Why Things Are Worse Than J.C. Penney's Letting On

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To say this week has been brutal for J.C. Penney (NYSE: JCP  ) shareholders seems a massive understatement.

The stock has lost more than 30% since Monday, when I pointed out that the struggling retailer was said to be in talks with banks and institutional investors to raise more capital to finance its faltering turnaround.

Incidentally, I also noted that the news was especially troubling considering that it came less than four months after J.C. Penney not only secured a $2.25 billion five-year term loan with Goldman Sachs (NYSE: GS  ) to stay afloat but also was left with $1.535 billion in cash at the end of last quarter after burning through more than $1.1 billion between capital expenditures, inventory restocking, and debt repurchases.

Here's what J.C. Penney said
But then, shortly after a plunge on Thursday, when a Goldman Sachs bond analyst raised eyebrows by recommending investors buy J.C. Penney credit default swaps (which pay off if a company defaults on its debt), J.C. Penney issued a press release stating it was "pleased with its progress thus far in the Company's turnaround efforts and the traction of its initiatives are starting to achieve."

In addition, the company said, it was "encouraged by improvements in purchase conversion both in store and on," primarily because of "being back in stock in key items and sizes the customer expects to find at JCPenney." It continued: "Overall sales on continue to trend double digits ahead of last year."

Here's what it didn't say
But J.C. Penney was also notably absent regarding its core bricks-and-mortar comparable sales, which makes you wonder just how bad the its next quarterly results will be.

And yes, I understand the company had to start somewhere to turn the business around, but if J.C. Penney's primary reason for seeing improvements in purchase conversion is simply restocking the same old stuff people expected them to have in the first place ... well, to me it seems a celebration of mediocrity, at best. 

Perhaps we shouldn't have been surprised, then, when shares of J.C. Penney plunged more than 13% on Friday, after the company announced plans to sell 84 million shares of common stock at $9.65 per share -- that's a 7.3% discount to Thursday's closing price of $10.42 per share -- with Goldman Sachs serving as the sole book-running manager for the offering.

All told, that would bring in around $811 million, not including an option granting underwriters the right to purchase up to an additional 12.6 million shares of common stock over the next 30 days.

But that brings up another question: If Monday's reports were true, and J.C. Penney was indeed undergoing talks with banks and institutional investors to raise more capital, why did it have to make the seemingly desperate move of trying to talk investors into buying 84 million new shares at below-market prices?

Assuming those talks weren't with Goldman Sachs about this particular offering, something tells me J.C. Penney simply couldn't convince any outside source of capital that it was worth risking more money by issuing another term loan or revolving credit line.

As a result, I think Friday's dilutive move was one of last resort from a company that knows its huge losses won't end anytime in the near future. When all's said and done, even if you thought J.C. Penney's harrowing decline so far has been impressive, that's why I'm convinced we haven't seen anything yet.

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Read/Post Comments (3) | Recommend This Article (4)

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  • Report this Comment On September 28, 2013, at 1:51 PM, HarryPiels wrote:

    Just went to a JCP store a few weeks after my last visit.. The (NY) mall store was better stocked than on my first visit. The sales staff was made up of mostly boomer- aged women who were friendly, courteous, and helpful. I think it would be a shame to lose JCP where I've enjoyed shopping for decades. Mighty Mouse, where are you?

  • Report this Comment On September 28, 2013, at 5:38 PM, flagellum wrote:

    I agree.

    1. When the Controller leaves, it could be an ominous sign. Not good.

    2. Selling more stock gives the bond holders more security. I am sure they are happier. Was this Goldman Sach's idea or the bondholders'?

    3. If you are going to file Chapter 11 and reorganize, you MUST have cash in order to operate.

    4. Goldman Sachs makes out with more fees.

    5. Anyone buying JCP stock is a fool or can afford to lose it. The cost/benefit is just not there.

    6. Let's see their latest weekly sales report in detail. Boy, would I like to have a seat in Corporate Accounting's internal reporting section right about now.

    7. Poor JCP had enough problems without being battered by the likes of an incompetent activist.

    8. It would be nice if JCP can make a go of it. The store in our area is very nice as always. But, I'm afraid that JCP may be another W. T. Grant.

    9. Will the new stockholders scream fraud once all the facts are out?

    10. Why would the stock be worth even $7? You would be better off buying secured bonds at a deep discount.

  • Report this Comment On September 28, 2013, at 5:43 PM, flagellum wrote:

    Some people think that there is value in their real estate, but, you need a viable tenant for that real estate to be valuable. Brick and mortar is still giving up sales to the internet.

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9/30/2016 12:42 PM
JCP $9.30 Up +0.05 +0.54%
J.C. Penney CAPS Rating: *
GS $161.38 Up +2.43 +1.53%
Goldman Sachs CAPS Rating: ***