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MT Insider: JC Penney's 84 Million Equity Offering Increases Dilution By 30% For Existing Shareholders, Mixed Views From the Street

By: MT Newswires
Posted: 9/30/2013 7:04:00 AM
Referenced Stocks: AEO;ANF;ARO;JCP;URBN

JC Penney Company, Inc. ( JCP ) announced last week a common stock offering for 84 million shares, which is in addition to the retailer's existing 220 million share base. Back of the envelope, this would imply about 30% dilution to existing equity shareholders.

Specifically, 84 million shares of common stock at $9.65 per share would raise approximately $811 million in proceeds. Underwriters will have a 30 day option to purchase up to an additional 12.6 million shares.

Management said that it expects to end the year (side bar 1, likely means FY13, but what about FY14?) with $1.3 billion in cash, excluding the offering.

Put simply, this sounds like a band aid that may help the wound in the short term, but it has become increasingly more difficult to make the bull case on the company's longer term growth prospects.

Recall that Thursday, JC Penney said it "anticipates it will experience positive comparable store sales trends coming out of the third quarter and throughout the fourth quarter of 2013."

Putting that statement into perspective, there have been cautious comments from retailers such as Abercrombie & Fitch ( ANF ), American Eagle ( AEO ), Urban Outfitters ( URBN ), and Aeropostale ( ARO ) for Back to School and ahead of Holiday.

Moreover, peers such as Macy's (M), Sears Holdings (SHLD) and Kohl's (KSS) as well as Walmart (WMT) have also been less than sanguine ahead of the Christmas selling season.

Bottom line, this makes investors a bit more skeptical regarding positive near term trends at JC Penney (which may not be getting as much traction as anticipated).

While the incremental $811 million should provide enough liquidity to get the retailer into a position to get through the critical holiday selling season, analysts on the street are mixed regarding shares of JC Penney.

Goldman Sachs, which is also the sole book-running manager for the offering, put out an equity report taking its price target down to $10 (previously $14) owing to dilution from the secondary offering. However, the firm maintained its neutral stance, citing a potential turnaround that could still be in the works (side bar 2, seems a bit optimistic).

In contrast, UBS believes that JCP's liquidity raise does not alleviate the retailer's longer term cash burn concerns. According to the report, JC Penney could still require additional capital to fund operations into 2016.

This is until the company can generate enough in profits (UBS estimates at least $750 million) to cover interest expenses and maintenance capital expenditures. Moreover, the analyst at UBS also lowered his price target to $7 (from $10 prior) and reiterated his sell rating.

JCP 8.99 -0.06 -0.66

ANF 35.97 -0.54 -1.48

AEO 14.33 +0.09 +0.63

ARO 9.51 -0.08 -0.83

URBN 37.07 0.00 0.00

M 43.48 -0.04 -0.09

KSS 52.03 0.00 0.00

WMT 74.25 -0.11 -0.15

SHLD 59.05 -1.33 -2.20