Retail major J.C. Penney Company, Inc. (NYSE:JCP) is set to offer 84 million shares of common stock through secondary offering.
The retailer indicated it would use the proceeds for general corporate purposes.
Goldman Sachs To Underwrite
J.C. Penney Company, Inc. (NYSE:JCP) has appointed the investment banking arm of Goldman Sachs as underwriter for the share sale.
The retailer is also granting Goldman Sachs a 30-day option to purchase up to 12.6 million more shares.
Interestingly, J.C. Penney Company, Inc. (NYSE:JCP) shares plummeted recently after Goldman Sachs assigned Underperform rating as it believes the retailer must take on more debt in order to continue the cash flow.
In their recent research report, Goldman Sachs Group Inc (NYSE:GS) analysts pointed out one of the things causing big cash flow problems at the retailer right now is the fact that the company has to rebuild its inventory. The analysts observed one of the things former CEO Ron Johnson did while running the department store chain was replace some of the brands the chain’s then-customers loved.
Goldman Felt J.C. Penney Need To Raise Capital
Goldman Sachs analysts felt if the retailer intends to replace some of the brands, it would require additional cash, which it just doesn’t have, unless it raises more capital. The analysts believe J.C. Penney Company, Inc. (NYSE:JCP) would need to burn over $300 million on inventory investment during the third quarter in order to rebuild its private label inventories. Goldman Sachs analysts feel this will bring the retail chain to a cash level of about $500 million, which the analysts view as being the minimum cash threshold for the company.
Interestingly, Citigroup analyst Deborah Weinswig in the recent research note felt the retailer has ample liquidity for 2013. However, she emphasized that the retailer ‘may need to raise capital to cushion against potentially challenging season’, if it runs cash faster than estimates.
Post the Goldman Sachs’ report, J.C. Penney Company, Inc. (NYSE:JCP)’s stock plunged 15 percent on Wednesday. Earlier in May, Goldman Sachs also arranged a $2.25 billion loan for the retailer.
Some feel the secondary equity sale would sound good news for J.C. Penney Company, Inc. (NYSE:JCP) as the retailer would get plenty of cash to get through the holiday season. Besides, the additional cash would save the retailer from the costly interest payment of raising more debt.