Sears Holdings Corporation (SHLD) is the parent company of Kmart Holding Corp. and Sears, Roebuck, & Co. It was formed in 2005 by the merger of Kmart and Sears. As of January 2011, the company operated 2,177 full-line and 1,384 specialty retail stores in the United States, through Sears and Kmart, in addition to 500 full-line and specialty stores in Canada, under the Sears Canada brand. The stores offer a variety of merchandise including, but not limited to, beauty and personal care products, consumer electronics, sporting goods, household appliances, apparel, jewelry, and certain automotive services.

The two individual entities had early beginnings. Sears was founded in 1886, and Kmart came just over a decade later, launching operations in 1899. After a long run of success, Kmart filed for Chapter 11 bankruptcy protection in 2002. Billionaire hedge-fund investor, Edward Lampert, saved the company by purchasing it out of bankruptcy in May 2003.

At the same time, Sears was not faring so well either. Sales were deteriorating and costs were becoming a problem. A year after rescuing Kmart, Lampert, who was now Chairman of Kmart Holding Corp., put in a bid for an $11 billion merger of Kmart and Sears, Roebuck, and Co., thus forming Sears Holdings Corp.

Both companies were struggling prior to the merger. The rationale behind the transaction was that the combination of the two would strengthen operations by building a single, lower-cost company while maintaining two separate chains. Many analysts were skeptical of this, and it appears rightfully so.

In 2005, its first year, Sears Holdings generated $49.1 billion of sales. The following year, it registered an increase, as revenues surpassed $53.0 billion. Unfortunately, this was the first and last time that sales have expanded. Since 2007, this number has been on a downward trajectory. Sears’ profit margins have followed downward, as higher costs persist, while sales falter.

Earnings have not been consistent in either direction. Although profit margins have decreased, there have been years where share-net has actually improved. This is in great part due to the company’s practice of repurchasing its shares, thereby boosting the earnings presentation. Indeed, the number of shares outstanding has decreased each year since 2005.

On December 27, 2011, Sears Holdings reported that its quarter-to-date sales were not as strong as expected. Instead, comparable store sales were down 4.4% at Kmart and 6.0% at Sears, as compared to the previous year’s showing. The holiday season, historically, generates the strongest sales and earnings, and has been the reason why share net has remained in the black for the past few years. In light of the news, it appears that fiscal 2011 (year ends January 28, 2012) will not be kind to the company.

Along with disappointing sales, Sears announced that it will be engaging in a number of cost-cutting initiatives, one of which will be to close up to 120 Sears and Kmart full-line stores. On hearing this news, investors quickly responded. Shares of Sears Holdings plummeted to close at $33.38 per share, a 27% decrease over the previous trading day’s close of $45.85. The stock’s price has perked up since then, though, perhaps on some speculative developments.

So, why has the company ended up in this situation? One explanation is the competition brought on other big box retailers, such as industry giant Wal-Mart Stores, Inc. (WMT - Free Wal-Mart Stock Report), Target Corporation (TGT), and The Home Depot, Inc. (HD - Free Home Depot Stock Report). The rise in popularity of these chains has taken consumer attention off of Sears.

On the other hand, there is some evidence that Sears has been successful in keeping its customers from redirecting their spending to these other retailers. If that is the case, and shoppers are simply not spending money at Sears or Kmart, then the merchandise these stores are offering may not be appealing or competitively priced. This is a more “fixable” problem, but not one that can be solved without some near-term pain, as discounting is the best way to reduce unwanted inventories.

After long histories, Sears and Kmart are faced with a future that is in the shape of a big question mark. In the end, there is no guarantee that Sears Holdings Corp. will be able to bring these two chains back to life or that shareholders will benefit if it can. The best attribute here, at present, is as a potential buyout candidate.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.