J.C. Penney’s Equity Offering Results In 44 Percent Share Dilution

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The recently announced underwritten public offering of 84 million shares of J.C. Penney Company, Inc. (NYSE:JCP) at $9.65 per share would result in a shares dilution of around 38% (excluding the 30-day option for 12.6 million additional shares) or 44% including the option for shareholders, according to Deborah Weinswig, an analyst at Citi Research.

J.C. Penney's Equity Offering Results In 44 Percent Share Dilution

J.C. Penney SSS recovery

Weinswig emphasized that the offering would eliminate the value creation for stockholders in the event of recovery. Weinswig projected that J.C. Penney Company, Inc. (NYSE:JCP) would experience a substantial SSS recovery next year (+7.5% estimate) and 2015 (+5 % estimate).

Based on the above reasons, Weinswig reiterated her Sell rating and $7 price target for shares of J.C. Penney Company, Inc. (NYSE:JCP). The stock price of the department store chain declined by 13% to $9.05 a share after announcing its decision to sell additional 84 million shares to the public on Friday.

J. C. Penney shares plunged

Prior to the announcement, shares of J.C. Penney Company, Inc. (NYSE:JCP) plunged by 15% after Goldman Sachs analyst Kristin McDuffy warned that the retailer might face liquidity problems  because it is burning cash faster than expected.  In her previous note to investors, Weinswig said the company has enough cash to last until the end of 2013, but it might need to raise additional cash to cushion against a potentially challenging holiday season.

In her latest note to investors, Weinswig estimated that J.C. Penney Company, Inc. (NYSE:JCP) would be able to raise $811 million from selling its equities and additional $122 million if the underwriters exercise their 30-day option to acquire 12.6 million additional share.

Cash generation

Based on the figures, the analysts calculated that the department store chain would end 2013 with $2.2 billion in cash [estimated $1.3 billion available cash + net proceeds of the equity offering] and approximately $2.5 billion in liquidity including the revolver. The company said it would use the net proceeds of the offering for general corporate purposes.

In addition, Weinswig projected that J.C. Penney Company, Inc. (NYSE:JCP) could deliver -6.61 EPS for 2013 compared with her previous estimate at -$7.46.  For the year 2013, its estimated EPS is now -$3.50 from -$4.87 to reflect the public offering of 84 million shares and lower interest expense.

Furthermore, the analyst projected that J.C. Penney Company, Inc. (NYSE:JCP)’s FCF would be -$2.1 billion and net proceeds from financing transactions of $3.5 billion for 2013. By next year, Weinswig estimated that its cash will decline to $1.4 billion, a decline of $0.8 billion, and its available cash by 2015 would be around $0.77 billion, down by $0.66 billion.

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