About eight hours after J.C. Penney Co. said yesterday it was "pleased" with its turnaround, the retailer announced the sale of 84 million shares to raise cash.
Goldman Sachs Group Inc. is running the offering, the Plano, Texas-based department-store chain said in a statement yesterday. The underwriters will have a 30-day option to buy as many as an additional 12.6 million shares, which would push the total to 96.6 million shares. Based on yesterday's closing price, the value of the sale would be about $1 billion.
On Sept. 25, Charles Grom, an analyst for Sterne Agee & Leach Inc., wrote in a note that Chief Executive Officer Mike Ullman told him the retailer would end the year with sufficient liquidity. J.C. Penney said today it expects to end the fiscal year with about $1.3 billion in liquidity, excluding the offer proceeds. It had said on Aug. 20 that it expected year-end liquidity of more than $1.5 billion and that the forecast didn't assume it would need any additional outside financing.
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The fact that the company is raising cash "doesn't bode well" for third-quarter results, Paul Swinand, an analyst for Morningstar Inc. in Chicago, said in an e-mail. Nor will the offering be good for current investors because the share count will increase by more than a third, which means the stock price will likely fall by that amount, he said.
The shares closed at $10.42 in New York and sank 5 percent to $9.90 in extended trading yesterday. On Sept. 25, J.C. Penney fell 15 percent to the lowest level since 2000 after a Goldman Sachs debt analyst raised concerns about the chain's liquidity. For the year, J.C. Penney's shares are down 47 percent, compared with a gain of 19 percent for the Standard & Poor's 500 Index.
"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 ahead of what could be a choppy holiday season for retailers."
Since Ullman returned in April, J.C. Penney had already taken out a $2.25 billion loan and drew $850 million from its revolving credit line. The company discussed with Goldman Sachs, which arranged the loan, the possibility of raising more cash to fund its turnaround, people with knowledge of the matter said earlier this month. While J.C. Penney didn't have immediate cash needs, it has faced shareholder pressure to take advantage of cheap financing, the people said.
Investors' Confidence
"For a survivability point, it's obviously better to raise equity while you can, rather than more debt when the debt is already high," Swinand said.
Yesterday, before the markets opened, the company said sales were continuing to improve. Ullman is working to shore up investors' confidence and fix a company that hasn't turned a quarterly profit since mid-2011 and has posted a 22 percent drop in revenue in the past year.
Ullman, who took back the helm this year after his predecessor Ron Johnson's attempt to appeal to younger and wealthier consumers failed, has revived sales events and brought 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 12 months sliding 12 percent in the fiscal second quarter ended Aug. 3.
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.
Comparable-store sales are expected to decline 4.3 percent in the current fiscal third quarter and gain 2.4 percent in the fourth quarter, according to analyst estimates compiled by Retail Metrics.
Since Pershing Square Capital Management LP, one of J.C. Penney's largest shareholders, exited the stock in the past month, hedge funds, including Glenview Capital Management LLC and Hayman Capital Management LP, have increased their stakes. Glenview Capital is the largest investor with a stake of 9.1 percent, according to Bloomberg data, followed by Soros Fund Management LLC with 9.06 percent.
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