Macy's Sues Martha Stewart

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Macy’s Inc. (NYSE:M - News) did not welcome the licensing deal between J. C. Penney Company Inc. (NYSE:JCP - News) and Martha Stewart Living Omnimedia Inc. (NYSE:MSO - News) that took place in December 2011, and it went on to file a lawsuit in New York State Supreme Court against the latter for the breach of contract, the Associated Press reported.

Since 2007, Macy’s has been selling an exclusive line of products by Martha Stewart under a five-year deal. Macy’s now claims that Martha Stewart’s agreement to sell certain home and lifestyle merchandise at J. C. Penney’s stores violates that exclusive pact, which it shares with Martha.

It seems Martha Stewart’s recent accord with J. C. Penney has resulted in a bitter relationship with Macy’s, who is now seeking a preliminary injunction from the court to scuttle the deal.

By virtue of the deal, J. C. Penney acquired a 16.6% stake in Martha Stewart Living, and plans to open Martha Stewart retail departments within its stores in February 2013 under a mutual 10-year pact.

J. C. Penney invested $38.5 billion (or $3.50 per share) to buy 11 million newly-issued shares of Martha Stewart Living. Thus, it become a major stockholder and now owns two seats in the latter’s board. The deal was viewed as a turning point for J. C. Penney, which has been losing its foothold in the market as it struggles against retail chains such as Macy’s and Kohl’s Corporation (NYSE:KSS - News).

Macy’s decision of blocking the deal might also boomerang, since Martha Stewart brands are known for their extensive range of lifestyle products and helps in drawing customers into the stores.

On the other hand, if the deal does not come to fruition, it would hurt Martha Stewart Living, as the contract with J. C. Penney would fetch the company $200 million in royalties, design fees and advertising commitments over the initial period. The company, which operates through three divisions: Publishing, Broadcasting and Merchandising, has long been grappling with waning sales, and the deal might help it regain its lost pace.

Currently, we have a long-term Outperform rating on Macy’s. However, the stock holds a Zacks #2 Rank that translates into a short-term Buy rating.

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