J.C. Penney Company, Inc. (NYSE:JCP) has warned that it will have less cash on hand at the end of the year than expected because of what looks likely to be a challenging holiday season. After pushing a public offering forward because of liquidity concerns, lowering expectations are signs of more trouble ahead for the struggling retailer, and Mary Ross-Gilbert at Imperial Capital has lowered her price target from $8 to $5.

J.C. Penney

J.C. Penney’s IPO

J.C. Penney Company, Inc. (NYSE:JCP) held a public offering at the end of September, selling 84 million shares of common stock for $9.65, with a 30 day option of selling an additional 12.6 million shares. “J.C. Penney believed it was compelled to raise the funds earlier than planned in light of negative press and analyst reports that raised concerns in the vendor community,” writes Ross Gilbert. She estimates that the take after fees and other costs was $785.8 million.

Before the equity raise, there were concerns about whether J.C. Penney Company, Inc. (NYSE:JCP) would run out of cash during the third fiscal quarter of next year, with a potential shortfall of $500 million.  “The equity raised… more than covers the deficiency. However, we think J.C. Penney will exercise the $400mn accordion feature on the revolver in F1Q14 to obtain an additional $360mn of liquidity and could consider an additional equity raise,” writes Ross Gilbert. The problem is that J.C. Penney, like other big retailers, has to stock up for the holiday season, and balancing the need to bring in stock with having enough liquidity for day-to-day operations can be a challenge.

J.C. Penney 8-K filing

But J.C. Penney Company, Inc. (NYSE:JCP) also filed an 8-K form, lowering the amount of cash it expects to have on-hand at the end of the year by $200 million due to capital expenditures and concerns about this year’s holiday season. Imperial Capital is lowering their expectations even more, from $1.381 billion to just $1.037 billion not including the equity raise.

Imperial Capital’s lowered price target is a lower mid-point enterprise valuation, which uses a revenue valuation multiple of 50 percent. The two closest comparisons, Macy’s, Inc. (NYSE:M) and Dillards, trade at 76 percent and 64 percent, but they “are posting positive comparable sales, have much higher EBITDA margins, own significantly more real estate, and are financially stronger, writes Ross-Gilbert.

JCP EV v Rev 1013