This story has been corrected to accurately state Joelle Maher's title while she was at Sears.