By Phil Wahba and Olivia Oran

(Reuters) - Struggling department store company J.C. Penney Co Inc <JCP.N> said on Thursday it had begun a public offering of up to 96.6 million shares, a move that will massively dilute its current shareholders.

Penney, which currently has 220 million shares on issue and a market value of about $2.2 billion, has been hit by collapsing sales after a failed attempt in 2012 to go up-market. It said it plans to use the money raised for general corporate purposes.

The retailer is offering 84 million shares, and underwriters have a 30-day option to buy another 12.6 million shares, but it has not disclosed the price at which it plans to sell the shares. Its share price, which has declined by nearly half so far in 2013, fell 4 percent to $10 after the announcement.

The news confirmed an exclusive Reuters report on Wednesday that Penney was looking to raise as much as $1 billion in new equity to build its cash reserves as it heads into the holiday season and seeks to turn around its performance.

Penney spokeswoman Kristin Hays denied an earlier CNBC report that said CEO Mike Ullman told investors on Wednesday that the retailer did not see the need to raise more money before the end of the fourth quarter, which ends in early February. She said that Ullman had only said Penney had sufficient liquidity and that the comment was misinterpreted.

Penney's shares climbed on the CNBC report, as well as in response to a statement from the company early Thursday that said it anticipates positive comparable sales trends as it comes out of the current quarter, and throughout the holiday quarter.

A source who was at the meeting told Reuters that he heard Ullman say that Penney did not see conditions over the rest of the financial year that would require it to raise liquidity.

Penney's Hays said that the company had decided to do the share offering now because of all the negative headlines this week about its financial health. The capital raising is in response to uncertainty and is aimed at reassuring suppliers and employees, she said.

"This is not because of panic, it's to be prudent," Hays said. She also noted that Penney had opted for a stock issue because it has $5 billion in debt on its books.

Penney has been struggling since a failed attempt last year to re-make itself into a trendier store group by getting rid of coupons and much of the merchandise that appealed to its long-time shoppers. Sales fell 25 percent last year, and have continued to fall this fiscal year.

Earlier this year, Penney got a $2.25 billion loan arranged by Goldman Sachs <GS.N>. The lack of a significant recovery in its sales in recent months has raised fresh concerns about whether its balance sheet is strong enough.

"The fourth quarter is not in the bag or else they wouldn't need this money," said Morningstar analyst Paul Swinand.

A Goldman research note this week said that weak business fundamentals, the need to rebuild inventory of goods popular with its long-time customers and the poor performance of its home goods department would likely put pressure on Penney's liquidity.

Its shares have been on a wild ride in the past 36 hours: plunging on the Goldman research, and declining further on the Reuters report about a capital raising, before recovering some of those losses on the company statement about trading conditions and the CNBC report. The shares then fell again on the share sale announcement.

Goldman is the book running manager for the offering.

(Reporting by Phil Wahba, Michael Erman and Olivia Oran in New York; Editing by Carol Bishopric and Ken Wills)

 

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