This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

J.C. Penney Crushed On Liquidity Concerns

Stocks in this article: JCP

NEW YORK (TheStreet) - J.C. Penney (JCP) shares plunged more than 11% on Wednesday, hitting a 12-year low on liquidity concerns for the struggling department store chain.

Shares were falling 11.7% to $10.50 with more than 55 million shares changing hands in mid-Wednesday trading.

In a note released late Tuesday, Goldman Sachs (GS) credit analysts Kristen McDuffy and Ryan Gallant initiated coverage with an "underperform" rating on the company's 7.95% unsecured bonds that are due in 2017, its 5.65% notes due in 2020 and its 6.375% notes due in 2036.

"We recommend that investors buy 5-year CDS and also recommend a steepener, whereby investors sell 1-year CDS and by 5-year CDS," the September 24 note said. "Additionally, although we are comfortable with the collateral value at the top part of the structure, in our view, the company's term loan could experience downside if the company were to tap the debt markets for incremental liquidity. ... As a result we are waiting for a better entry point on the term loan."

J.C. Penney's credit default swaps, essentially an insurance policy protecting investors against the riskiness of a company's credit profile, were soaring to almost 1,100 basis points, according to Bloomberg.

The company couldn't be immediately reached for comment regarding a potential offering.

The Plano, Texas-based retailer, struggling to jumpstart a turnaround under the direction of CEO Mike Ullman, is said to be in discussions with hedge funds and other investors under the advisement of Goldman about additional fundraising options. Included in the range of possibilities is the company borrowing against its real estate holdings, Bloomberg said Friday.

"In our view a combination or weak fundamentals, inventory rebuilding and an underperforming home department will likely challenge J.C. Penney's liquidity levels in [the third quarter]," the Goldman note said. "In order to safeguard against a potentially poor [fourth quarter] holiday season, it is likely that management will look to build a bigger liquidity buffer, as has been suggested by recent press reports. Although we believe this would be a prudent measure for the company, given our expectation for new capital to come in the form of debt (rather than equity), we believe this will be a negative catalyst for creditors."

A key risk to Goldman's "underperform" rating is if the company is able to raise a "significant amount" of new capital in the equity markets, the analysts wrote.

Last month, the department store reported a worse-than-expected net loss of $586 million, or $2.66 a share, in a second quarter chock full of extraordinary charges that pulled the number down. Net sales slumped 12% year over year and gross margin fell to 29.6% in the quarter. The company said it plans to end the year with $1.5 billion in excess liquidity.

The dismal earnings results followed a very public battle with Pershing Square's Bill Ackman who sought to shake things up at board and executive level to speed up J.C. Penney's turnaround. Ultimately, Ackman lost that battle and resigned his board seat. Ackman announced on Aug. 27 plans to sell his entire 18% stake in J.C. Penney.

In the wake of the activist investor headache, J.C. Penney recently adopted a stockholder rights plan in hopes to make it more difficult for anyone to acquire or own more than 10% of the company.

Separately, Vornado Realty Trust (VNO)said earlier this month in a Securities and Exchange Commission filing that it sold its remaining stake in J.C. Penney.

Prior to the sale, Vornado owned 13.4 million shares, or 6.1% of J.C. Penney's stock, worth about $185 million.

-- Written by Laurie Kulikowski in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,765.10 -13.05 -0.07%
S&P 500 2,064.25 +3.02 0.15%
NASDAQ 4,756.8210 +8.4250 0.18%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs