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SEC Investigates JCP’s $800 Million Stock Sale

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J.C. Penney (JCP) is under investigation by the Securities and Exchange Commission (SEC) regarding its sale of approximately $800 million worth of its stock in late September, according to a filing made by the company yesterday.

The sale was controversial at the time of the offering, widely interpreted as a hastily made and strategically misguided decision to raise cash that left JCP’s stock price battered. The secondary offering also left its shareholders disillusioned; after reassurances that there was no plan to raise capital, they then found that their holdings were considerably diluted.

In an attempt to raise $932 million, JCP issued 84 million new shares on September 26, after which 256 million shares changed hands overall, devaluing current investor holdings by approximately 30 percent.  In the month following the offering the stock price steadily declined, hitting a thirteen-year low of $6.24 on October 21.

And the damage done was not merely financial. After insisting that it was flush with cash and had no intention to sell more shares, the sudden maneuver raised the ire of shareholders. David Glick, retail analyst at Buckingham Research Group, said, “The underlying reasons for this sudden need for expensive capital, the damage to JCP’s credibility, and the more challenging than expected consumer environment all pose threats to the pace of JCP’s recovery.”

CEO Mike Ullman repeatedly disavowed rumors that the retail giant was poised to increase its capital reserves. At a investor meeting just in advance of the stock sale he said, “As we said on the second quarter call, the company has sufficient liquidity to end the year.” Officially, before the offering, Ullman had said he expected the company to end the year with $1.3 billion on hand.

Paul Lejuez, analyst at Well Fargo, said, “Since the company had publicly stated it did not need any additional financing as recently as its second quarter earnings call, this move seems to reflect a new level of concern within the company and likely amongst the vendor community.”

Before the offering was officially announced, JCP even issued a press release responding to criticism that its turnaround strategy was failing. In full, it read:

“In response to inquiries, J.C. Penney said today that it is pleased with its progress thus far in the Company’s turnaround efforts and the traction its initiatives are starting to  achieve.  Moreover, the Company said it is starting to see greater predictability in its performance across many areas.

“The Company continues to be 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.”

It is not entirely clear why the SEC is investigating JCP’s stock sale or for what precisely it is looking. According to the official filing, the SEC is requesting information not only about the offering but also the retailer’s general financial standing including its cash position, liquidity and debt and equity financing.

Times have been tough for JCP, to put it mildly. For the fiscal period ending November 2, the company endured a staggering $489 million loss, or $1.94 per share, compared to last year’s $123 million loss, or 56 cents per share. Thomson Reuters analysts had expected a better performance, estimating a per share loss of $1.77.

And JCP’s numbers lagged across the board. Sales were down 5.1% to $2.78 billion. Gross margin winnowed to 29.5% from 32.5%, mostly the result of steep promotional discounts from clearance sales implemented to dispose of inventory left over from the failed turnaround attempt spearheaded by former CEO Ron Johnson.

This was the company’s seventh consecutive quarterly net loss. Revenues have been steadily declining from a peak of almost $20 billion in 2007 to about $12 billion last year. In 2012, the company’s net loss was almost a billion dollars.

The SEC is not alone in expressing concern regarding JCP’s access to capital. The prospect of a future liquidity crisis looms large, according to many.  Just recently, the company watched  its credit rating humiliatingly downgraded by Fitch Ratings from “B-Minus” to “CCC.”

A spokesman for Fitch said that the downgrade was issued to reflect “higher than expected cash burn in 2013.” Also, they anticipate that JCPenney, despite its recent share sell-off, will still have to see additional funds next year.

CEO Mike Ullman remains optimistic. He recently said, “Our strategies to reconnect with customers are beginning to take hold, and this became increasingly clear as the quarter progressed. We are proud of the company’s October sales performance, and encouraged by the early weeks of November, and believe we are making strides toward a path to long-term profitable growth.”

To further underscore his belief in the turnaround, on November 25 Ullman purchased 112,000 shares of JCPenney stock at $8.95 per share, a total outlay of about $1 million.

JCP stock closed at $8.08, reflecting a 19% drop for the week ending December 6.

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