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J.C. Penney Surges Despite Equity Concerns (Update 1)

Stocks in this article: JCP

This story has been updated to reflected J.C. Penney's share price fluctuations.

NEW YORK (TheStreet) - J.C. Penney (JCP) shares were spiking Thursday despite reports that the troubled retailer was looking for an equity infusion, possibly as high as $1 billion, as the company finally spoke out.

After a morning of share price fluctuation, J.C. Penney's stock was surging 7.5% to $10.88 at last check, along with broader markets gains.

J.C. Penney issued a statement shortly before the market opened meant to assuage investors' fears, saying that it is "pleased with its progress thus far in the company's turnaround efforts and the traction its initiatives are starting to achieve," by seeing "greater predictability in its performance across many areas," it said.

The Plano, Texas-based retailer also said it is "encouraged" by improvements in "purchase conversion both in store and on jcp.com, primarily due to being back in stock in key items and sizes the customer expects to find at J.C. Penney. Overall sales on jcp.com continue to trend double digits ahead of last year."

The company still anticipates "positive comparable store sales trends coming out of the third quarter and throughout the fourth quarter of 2013."

However, there was no mention of liquidity or capital raising activities in the statement, despite a Reuters report saying the troubled department store is to raise anywhere from $750 million to $1 billion in new equity, which cited three people close to the matter.

J.C. Penney's stock plunged to a 13-year low on Wednesday after Goldman Sachs credit analysts issued a report initiating an "underperform" rating on the company's debt. The analysts said they had concerns about the company's liquidity.

"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."

J.C. Penney is struggling to jumpstart a turnaround under the direction of CEO Mike Ullman.

Separately, Citigroup equity analysts on Thursday cut their 12-month price target on J.C. Penney by $4 to $7. Citi analysts are concerned the company's relationships with vendors are deteriorating as the turnaround takes longer than expected.

The analysts also said it would be "prudent" to raise capital to "cushion against a potentially challenging holiday season," even though it does have enough cash currently. Citi has a "sell" rating on the company.

According to Sterne Agee, analysts liquidity is not a problem today but could become a problem in fiscal 2014.

The analysts met with Ullman and other management on Wednesday who emphasized that the company would "end the year with sufficient liquidity" of $1.5 billion, which includes $1.2 billion in cash and approximately $300 million in revolver loan availability, according to a research note published Wednesday.

"We model $365 million in cash burn in (the second half of the year) 2H13 and an ending cash balance of $1.17 billion," the note said. "While we agree that liquidity will not be an issue through FY13, looking ahead to FY14 we believe that the issue of liquidity remains a big question with working capital typically a use of cash up until fourth quarter."

"CEO Ullman did not speak to FY14 specifically, but he did note that all options are on the table, if necessary and most retailers of this size are comfortable with (approximately) $1 billion in liquidity," the note said.

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, although there were small improvements in the company's comparable sales. J.C. Penney said at the time it plans to end its fiscal 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.

-- 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.

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