By Dow Jones Business News, September 26, 2013, 09:55:00 AM EDT
J.C. Penney Files to Sell Up to $1 Billion in Stock
J.C. Penney Co. moved to raise as much as $1 billion by selling stock, boosting its cushion of cash ahead of what
could be a hard-fought holiday season.
Penney said Thursday afternoon it would sell up to 92.6 million shares in a public offering underwritten by Goldman
Sachs. Its shares fell to $9.86 after the announcement from their close of $10.42.
The move comes as the struggling department store chain is seeing some improvement in sales but is still facing
concerns from creditors who worry the company still faces an uncertain road ahead.
Companies that finance clothing deliveries to Penney are making it more expensive for suppliers to do business with
the retailer. Rosenthal & Rosenthal, a so-called factoring firm that pays suppliers up front then collects later from
Penney, raised the surcharge it imposes for Penney suppliers to 2% from 1% and is now only financing 70% to 80% of the
goods that are delivered.
Previously, the New York-based firm had financed the full value of the goods. Despite the changes, J. Michael Stanley,
the managing director of Rosenthal, said his firm continued to support Penney and approve all orders.
A Penney spokesman said Rosenthal accounts for less than 1% of its orders at any time, adding the company hasn't been
contacted by any factor regarding the tightening of terms.
Credit concerns also were evident in the cost of buying derivatives that will pay out in the event of a Penney
default, which jumped to near an all-time high Wednesday, according to Markit, a financial data firm. That means lenders
and companies with financial exposure to Penney have to pay more to hedge their positions in case the retailer runs out
In the credit default swaps market, where investors buy and sell such credit protection, it currently costs roughly $
1.2 million annually to protect $10 million in Penney debt against default over five years.
Penney's shares closed up 3% Thursday at $10.42 after the company said it was getting traction with shoppers and said
it expects to report growth in sales at stores open at least a year for the quarter beginning in November. That followed
a 15% drop Wednesday to a 13-year-low after debt analysts from Goldman Sachs offered a downbeat view of the company's
prospects and reports Penney was looking to raise more funds.
The company is struggling to overcome a year and a half under former Chief Executive Ron Johnson, who cut back
discounts and did away with some popular house brands without first testing the moves, which drove away shoppers and
plunged the company into the red.
Myron "Mike" Ullman, who returned to the helm of Penney in the spring, has brought back sales and is stocking more of
the house brands that the retailer was known for, including women's apparel labels Worthington and St. John's Bay. He's
also trying to rework the chain's home departments after a revamp planned by Mr. Johnson failed to catch on with
Suppliers said in interviews that Penney's business seems to be improving each month, indicating that sales at stores
open at least a year were flat to slightly positive in September after running negative for the previous six quarters.
Still, they worried that a challenging holiday shopping season could make it more difficult for Penney to continue
Early forecasts from analysts and guidance from other retailers suggest that purchases of apparel and other typical
department store fare may take a back seat to home and appliance sales. Wal-Mart Stores Inc., the country's largest
retailer, last month reported weak sales that it expects to persist into the fall. And Macy's Inc. has said it will
boost marketing to bring shoppers in stores.
Even if Penney manages to generate positive sales in the fourth quarter, analysts say investors shouldn't get carried
away. "We don't think it's an achievement the market should be too excited about," Paul Lejuez, an analyst at Wells
Fargo & Co., wrote in a note to clients, given that it comes "on top of a 32% decline in the fourth-quarter of last
Mr. Lejuez added that if same-store sales aren't positive in the fourth quarter, "we will likely move into a different
phase of problems" that would cut to Penney's very survival.
Mr. Ullman told investors Wednesday that Penney doesn't need to raise cash this year. But a person familiar with the
situation said that the retailer may need additional capital next year, depending on how business goes.
Rather than wait until the last minute, Penney has held discussions with bankers at Goldman Sachs Group Inc. about
raising additional financing now, the person said. The financing could come in the form of additional borrowing, a sale
of stock or a combination of the two, the person said.
Earlier this year, Goldman arranged a $2.25 billion loan for Penney backed by its real estate. Other options could
include selling 240 acres of land it owns near its Plano, Texas, headquarters, pledging its inventory as collateral on
an additional loan or doing a private placement of stock.
Deborah Weinswig, a Citigroup Inc. analyst, said that while she believes Penney has adequate cash for the remainder of
the year, it's unclear whether those reserves will be enough to see the company through 2014 or longer.
--Serena Ng contributed to this article.
Write to Suzanne Kapner at email@example.com
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