J.C. Penney Company, Inc. (NYSE:JCP) raced to get its equity offering completed by today, leaving some analysts wondering just how bad the retail chain’s liquidity has become. Analysts at BMO Capital Markets see nothing but negatives in J.C. Penney right now, so they continue to rate it as Underperform with a $7 per share price target. They say $7 is the point at which the company’s stock becomes “interesting” to them.

J.C. Penney

J.C. Penney’s offering is dilutive to shareholders

J.C. Penney Company, Inc. (NYSE:JCP) said it would offer 84 million shares of common stock at a value of $9.65 per share with estimated gross proceeds of $811 million. There’s a $12.6 million over-allotment option, which could boost the value of the offering to $924 million. BMO analysts Wayne Hood, Shannon Coyne and Gabe Lembeck note that although the math associated with that offering raises their earnings per share estimates because the losses are spread over a larger denominator, it is, in their estimates, 30 percent dilutive to common shareholders.

They also point out that J.C. Penney Company, Inc. (NYSE:JCP) management lowered their fiscal 2013 year liquidity guidance before the offering to $1.3 billion from $1.5 billion at the end of the second quarter. They said this implies higher than expected inventory build, higher capital spending and lower profitability. They’re estimating that the retail chain’s total liquidity at the end of the fiscal year will be $2.2 billion, including the offering. But they believe the company’s cash burn rate will still be as high as $1.2 billion in the first to third quarters of the 2014 fiscal year. This would lead to another capital raise being needed in the 2015 or 2016 fiscal year.

J.C. Penney faces several headwinds

The BMO analysts reiterated their Underperform rating, saying they see a number of headwinds for J.C. Penney Company, Inc.  (NYSE:JCP). They note that although management was upbeat about the changes happening at the company, they didn’t mention gross margins, which leaves them questioning the profitability of the company’s sales.

They see headwinds in the form of third quarter clearance sales and growing promotional activity from competitors, which could lead to less of a rebound in gross margins for the third and fourth quarters. The analysts believe that these issues, plus worries among suppliers, are why J.C. Penney Company, Inc. (NYSE:JCP) rushed through to complete its equity offering.

Shares of the retail chain’s stock rose 2 percent in early Tuesday morning trading.