J.C. Penney Co. (JCP:US), the department-store chain that hasn’t been profitable since 2011, sank in New York trading after saying it would sell shares to raise as much as $932 million and lowering its year-end liquidity forecast.
Goldman Sachs Group Inc. is running the offering of 84 million shares for $9.65 apiece, J.C. Penney said in a statement today. The price is 7.4 percent lower than yesterday’s close.
Chief Executive Officer Myron Ullman is raising more cash to get J.C. Penney through the holiday season and quell concerns that a Goldman Sachs debt analyst raised in a note predicting that the chain’s liquidity will be strained this quarter. The company stoked those concerns again today when it said it would have $1.3 billion in liquidity at the end of the year, $200 million less than previously forecast. The stock slid 13 percent to $9.05 in New York, while the bonds gained.
The offering is “a near-term positive for the company because they needed it, but if you’re a shareholder you are 30 percent diluted today,” Michael Binetti, an analyst at UBS AG in New York, said in an interview. While the cash infusion takes bankruptcy “off the table” for now and will get J.C. Penney through this year, sales that fall behind the retailer’s projections may force it to raise more capital next year, he said.
Since Ullman returned in April, J.C. Penney has borrowed about $3.1 billion to help fund its attempt to rebound from Ron Johnson’s failed transformation into a destination for younger, wealthier shoppers.
J.C. Penney is offering equity because it already has $400 million in annual interest payments and adding more fixed costs would have been risky, given that the turnaround is taking longer than expected, said Binetti, who recommends selling the shares.
“For a survivability point, it’s obviously better to raise equity while you can, rather than more debt when the debt is already high,” said Paul Swinand, an analyst for Morningstar Inc. in Chicago.
The retailer’s $200 million of 6.875 percent bonds due October 2015, its nearest maturity, increased 2.1 cents to 93.25 cents on the dollar to yield 10.65 percent as of 9:57 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Credit swaps protecting against losses on the debt, which typically fall as confidence improves, declined 1.8 percentage points to 19.5 percent upfront as of 10:30 a.m., according to data provider CMA, which is owned by McGraw-Hill Financial Inc. and compiles prices quoted by dealers in the privately negotiated market.
Goldman, which also arranged J.C. Penney’s $2.25 billion term loan in May, will have a 30-day option to buy as many as 12.6 million shares. That would push the deal’s total to 96.6 million shares.
“It’s an opportunity to do things now,” Kristin Hays, a spokeswoman for J.C. Penney, said of the share sale. The fundraising “has the dual benefit of easing the concerns of our vendors” and our employees, Hays said in a telephone interview yesterday. “It also shores up the balance sheet (JCP:US) ahead of what could be a choppy holiday season for retailers.”
Ullman has been working to regain shoppers before the holidays by reviving sales events and bringing back private-label merchandise that appeals to the chain’s traditional customers. Those actions helped slow the loss of shoppers, with sales at stores open at least a year sliding 12 percent in the fiscal second quarter ended Aug. 3, a slower decline than a year earlier.
Comparable-store sales (JCP:US) may fall 4.3 percent in the fiscal third quarter and gain 2.4 percent in the fourth quarter, according to analysts’ estimates compiled by Retail Metrics.
J.C. Penney forecast today for ending the year with about $1.3 billion in liquidity excludes the offer proceeds. On Aug. 20, it projected more than $1.5 billion, a forecast that didn’t assume it would need additional outside financing.
Separately, the company said yesterday that Mark Sweeney, who had served as controller, left the company last week. Dennis P. Miller, senior vice president for finance, will serve as J.C. Penney’s interim principal accounting officer.
A report from Cleveland Research earlier this week said the third quarter looks “more difficult than initially expected.” The return to more promotions doesn’t appear to be generating better sales or store visits, the firm said.
J.C. Penney’s ‘Issues’
“Given all the issues J.C. Penney has, the fact that they are raising equity junior to us is fantastic,” said Ian Goltra, a portfolio manager at Forward Management LLC, a San Francisco-based firm with about $5 billion in assets under management. “It’s very expensive capital, but given the duress the company is under, it’s very positive for bondholders.”
Goltra said his firm holds J.C. Penney bonds with a market value of about $30 million.
While Binetti expects J.C. Penney’s same-store sales to rise next quarter, he points out the gain would be coming after a 32 percent drop a year earlier. The sales also may not be very profitable because a lot of merchandise is on clearance to clear items Johnson brought into stores, he said.
“People are still underestimating how challenging it will be to get this consumer back,” Binetti said. “They fired their consumer last year. At a minimum it’s going to be very expensive to re-engage that consume over multiple years.”
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