Founded as a catalog business by a railway clerk in 1886, Sears firmly held its ground as an iconic retailer in the lives of U.S. households for more than a century.

Any kitchen in middle-class suburbia may well have a Kenmore appliance humming in the background. The car in the garage might fire up with a kick from a trusty DieHard battery. I'll always keep my Craftsman tool set as a reminder of my father, who gave it to me for a birthday present years ago. Besides, those tools are good.

Now though, thanks to a combination of neglect, mismanagement, a weak economy and the ever-changing dynamics of retail, the unthinkable may happen. After years on death watch, Sears Holding (SHLD) may actually fall -- joining the ranks of retailers like Borders and Blockbuster as mere entries in the archives of Wikipedia.

A new round of store closings was recently announced. Key executives are leaving. Sales have been in steady decline for years. These are not good signs.

"I don't think Sears is viable. I don't think they can survive in their current state," says veteran retail sector financier Howard Davidowitz of Davidowitz & Associates, who has advised retail greats like Wal-MartStores (WMT) founder Sam Walton over the years. "Too many things have gone off track. Too many customers have been lost, and it's too expensive to bring them back."

image: Michael Brush

Michael Brush

A turnaround that tanked

In short, under the management of hedge-fund kingpin Eddie Lampert of ESL Investments, which took over the show in 2005, a lot of sins have been committed at Sears. Redemption may not be possible.

"It's too late. Something different has to happen to the company, and I honestly don't know what it can be," says Davidowitz.

Goldman Sachs analyst Adrianne Shapira has a $27 price target on Sears stock, which recently changed hands for $59. In other words, Shapira is forecasting a decline of more than 50% from here -- because she's not convinced a turnaround will play out, despite a smattering of reforms by the retailer.

Of course, Sears has a different view. The company believes using technology to improve the shopping experience, such as arming sales staff with iPads to carry out research on the floor for customers, a new loyalty program called "Shop Your Way Rewards," and improving merchandise, among other things, will bring its core customers back.

And there's value in those powerful brands: Craftsman, Kenmore, DieHard and Land's End. As for bankruptcy -- a clear risk at a retailer that's posted six straight years of sales declines -- Sears believes financial wizardry will keep the wolf from the door.

Some investors agree; Sears was actually the best performing S&P 500 stock in the first quarter of 2012.

They may be right, but such financial wizardry -- or the use of tactics like asset sales and balance-sheet adjustments to drain off cash -- goes only so far. It's also a big part of what got Sears in trouble in the first place.

For the past seven years, Sears and Kmart (also owned by Sears Holding) has been in the hands a of hedge fund manager whom many consider to be a financial genius, Eddie Lampert.

The problem is, he's been treating Sears more like a hedge fund than a retailer, say critics. And that simply doesn't work in the highly competitive world of retail. Instead, it leads to one sin after another, and the sins build on each other until - poof! -- an iconic retailer hits the endangered-species list.

Now, I don't think Sears will go bankrupt or close its doors overnight; Lampert has the financial clout and skills to keep it going. More likely, the retailer may simply keep getting whittled down, as Lampert continues to hive off stores, leases, brands and other assets to try to deal with ongoing sales declines. Sears announced 120 store closings late last year, and more than 60 more last month.

But in retail, you can't shrink your way to success. This is why retail experts like Davidowitz now question the viability of Sears.

Here's a look at the five sins of Sears, and how the company is trying to repair the damage.

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Sin No. 1: Cutting investments in stores too much

Soon after taking over, Lampert started reducing investments in stores to support cash flow at a time when the recession was hitting cash flow hard at many other companies. From 2007 to 2009, capital investments at Sears declined 37% to $361 million, but cash flow held steady. This may have been some great financial wizardry, but it left stores in shambles -- and customers noticed, say critics. They stopped going.

"Lampert said it was a bad investment to invest in the stores," says Paul Swinand, a Morningstar analyst who covers retail stocks. "That's like saying in the airline business, it's bad to buy planes. That's the wrong way to run a business." in 2010, Sears was investing an industry low of $1 to $2 a square foot in stores, calculates Swinand.

Lampert used the cash to buy back Sears stock, and a lot of the purchases were at prices much higher than where it now trades. "Sears, Kmart -- they're both wrecked," says Davidowitz. "This was a guy running a hedge fund, not a retail company. The long-term impact of what he is doing is catastrophic."

Stocks mentioned in this article include: Target (TGT), IBM (IBM) and Sony (SNE).

As another way to generate cash, Lampert has sold off several of the better Sears stores, says Columbia Business School professor Mark Cohen, who was CEO of Sears Canada until mid-2004 and chief marketing officer and president of soft lines in the U.S. before that. A lot of the remaining stores are in economically challenged areas, or in older, declining malls. "Most retailers have come out of the recession with some manifestation of recovery," says Cohen. "But Sears continues to decline, and there's no reason why it should show any positive performance because there's been no strategy or investment. This has been an asset strip."

In fairness to Sears, capital spending has picked up 23.4% over the past two years, to $432 million last year, points out David Trainer of New Constructs. Trainer still considers Sears a dangerous stock because of poor returns on investment and because shares look expensive, given the company's prospects, after such strong performance this year.

Sin No. 2: Prices that are too high

Another problem for Sears is that it rarely offers regular discounts and low pricing like Wal-Mart and Target (TGT) do. "Lampert decided that price doesn't matter; he's going to go for profit margin," says Davidowitz. "In retail, you don't start with profit margin, but in Lampert's world you do. So Sears was not price-competitive and still isn't." Again, customers noticed and went elsewhere.

