J.C. Penney Company, Inc. (NYSE:JCP) announced on Friday that it would sell 84 million shares of common stock to raise $932 million, which it will use the cash for general corporate purposes. Unfortunately this isn’t necessarily good news for current shareholders because it results in a 44 percent share dilution. Also it might do nothing more than simply delay the inevitable.
J.C. Penney shareholders not in a good spot
Shares of the retail chain’s stock fell as much as 1 percent on Monday morning, and analysts at Northcoast Research say the stock offering may give the company’s balance sheet a boost, thus extending its life, but it won’t do much good for the company’s business. The retail chain announced that the shares will be sold at $9.65 per share, and the deal is expected to close tomorrow.
Northcoast managing director Jeff Stein notes that although it’s no surprise that J.C. Penney Company, Inc. (NYSE:JCP) needs cash, the size of the offering shows that the company needs a lot of cash to continue its turnaround efforts. He said although some debt holders and suppliers might be happy that the retail chain is seeking more financing, but shareholders “may still be left holding the bag.”
J.C. Penney needs more than a balance sheet boost
Stein believes that even if J.C. Penney Company, Inc. (NYSE:JCP) successfully completes the equity offering, it doesn’t solve the fundamental issues which have brought the retail chain to the brink of bankruptcy. He doesn’t think management has explained a strategy to set the company apart from its competitors, and he remains skeptical that returning to legacy brands and promotional pricing will be enough to turn things around.
He believes that an equity infusion might do little more than simply delay the death of the struggling company.
More struggles ahead for J.C. Penney
The analyst said if the company is going to successfully complete the deal, then it will have to show that they have turned the corner. Nonetheless, there are still plenty of hurdles the company will still have to jump. Aside from how difficult the apparel industry is right now, the re-launch of J.C. Penney’s home store has been an expensive failure.
He notes that one of J.C. Penney Company, Inc. (NYSE:JCP)’s newest vendors Bodum has already sued it for breach of contract. In addition, the company is still seeking its next CEO, so investors who buy into this stock offering will need to “take a leap of faith that the next leader will come in with a plan that can quickly gain traction.”
Stein also finds it “curious” that the underwriter selected by the company (Goldman Sachs) for its stock offering is split on its view, with “one side of the house” advising investors to buy while the other side says sell.
Northcoast remains Neutral on J.C. Penney Company, Inc. (NYSE:JCP)