(Adds short interest, Sterne Agee note, updates share price)
Sept 25 (Reuters) - J.C. Penney Co Inc shares tumbled to their lowest in nearly 13 years on Wednesday after Goldman Sachs said it expects sales at the struggling department store chain to improve more slowly than expected and raised questions about its liquidity.
The stock slid as much as 16.5 percent to $9.94, the lowest since January 2001, before recovering up to $10.27.
Penney's sales fell 25 percent last year after it eliminated the coupons and sales events favored by its price-conscious shoppers. Improvement has been slow since it reinstated that pricing strategy and sales again dropped in the first and second quarters. A lawsuit pitting Penney and Martha Stewart Living Omnimedia against Macy's Inc has also hampered a comeback.
"We expect 3Q and 4Q to be difficult, with comp store sales likely showing a slower-than-expected improvement," Goldman said in a research note on Penney's credit, referring to the current and final quarters, which include the holiday season.
Goldman also said the overall difficult environment for retailing is "increasing the risk of a poor holiday season that the company can ill afford."
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 will likely put pressure on Penney's liquidity, Goldman wrote.
A source told Reuters last week that the retailer was looking to raise more money, possibly through a combination of debt and equity, according to a source familiar with the matter.
Goldman initiated its rating on Penney's 7.95 percent unsecured notes due 2017, its 5.65 percent notes due in 2020, and its 6.375 percent notes due 2036 with an "underperform" rating.
Earlier this year, Penney got a $2.25 billion loan arranged by Goldman to shore up its finances.
Maxim Group cuts its price target on Penney to $22 from $27 but maintained its buy rating.
In a more upbeat research note, Sterne Agee analyst Charles Grom said that following a meeting with Penney Chief Executive Myron Ullman this week, he had no reason to believe that same-store sales for the current quarter were worse so far than his initial expectations.
Grom said Ullman and his team said there was less variability in sales levels and that trends have been "encouraging." Penney did not immediately return a request for comment.
According to Thomson Reuters, 35 percent of Penney shares have been sold short, the highest in the S&P 500, making them very volatile.
Separately, New York judge said he expected to render a ruling "in a short time" in the case of Penney and Martha Stewart Living Omnimedia against Macy's Inc over Penney's deal to sell items designed by Stewart and bearing her name in its stores. (Reporting by Phil Wahba in New York; Editing by Jeffrey Benkoe and Gunna Dickson)