Looks like Martha Stewart bet on the wrong guy when she tried to slip out of an exclusive deal with Macy's CEO Terry Lundgren.
Less than two years after Martha Stewart Living Omnimedia (MSO) and J.C. Penney (JCP) formed a partnership to create revolutionary stores within a store, it appears the struggling retailer has sent Martha packing. Officially, both companies announced they've reached an agreement. Penney's move, which severely reduces the length and depth of its relationship with Stewart, comes just days before a Manhattan court judge was set to rule on a case brought by Macy's (M), which claimed Stewart selling product through J.C. Penney violated an exclusive deal Stewart had with Macy's.
The "revised agreement" between Stewart and J.C. Penney means Penney will not sell kitchen, bed or bath products designed my Martha Stewart and currently being sold under the "JCP Everyday" brand.
Stewart isn't being ousted from J.C. Penney entirely. The amended agreement allows Penney to carry Stewart-designed window treatments and hardware, lighting, rugs and holiday goods under a "MarthaHome" brand through 2017.
Apparently everything else, including Martha's dignity, will continue to be sold at Macy's which has renewed its contract with Stewart.
The legality of the deal struck by former J.C. Penney CEO Ron Johnson and Stewart hinged on the argument that the Martha Stewart brand wouldn't be selling goods through J.C. Penney per se, but that Penney would be opening what amounted to free standing Martha Stewart stores that happened to be located on the same floor as the housewares department of existing J.C. Penney.
Macy's CEO Terry Lundgren was unamused. As the hearing dragged on in a New York courtroom Johnson, Lundgren and Stewart all took the stand to tell their version of events. In borderline salacious often weird testimony Lundgren admitted to hanging up on Stewart when she called to tell him of her deal with J.C. Penney and Johnson. Lundgren was reportedly infuriated Stewart would sign a deal with another department store after Macy's had stuck by the occasionally struggling Stewart brand for years.
As part of the December 2011 Martha Stewart double-deal, J.C. Penney made a $38.5 million cash investment in 11-million Martha Stewart Living Omnimedia shares, which at the time was equal to 17% of the company, and taken two seats on the MSO board. As part of yesterday's revision J.C. Penney will return the shares and surrender the board seats. Stewart will get royalties on whatever ends up being sold at J.C. Penney under the new deal.
MSO shares closed at $2.26 per share yesterday, valuing the Penney stake $24.86 million, or 35% below the purchase price. Shares of JCP have done even worse over the last two years, dropping more than 70% since striking the ill-fated deal with Stewart's company.
The Bitter Aftermath
Stewart, the non executive chairwoman of Martha Stewart Living Omnimedia, tried to put a happy face on the break-up with J.C. Penney.
"We are pleased to announce this revised commercial agreement. We are designing excellent products for 2014 and we look forward to seeing them in stores and online at JCP.com."
A spokesman for MSLO claims "there is a lot of value in getting our stock back" and the company hopes the revised deal satisfies Macy's, with whom Stewart is "looking forward to continue to work with for many years to come."
Current J.C. Penney CEO Myron "Mike" Ullman sounded exactly like what he is, a man left to clean up after his predecessor's dirty work. Here's part of his statement:
"We are happy to be moving forward and continuing to provide our customers with quality products from the MarthaHome collection which includes MarthaWindow, one of our best-selling lines of window treatments."
For those unfamiliar with retail, having a product line referred to as being one of your best selling window treatments is not high flattery.
Ullman has hardly taken a strong stance defending Stewart since returning to the helm at J.C. Penney last April. In an August conference call Ullman said the Penney had begun to emphasize higher-end home goods to the point of offending customers. "To the extent we got too pure as to the upscale nature of the home business I think we drove away customers," he told analysts. In light of such comments it was surprising the Stewart case lasted as long as it did.
Macy's doesn't seem quite as willing to let bygones be bygones. The company's lead counsel Theodore M. Grossman pronounced the new Stewart/J.C. Penney agreement a "total victory" for his client and a "complete surrender." Grossman suggested Macy's wasn't done fighting just yet, noting that "J.C. Penney sold goods" in a category in which Macy's had rights. The statement suggests Macy's could still sue J.C. Penney, Martha Stewart Living Omnimedia, or both for damages.
On the other hand, after everything that's happened, maybe Terry Lundgren just enjoys watching his former tormentors squirm. Retail whiz kid Brian Sozzi of Belus Capital Advisors thinks Lundgren will eventually welcome Stewart and her products back to the Macy's, if only because it's good for business.
"The reality is her contract with Macy's is still in play," Sozzi explains. "People still want (Martha Stewart brand) goods, they're still better than what's offered at Kohls (KSS)... I think Martha wins too, in the long run."