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J. C. Penney Is on the Brink

A J. C. Penney store inside the Glendale Galleria shopping center in Glendale, Calif.

Photograph Patrick T. Fallon/Bloomberg

A J. C. Penney store inside the Glendale Galleria shopping center in Glendale, Calif.

J. C. Penney (JCP), the centenarian retailer, is reeling from post-traumatic stress disorder. Its sales, stock price, and management credibility are all tanking. The company is in disarray after activist hedge fund manager Bill Ackman installed a chief executive officer (now departed) whose aborted attempt to reinvent the department store failed miserably and alienated longtime customers. Penney hasn’t registered a quarterly profit in two years. Suppliers are scared. The stores echo.

The situation recently turned Cirque du Soleil when a frustrated Ackman publicly dissed his fellow board members and called for new management, before ditching the boardroom and dumping his shares.

With Penney continuing to founder and incinerate cash, the three-ring atmosphere lives on. Just hours after management said it was “pleased” with its turnaround—and with the stock down 25 percent in a week and more than 50 percent this year—Penney on Thursday announced a share offering to raise as much as $932 million and lowered its yearend liquidity forecast. That’s especially expensive financing for a company that now has just $2.5 billion in market value.

On Wednesday, J. C. Penney tanked 15 percent to its lowest level in 13 years after Goldman Sachs (GS) raised questions about the health of its balance sheet. Turns out that Goldman Sachs, which earlier this year arranged a $2.25 billion loan for the company, is also running Penney’s desperation share sale. The stock plunged another 10 percent on Friday morning.

“It’s an opportunity to do things now,” Kristin Hays, a spokeswoman for J. C. Penney, told Bloomberg News. The fundraising “has the dual benefit of easing the concerns of our vendors” and our employees. “It also shores up the balance sheet ahead of what could be a choppy holiday season for retailers.”

“The extra equity injection is a clear positive for Penney’s liquidity,” wrote CreditSights’ James Goldstein late Thursday night. “But it is by no means a guarantee that the company’s glidepath to a full-scale turnaround will be free from major turbulence.”

One intangible asset the share sale may impair is Penney’s credibility, both on Wall Street and with its vendors. “We are concerned about investor backlash given J. C. Penney’s public announcement of the equity offering just after its public commentary (as reported by the financial press) indicating that they do not see conditions for the rest of the year where they would need to raise capital,” wrote David Glick, a retailing analyst with Buckingham Research Group.

“We believe J. C. Penney has been burned by the effects of a failed turnaround strategy, which has created a hole that is just too deep,” argues Paul Lejuez of Wells Fargo Securities (WFC).

Penney now expects to end the fiscal year with about $1.3 billion in liquidity, excluding the offer proceeds. On Aug. 20 management pegged that figure that $1.5 billion, a forecast that didn’t assume it would need additional outside financing. Since CEO Mike Ullman arrived in April, J. C. Penney has had to draw $850 million from its revolving credit line. Shareholder rights law firm Johnson & Weaver is already on the case.

The New York Post, meanwhile, reported that middlemen that finance clothing deliveries to Penney are tightening their credit terms, shortening payment windows, and adding surcharges on increasing concerns that the retailer won’t be good for the money.

To whatever extent J. C. Penney survives the holiday shopping season, you can be sure it will soon end up in the canon of B-school case studies of shareholder activism gone awry.

Farzad is a Bloomberg Businessweek contributor. Follow him on Twitter @robenfarzad.

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