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Even Good News Can't Send J.C. Penney Higher

By Dan Caplinger - Apr 12, 2013 at 2:13PM

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The dismissal of an unfair-competition claim wasn't enough to send the retailer's shares higher.

Ordinarily, you'd expect a legal victory to give a company's stock at least a short-term boost. But for J.C. Penney (JCPN.Q), all news lately has seemed to be bad news, and the stock has fallen 2.8% as of 2:05 p.m. EDT.

Winning a legal battle...
Today's news involves J.C. Penney's lawsuit with Macy's (M -6.20%), in which a judge dismissed Macy's claim that J.C. Penney engaged in unfair competition by selling products from Martha Stewart Living (MSO.DL) in store-within-store settings. The judge based his decision on J.C. Penney's past experience in creating similar store-within-store concepts based on other brands.

Yet the dismissal of the claim doesn't end J.C. Penney's legal controversy, as a claim of tortious interference in Macy's contract with Martha Stewart Living still remains outstanding. Moreover, Macy's is seeking an injunction against J.C. Penney to keep it from selling various Martha Stewart items, and Macy's has promised to appeal the court's decision if it loses.

...but losing the business war?
Despite its small legal victory, J.C. Penney still has big challenges ahead of it. Reports earlier today said that retailer had retained Blackstone Group to help it raise $1 billion. Given the massive expenditures the retailer has made as part of its ongoing restructuring, the cash will help bolster J.C. Penney's operating capital and address its short-term capital needs.

Whether prospective capital-infusions come in the form of bank loans or additional equity, it's highly likely that existing shareholders will end up seeing their stakes in the company diluted. Given how low the share price is, now is clearly not the ideal time for J.C. Penney to be tapping the capital markets for cash. Yet as painful as it is, returning CEO Mike Ullman has little chance of successfully rescuing the retailer if he doesn't have the financial capacity to implement changes in strategy going forward.

A long road ahead
At this point, it's hard to imagine what could make J.C. Penney shares rise. An outright dismissal of Macy's lawsuit might be sufficient, especially if it eliminates the possibility of an injunction. Yet even with Martha Stewart's help, J.C. Penney's anticipated about-face on its discounting and coupon model is going to leave customers feeling whipsawed. If that happens, investors may never get the good news they've been waiting for.

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Stocks Mentioned

J. C. Penney Company, Inc. Stock Quote
J. C. Penney Company, Inc.
Macy's, Inc. Stock Quote
Macy's, Inc.
$18.16 (-6.20%) $-1.20
Martha Stewart Living Omnimedia, Inc. Stock Quote
Martha Stewart Living Omnimedia, Inc.

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