Breakout

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Martha Stewart, Macy’s & JC Penney Take High-Stakes Love Triangle to Court

Breakout

After all these years, retailers are still fighting over Martha Stewart. The queen of all things domestic is now at the center of a legal battle between Macy's (M) and JC Penney (JCP), which officially got underway this week in a New York State Supreme Court. At stake are the rights to sell Martha Stewart merchandise.

Like most corporate love triangles, this one has a history that's equal parts business and personal. Macy's, led by CEO Terry Lundgren, claims to have exclusive rights for certain Martha Stewart-brand products. JC Penney, led by CEO Ron Johnson, begs to differ, having struck a deal to open Martha Stewart "mini-stores" within most JCP stores in December of 2011. As part of the same deal, JCP purchased a 16.6% stake in Martha Stewart Living Omnimedia (MSO), the company Stewart founded in 1997.

The deal with Martha Stewart was the first high-profile move by Ron Johnson after he arrived at JCP, following his wildly successful run as head of retail operations at Apple (AAPL). In emails presented as evidence, Johnson says the deal "put Terry in a corner" and forced Macy's into making bad decisions.

With Lundgren, Johnson, and Stewart all possibly taking the stand the trial is getting plenty of attention. The question is whether or not the Martha Stewart brand is still worth so much fuss. Brian Sozzi, chief equities analyst at NBG Productions says no.

"The consumer that JC Penney is going after is that 30 to 40-year-old consumer that grew up thinking of Martha Stewart as a housewife brand," he says in the attached video. "They can relate more to the Food Network."

Sozzi explains that Stewart didn't just strike a one-off deal but is trying to shore up the financial condition of her company after years of decline. It's worth noting that Stewart herself was banned from serving in any executive role from 2004 until August of 2011 due to her involvement in an insider trading scandal. Stewart rejoined the Board of Directors in late 2011. The deal with JCP was struck just months later. She is now non-executive Chairman of her namesake company.

JC Penney's paid nearly $40 million in cash for their stake in Martha Stewart Living Omnimedia, but that deal threatens to cost much more Macy's is playing hardball. In addition to actions against JCP, Macy's has secured an injunction against Stewart selling goods at JC Penney, potentially leaving merchandise stranded while the parties slug it out.

With Macy's playing the jilted husband and JC Penney in the role of the other man, it's Martha Stewart with the most at stake. Sozzi says the JCP deal was a key element for the Stewart brand, aligning it with a company on the go instead of the comparatively tired Macy's.

The precise terms of Macy's relationship with Martha Stewart are unclear, but there is little doubt the company needs to have the chance to diversify its revenue stream by getting into more stores.

Shares of MSO are down by more than 90% since 2005 and the price of JCP's stake values the company at just over $200 million, compared to more than $15 billion and $4.8 billion market caps for Macy's and JC Penney, respectively.

She may be the belle of the ball, but Martha Stewart's company could be in serious trouble if Macy's prevails in this titanic battle of egos and pocketbooks. Enormous egos, hundreds of millions of dollars and the fate of the once powerful Martha Stewart Empire could all be decided in the next three weeks.

Right now the only thing we know for sure is that there will be plenty of drama.

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