JC Penney Falls on Vornado Share Sale, Bank of America Price Target Cut

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Shares of J.C. Penney
JCP
continued to plunge on Tuesday after Vornado Realty Trust
VNO
sold 10 million shares in the retailer. The stock was down more than 8 percent trading at $15.31. Over the last month alone, JCP has fallen almost 23 percent with most of the losses coming in the wake of a disastrous fourth-quarter earnings report. According to people familiar with the matter, Vornado, which operates as a REIT and is the owner of more than 100 million square feet of office and retail space, sold the 10 million shares at $16.40 apiece through Deutsche Bank
DB
. Last week, Vornado revealed that it had lost roughly $225 million in the fourth-quarter on its investment in J.C. Penney. Alex Goldfarb, an analyst with Sandler O'Neill & Partners told Bloomberg that the stock sale was "a positive." Shares of Vornado were last trading up on the news, having added around 3 percent on Tuesday. “This is a company that typically doesn't walk away from losses,” Goldfarb said in a telephone interview. “It's one thing to write down your investment on your books, it's another to crystallize it by actually selling. It's certainly a recognition on the part of management that J.C. Penney didn't turn out as they expected.” Vornado acquired its stake in the struggling retailer in 2010 along with noted activist investor and hedge fund manager Bill Ackman, who's Pershing Square Capital Management owns a 17.8 percent stake in J.C. Penney. Prior to the share sale, Vornado owned around 11 percent of the company. Losses on the sale are estimated to be around $60 million. Analysts at Bank of America
BAC
reacted to the news of the Vornado sale by lowering their price target on J.C. Penney shares from $16 to $13. The firm also reiterated its Underperform rating on the stock. They wrote, "we think the stock will remain under pressure due to deteriorating investor confidence in JCPenney's turnaround and we reiterate our Underperform rating." The analysts added that "Last night, the WSJ reported that Vornado, JCPenney's third largest shareholder is liquidating 10mn shares of JCPenney (54% of its 18.5mn share stake). Vornado's CEO resigned last week and JCPenney was discussed on Vornado's earnings call as being on Vornado's 'for-sale' list. Vornado was not willing to discuss a time frame for exiting its investment due to a conflict of interest (Steven Roth is on JCPenney's board). We think Vornado could be back in the market in the near term to sell its remaining 8.6mn shares." The Bank of America analysts also argued that the possibility that J.C. Penney could split itself into two companies, a publicly traded REIT and an operating company, is unlikely. Although some market participants have argued that such a move would help unlock shareholder value by more fully valuing JCP's real-estate holdings, the analysts said that their analysis suggests that the company's "retail fundamentals are not sound enough to support a standalone operating company and we do not think REIT investors have an appetite for owning single tenant mall anchor real estate." The news of the Vornado share sale is concerning for both the company and investor Bill Ackman. Now that Vornado appears to have lost its patience with the JCP turnaround story, Pershing Square is on its own. Although Ackman has said that the transformation will take years, recent reports have suggested that CEO Ron Johnson may only have six-months to show real progress before he is shown the door. Comments made by the Pershing Square founder also suggested that his patience is not unlimited. For the fiscal fourth-quarter, J.C. Penney reported a $552 million loss or $2.51 per share. On an adjusted basis, the net loss was $427 million or $1.95 per share, versus earnings of $45 million or $0.21 per share, in the year ago period. Net sales in the quarter were $3.884 billion, versus $5.425 billion last year. This badly missed consensus revenue estimates of $4.08 billion. Same-store sales in the period plunged 31.7 percent and online sales fell 34.4 percent. Gross margins fell from 30.2 percent to 23.8 percent. The Bank of America analysts argued that the company will likely be forced to draw on its revolving line of credit in 2013 due to deteriorating fundamentals. They wrote, "JCPenney intends to self-fund its transformation, but we think it will need to draw down on the revolver as early as this quarter."
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