J.C.Penney Keeps Slumping; Critics Worry About 2014

J.C. Penney's (JCP) plans to raise almost $1 billion though a public offering hasn't alleviated worries about the struggling department store operator.

What's the issue? Concerns that the company has been burning through cash faster than anyone expected and will keep right on blazing away next year. Or as UBS analyst Michael Binetti writes…

Liquidity Raise Does Not Alleviate Longer-Term Cash Burn Concerns. While an equity raise improves NT liquidity (like the $2.3B loan completed in May'13), we remain concerned that JCP will continue to burn cash in '14 and beyond. In our modest base case '14E recovery scenario (SSS: +5%; GM: +500bp, EBITDA -$40m) we are forecasting -$650m cash burn (assumes $385m int. expense, and capex 55% below Macy's at $300m). We fear JCP could require add'l capital (potentially to fund 2016 ops) until the company can sustainably generate $750M+ to cover cash int. expense + maintenance capex.

Announced late Thursday, the stock offering of 84 million shares was priced at $9.65 per share (a 7.4% discount to Thursday's closing price). And the company says it will have more than $2 billion in cash at year end.

But some Wall Street pros were left scratching their heads. The media had widely reported early Thursday that CEO Mike Ullman didn't see conditions for the rest of the year where the department store chain would need to raise capital.

J.C. Penney has seen some improvement in sales. But critics worry about the road ahead. Earlier this week, the credit research group at Goldman Sachs offered a bearish view of the retailer's prospects, and a Citigroup analysts cut herprice target from $11 to $7. Adding to worries is a downbeat outlook for the broader retail industry.

Brian Sozzi, CEO and chief equities strategist for Balus Capital Advisors, told Stocks to Watch:

All of the signs since August tell you that the company is underperforming and their margins haven't bottomed yet. The concern now is what will happen if these trends continue, and I think they will, as the company enters 2014…You are still looking at a J.C. Penney that is burning through cash and will have no other external ways of raising more. No one expects great holiday sale. In that sort of environment, how will a struggling J.C. Penney do?

Down more than 9% in Friday afternoon market action, J.C. Penney trades at $9.48.