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Is J.C. Penney Raising Enough Capital?

Tickers in this article: JCP

NEW YORK ( TheStreet) -- J. C. Penney could step back from the brink of collapse, after announcing a highly dilutive capital raise that all but assures the retailer will be among the worst stock market performers of 2013. But will it be enough?

J.C. Penney is looking to raise about $810 million in equity through an 84 million share offering that UBS analysts calculate will dilute existing shareholders by roughly 38%. While that dilution will hinder J.C. Penney's ability to generate meaningful earnings per share in coming years, it also means that the company may have stepped back from the brink of a make it or break it holiday season.

The real question is whether J.C. Penney can use a extra quarter's worth of cash to stabilize its business and begin a turnaround, or whether the company will be in need of additional equity after the holiday season.

On one hand, most Wall Street analysts have taken the surprising equity raise as a signal that J.C. Penney wanted to shore up its vendor relationships heading into the holiday season. The company receives inventory on credit and also relies on firms such as CIT Group for short-term financing.

Placating vendors ahead of the holidays could be seen as a necessary, if painful pill for the company to swallow, after it wasted billions of dollars trying to implement a new pricing strategy and store branding under the management of former CEO Ron Johnson.

"While just 37 days prior, on J.C. Penney's second quarter conference call CFO Hannah stated that additional liquidity would not be needed through year-end, our conversation with management pointed to (1) a recent change in the macro picture heading into holiday (i.e., increased uncertainty), and (2) the need to assuage swirling vendor and investor concerns as key explanations for the recent mindset shift," JPMorgan analyst Matthew R. Boss wrote in a Friday note to clients.

So assuming that vendors are now in place through year-end, shareholders are likely left wondering whether a similar equity raise might be in the cards in 2014. On that front, there is reason for concern.

Friday's stock sale is less than the over $1 billion in equity many analysts say they expected the company to raise. The Plano, Texas-based retailer said Friday that it would price 84 million shares of common stock at $9.65 a share, well below the closing price of $10.42 on Thursday.

"The timing was somewhat surprising, especially given the low stock price, the size of the deal was in-line with our thoughts, albeit at the low-end of our forecasted range ($1.0-$1.5 billion)," Deutsche Bank wrote in a Friday client note. Those analysts said the smaller raise will give J.C. Penney year-end liquidity of $2.3 billion, in a deal that prevents the fourth quarter from being a "make it or break it period" for the company.