"We believe it is not just solely about price when it comes to value to our customers," responds Sears spokeswoman Kimberly Freely. Sears also provide value through special offers inside a membership program, a guarantee to process returns in five minutes, free shipping on some products at certain times and "best in class brands at both Sears and Kmart."

Sin No. 3: Hiring CEOs without solid retail experience

Sears needs a CEO with solid retail experience to shake things up by clearly defining a direction and trying out new concepts in test stores, says Davidowitz. Instead, the CEO who joined in February 2011, Louis D'Ambrosio, comes from Avaya, a tech company. Before that, he worked with IBM (IBM). "He has no retail experience, and there's no reason to believe he is anything more than the latest puppet," says Cohen, at Columbia Business School.

Before that, Sears had an interim CEO for a few years, W. Bruce Johnson, who was promoted from inside the company, where he was in charge of supply chain and operations -- more of a tactical than a strategic leadership position. Sears has also had a lot of top management turnover in recent years, which also makes it more challenging to set a clear strategy, says Morningstar's Swinand.

In defense of Sears, it recently put Ron Boire, a solid retail veteran, in the position of chief merchandising officer. Boire had been the CEO of Brookstone and the president of U.S. Toys, North America for Toys R Us. He had also worked in Sony's (SNE) consumer division.

Sin No. 4: Regular sales declines

A combination of the sins above, plus a weak economy, has led to the cardinal sin in retail -- regular sales declines. The key metric to watch in retail, says Davidowitz, is "same-store sales." This gauges sales at stores open more than a year, to strip out the effect of store openings and closings. "That is the most important thing in retail. It proves your viability," says Davidowitz.

Unfortunately, Sears' same-store sales have been in decline for six straight years. The trend continued in the fourth quarter, when U.S. same store sales fell 5.2%. "In other words they are shrinking their market share," says Davidowitz. As a result, the company lost $4.52 per share last year, after accounting adjustments.

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In its most recent conference call, Sears outlined several tactics it believes will help reverse the negative trends. It's "arming" sales associates with iPads so they can better help customers figure out which products are right for them. This makes sense with big-ticket appliances. Sears is rolling out a shoppers' loyalty program, and new Kenmore and Craftsman products. It's revamping store layouts to mix up merchandise so that customers who go in for one thing pick up other stuff as they move through stores. Work clothes, for example, have been moved closer to tools.

Stocks mentioned in this article include: CIT Group (CIT) and Sears Holding (SHLD).

And Sears' customer-satisfaction level has been improving, says Claes Fornell, a University of Michigan business school professor who tracks these things. But that might be because the most dissatisfied customers have mostly left, which mathematically pushes up the average ratings of remaining customers who are polled, says Fornell. Still, it's a reversal.

Sears also recently announced it is hiring Leveraged Marketing of America to explore how to extend its popular Kenmore, Craftsman and DieHard brands to new products and new regions of the world.

Despite all these efforts, things don't look good for Sears, say analysts. A sluggish economy, a weak appliance market and high gasoline prices, combined with Sears' self-inflicted wounds, suggest sales will continue to shrink at least this year, if not beyond, they say. Wall Street analysts predict a 5% overall sales decline this year and a 2% decline next year, according to Thomson Financial.

Sin No. 5: A credit scare

Those weak sales trends have been worrying Sears' lenders. Back in December, Fitch Ratings downgraded Sears' debt, explaining that those weak sales, and the possibility that one measure of cash flow could turn negative this year, may force Sears to increase borrowing. Fitch also cited "competitive pressures, inconsistent merchandising execution, and the lack of clarity about the company's longer-term retail strategy." Then in January, a financial firm called CIT Group (CIT) said it would stop acting as an intermediary between Sears and its suppliers.

This was bad news, because small developments like these can quickly snowball, drying up credit for a retailer, says Davidowitz. Lampert reacted quickly. He announced the sale of 11 stores, the spinoff of Hometown and Outlet stores, and improvements in inventory management. Together, these steps should raise mroe than $1 billion. "Lambert's reaction the minute trouble started was magnificent," says Davidowitz. "No one has ever accused him of not knowing finance."

But it also may foreshadow what really may be in store for Sears, as those negative sales trends continue.

So what's the endgame?

Sales trends suggest Sears is dying. Current efforts could turn it around, but the recent track record isn't good, and a big part of the game plan remains store and asset sales to generate cash. Tellingly, a big part of the most recent conference call with investors covered this kind of financial wizardry, as opposed to the basic block and tackle of retail.

"I think it all comes apart. It dissembles," says Cohen, the former Sears Canada CEO. "(Lampert) will continue to sell off pieces and parts. There is no meaningful strategy to manage the business successfully in any conventional way."

That kind of scenario won't necessarily help shareholders. But another option might. Swinand, at Morningstar, thinks Lampert could eventually take Sears private to try to fix it up inside his hedge fund.

Such a move would mean a premium for shareholders as Lampert buys their stock.

The catch is, there's no telling how much the stock might sink between now and when this scenario plays out, if it does. So there's little point in buying Sears now, hoping the stock will jump in a take-under.

For shoppers, the hedge-fund manager's financial wizardry may mean your neighborhood Sears will disappear. They won't all go at once, but they're already going. Of course, retailers go away all the time.

But icons shouldn't.

Stocks mentioned in this article include: Sears Holding (SHLD), Wal-Mart (WMT), Target (TGT) and IBM (IBM).

At the time of publication, Michael Brush did not own shares of any company mentioned in this column.

Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.