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Martha's Deal Miffs Macy's

Martha Stewart's deal with J.C. Penney Co. could well get her company into hot water with Macy's Inc.

The media and merchandising company raised $38.5 million by selling a stake to Penney and providing two board seats, a deal that could help the department-store chain's new chief, Ron Johnson, shape up his struggling housewares business.

But it appears to have annoyed Macy's, which has sold an exclusive Martha Stewart line since 2007. In a statement Wednesday, Macy's said it will review its Martha Stewart product line for "potential changes" in light of "the proliferation of Martha Stewart-branded product in the marketplace."

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The spat has broader significance for all three companies. Penney and Macy's each rely heavily on home goods to drive traffic and sales at their stores, and merchandising is a key source of profits at Martha Stewart Living Omnimedia Inc.

Mr. Johnson, who used to run Apple Inc.'s retail operations, said chains just need to share.

"A lot of retailers through the years have fought for exclusivity, and at times that's important, but there are certain brands that should be available broadly," the chief executive said. He added that he's more concerned with being "the best place to buy" Martha Stewart products.

Macy's declined to comment further. The chain had the opportunity to explore a deal similar to Penney's considering how public Martha Stewart Living's pursuit of partners was, said a person familiar with the media company's thinking. If Macy's were to dump Martha Stewart as a result of the Penney deal, they'd be "cutting off their nose to spite their face," because it is the store's top-selling home brand, the person said.

Martha Stewart Living is expected to receive more than $200 million over the 10-year life of the contract with Penney. Martha Stewart Living President Lisa Gersh said the products that will be sold at Penney will differ from those at Macy's and will help raise the brand's profile for all of its partners.

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Macy's used its Martha Stewart line to attract new customers by developing an extensive range of home goods, from bedding to dinnerware. Ms. Stewart has been very visible in Macy's marketing, appearing in holiday commercials touting "the magic of Macy's" and in a backstage video series where the celebrity homemaker demonstrates her exclusive line of products, such as spatulas and baking sheets.

The five-year deal with Macy's expires around the end of 2012 but can be renewed. Martha Stewart Living didn't notify Macy's about the Penney's deal until Tuesday night, a person familiar with the matter said.

Mr. Johnson has had his eye on Martha Stewart since the 1990s, when he was working at Target and the homemaker paired up with Kmart. Under the deal announced Wednesday, Penney has bought 16.6% of Martha Stewart, which will set up distinct retail spaces inside the majority of J.C. Penney's stores beginning in February 2013.

The stores-within-a-store will offer home and lifestyle gear selected by Martha Stewart's team and sourced by Penney. Penney has successfully used such arrangements with Sephora, MNG by Mango and Call It Spring by Aldo Group Inc., but it continues to struggle with weak sales.

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Home sales were 18% of Penney's total sales in 2010 but remain the department store's worst performer. More than half of Penney's online sales are in the home category so its poor performance there is weighing on what is the fastest growing channel for most retailers.

For Martha Stewart Living, the partnership provides a much needed infusion of cash at a time when all of its key businesses have been shrinking. In recent years, revenue has mostly declined in all three divisions of the company, which includes publishing, broadcasting and merchandising.

Penney considered taking a full stake, but management was deterred by Martha Stewart Living's magazine and media business, says a person familiar with the matter. Talks between the two companies began in the fall, this person says.

Mr. Johnson aims to attract more well-known brands to Penney as a way to draw younger customers and give existing ones new reasons to spend.

Write to Dana Mattioli at dana.mattioli@wsj.com and Russell Adams at russell.adams@wsj.com