Breakout

Martha Stewart Takes the Stand to Save Her Company

Jeff Macke
Breakout

The hits keep coming for JC Penney (JCP). JCP's stock has dropped 10% since news leaked yesterday afternoon that board member Steven Roth sold 10 million shares of JCP late Monday.

According to The Wall Street Journal Roth's firm Vornado Realty Trust (VNO) has lost more than $300 million on its investment in JCP. Together with Bill Ackman's Pershing Square hedge fund, the two firms own 27% of JCP. Ackman still holds 39 million shares with an average cost of $25, giving Ackman a paper loss of over $350 million on the disclosed portion of his position.

As if the story needed more drama, today Martha Stewart takes the stand in the three-way lawsuit between Martha Stewart Living Omnimedia (MSO), Macy's (M), and JCP. Macy's is suing MSLO and JCP, claiming it has exclusive rights to sell certain Martha Stewart products. Everything up to this point in the trial has been little more than highly entertaining prelims — Stewart is the main event.

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

What's at stake? For Macy's, some agitation and possibly negative publicity. Also, CEO Terry Lundgren's feelings seem to have been hurt.

JCP has more exposure. The company invested nearly $40 million in Stewart's MSO as part of a plan to build "Stores within a Store." The deal is now being contested, and the judge has ruled that JCP can't sell Stewart goods until the conclusion of the case. That means there's a very real possibility that JCP will have inventory sitting on a boat, empty shelves and a 17% stake in a company that does business with JCP's main competition.

As bad as the situation is for JCP, it's even worse for Martha Stewart. MSO has a variety of businesses, but only merchandise sales are growing and profitable. Revenues for products sold rose 23.5% and netted $11.3 million in profits. In contrast, the publishing segment of MSO lost more than $2 million on $35 million in revenues.

Related: Macy's vs. JC Penney: Battle Over Martha Stewart Gets Nasty

The trial is also draining MSO's coffers. Corporate expenses for MSO in Q4 were $7.5 million, of which $800,000 were legal fees from the Macy's litigation.

If Stewart and J.C. Penney lose this case, MSO will be getting most of its merchandising revenue and all of its profits from Macy's royalties. Terry Lundgren has made no bones about his sense of betrayal when Stewart told him about the Penny's deal just one day before it was announced in the press. He also says Stewart hurt his wife's feelings. Alpha dogs like Lundgren don't achieve their positions by letting such slights go unpunished.

All business is personal, and Martha needs Macy's much more than they need her. It's not a stretch to say a Macy's victory could be a death blow for MSO and a crippling shot to whatever it is that's left of J.C. Penney.

It all comes down to Martha Stewart's performance this afternoon. Stay tuned.

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