Stayin' alive: The shoppers driving Sears' sales

Sears' profits tumbled farther down the rabbit hole in the first quarter, as the struggling department store's sales took a hit from operating fewer stores, the spinoff of its Lands' End apparel unit and a resistant consumer.

But there was a silver lining in the retailer's report—people who remain loyal to Sears are shopping there a lot.

The outside of a Sears store in Fairfield, Connecticut.
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According to CEO Eddie Lampert, members of Sears' Shop Your Way loyalty program made up nearly three-quarters of eligible sales at Sears' and Kmart's domestic locations for the first quarter, up from 68 percent a year ago and the highest on record.

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Members' point redemptions also increased more than 30 percent, "demonstrating that our members are becoming even more engaged with the program," Lampert said in a conference call following the report.

Sears does not disclose how many more visits these customers make, or how much money they spend, but Sears spokesman Chris Brathwaite said the program is growing in both engagement and size.

"They shop us more [and] they spend more," Brathwaite said.

Despite gaining traction among its loyal shoppers, experts have remained critical of Sears' rewards program, saying they don't think it's enough to move the needle for a retailer that lost $930 million in 2013, and piled on another $402 million in first-quarter losses.

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Retail Metrics president Ken Perkins said the success of the rewards program is tempered by the damage it does to the retailer's gross margin, which fell in the first quarter as redeemed Shop Your Way points gave shoppers steeper discounts without an upfront membership fee.

Big box retailers broken?
Big box retailers broken?

Standard & Poor's maintained its CCC+ credit rating on Sears following the company's earnings report, saying "margins continue to erode because of markdowns and costs associated with carrying both traditional promotional market discounts and Shop Your Way points."

"We expect negative performance to persist in 2014 absent a sharp reduction in the costs of parallel promotion costs," the credit ratings agency wrote.

Sears addressed this concern in its conference call, saying it is focused on replacing its promotional markdowns with its Shop Your Way points when it makes sense. The retailer also pointed to a potential $50 million increase in annual profits by increasing the frequency of one million active rewards program members—defined as those who made at least one purchase at the retailer in the past year.

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Still, Perkins said the fact that Sears posted such a soft domestic comparable-store sales increase for its Sears unit—0.2 percent—after shuttering 50 underperforming stores in the past year, is evidence that it needs to grow its customer base. But before that can happen, he said, Sears needs to invest in its stores, bring freshness to its merchandise selection and ramp up its bread-and-butter appliance category.

"There's so much work that needs to be done for them in order to generate buzz and bring in a new customer, a younger customer," Perkins said.

Kevin Paul Scott, a branding consultant and co-founder of the ADDO Institute consulting firm, which encourages companies to be socially conscious, said the retailer needs to tap into its heritage as an all-American brand. By focusing on causes tied to American patriotism, the retailer stands to attract a new millennial customer, which is more focused on companies' social responsibility than the previous generation.

"They have got to do something big and bold to create a narrative that changes the way that people see their stores," Scott said.

Perkins said it remains to be seen whether the retailer will ever return to its roots as a great American company, but he hasn't entirely written the idea off.

"[Sears is] such a great icon. A lot of people are hoping that it will turn itself around," he said.

—By CNBC's Krystina Gustafson.