Penney stock plunges on share sale, lower cash forecast

Reuters

By Phil Wahba and Olivia Oran

Sept 27 (Reuters) - J.C. Penney Co Inc's decision toshore up its cash reserves by issuing almost $1 billion in newshares sent its stock tumbling more than 13 percent Friday.

Earlier in the day, the struggling U.S. department storechain had cut its forecast of year-end cash reserves, suggestingthat it is burning through money faster than expected.

Penney said the 84 million shares in the offering had pricedat $9.65 each. Underwriters have the option to buy another 12.6million shares.

The board decided Thursday afternoon to sell shares afterdiscussing in recent weeks various options to raise cash. As ofSept. 6, Penney had total debt of $5.82 billion, according tothe stock offering prospectus, making it difficult to raise newmoney through debt.

"We could not risk losing the confidence of our Associatesor our supplier partners, both of whom are paramount to ourlong-term success," Chief Executive Myron Ullman said in a notesent to all store employees on Friday and obtained by Reuters.

Penney spokeswoman Kristin Hays said the company wasconcerned that "shares could not handle much more pressure" ifthe company wanted to be able to sell new stock at some point.

The company has been struggling to improve sales after afailed attempt by Ullman's predecessor Ron Johnson to take thestore more up-market sent sales down 25 percent in 2012.

On Friday, in their first session since the sale wasannounced, shares closed at $9.05, down from a February 2007high of $87.18. About 35 percent of Penney shares are held shortby investors betting on its decline, making them very volatile.

Penney said in the prospectus it would have about $1.3billion in cash by the end of the year. In August, it hadforecast $1.5 billion.

"While an equity raise improves (near-term) liquidity, weremain concerned that JCP will continue to burn cash in '14 andbeyond," UBS analyst Michael Binetti, who has a "sell" rating onthe stock, wrote in a note.

UBS' Binetti said the pre-holiday capital-raising, alongwith cautious comments from other retailers, increased concernsthat near-term trends were not improving as anticipated.

So far some financing companies, known as factors, are notchanging terms on the short-term loans they provide Penneysuppliers.

Michael Stanley, the managing director at Rosenthal &Rosenthal, a large factor, said his firm has kept approvingorders to Penney.

"We feel they have enough liquidity, especially with thisshare sale," Stanley said.

A TURBULENT WEEK

Penney's offering confirmed an exclusive Reuters report onWednesday that the company aimed to raise as much as $1 billionin new equity to build its cash reserves.

Penney on Thursday denied a CNBC report that said Ullman hadtold investors there was no need to raise more money before theend of the fourth quarter, which ends in early February.

The company's shares had climbed on the CNBC report.

Earlier this year, Penney had a $2.25 billion loan arrangedby Goldman Sachs, which is also the sole book-runningmanager for the stock offering.

Goldman said in a research note this week that poor businessfundamentals, the need to rebuild inventory of goods popularwith long-time customers and the weak performance of its homegoods department would likely put pressure on Penney'sliquidity.

Penney's shares have been on a wild ride in the past threedays: plunging on the Goldman research, and declining further onthe Reuters report about a capital raising, before recoveringsome of those losses on the company statement about tradingconditions and the CNBC report. The shares fell again on theshare sale announcement on Thursday, and continued their slideon Friday.

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