After a court-ordered mediation period seems to have hit a brick wall, Macy's (M), Martha Stewart Living Omnimedia (MSO) and J.C. Penney (JCP) will be back in New York state court this week. As previously discussed on Breakout, the case is a love triangle of sorts. Macy's claims they have a five-year exclusive deal with Martha and that JCP's efforts to open MSO "stores within a store" clearly violate the terms of the contract.
The case is relatively small potatoes for Macy's, and CEO Terry Lundgren and his legal team have made noise about financial damages to Macy's. But given JCP's collapsing sales — with or without Martha — such claims seem designed more for legal positioning than financial peril. Brian Sozzi, CEO of Belus Capital Advisors, suggests JCP has a lot more riding on the outcome and traders know it.
"Since the trial began on February 20, JCP shares are down 25%, Macy's up 10%," Sozzi points out. "So what is Mr. Market saying? That Macy's is going to put the final knife, the final dagger, into the heart of J.C. Penney."
New York Supreme Court Justice Jeffrey Oing is clearly aware that a draconian ruling against JCP and MSO could be a death blow for either or both companies.
JCP CEO Ron Johnson didn't just sign off on the attempt to exploit a perceived loophole in Stewart's contract with Macy's, he also invested $38.5 million for a 16.6% stake of MSO. The deal placed a value of $3.50 a share for MSO, roughly 30% higher than where the stock is trading today.
Making matters even worse, Sozzi notes that JCP has Stewart goods sitting in inventory and literally floating on cargo ships waiting to be delivered to JCP stores. Without those goods JCP will be forced to continue its remodeling efforts with a giant hole in the store where the Martha Stewart "store" was supposed to be.
Sozzi says JCP has a real survival risk should they lose this case. If those Martha Stewart goods can't be sold, JCP's Home Department will be completely irrelevant and still under construction for months to come. A company with Penney's growing liquidity concerns can't afford to keep one-fifth of its stores boarded up through the holidays — assuming they even make it that long.
Macy's wins regardless of the outcome simply by keeping JCP in court. A ruling in Macy's favor just might be the end of J.C. Penney entirely. "Macy's is going to have a grand holiday season," Sozzi concludes. "If they win this case, they still have Martha. They can run those commercials, and they can really put J.C. Penney down into the toilet."
It would seem that hell hath no fury like Terry Lundgren scorned.
- Martha Stewart