Who Is The Real Diva in the Dispute Over Martha Stewart’s Line?

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Domestic diva Martha Stewart, the name and face behind Martha Stewart Omnimedia Inc. (NYSE: MSO), is in middle of a heated dispute involving department store behemoths Macy’s (NYSE: M) and J.C. Penney (NYSE: JCP) over their partnerships with MSO and the right to sell a plethora of particular items from the iconic and multi-faceted goddess of homegoods--Ms. Stewart.

At issue is a deal inked in 2011 allowing J.C. Penney to create Martha Stewart “stores within stores,” which would peddle a myriad of Martha-branded home items. The addition is anticipated to increase traffic and, more importantly, sales. These mini stores are set to open May 1. It also marks a major test for Penney, which is on a mission to reinvent itself.

Macy’s moved quickly to block the J.C. Penney union, alleging that it violates the agreement it has with MSO to be the exclusive department store vendor of wares embossed with the highly recognizable and popular Martha Stewart name. Macy’s is also vying to block Ms. Stewart from sharing any of her dazzling designs with Penny’s in select categories. A spokesperson for MSO said Martha has the right to design any product for anyone.

Macy’s motive is crystal clear. The Martha Stewart line is responsible for a significant chunk of revenue for the NYC headquartered retailer. In fact, sales of the Martha Stewart brand have outperformed Macy's overall sales for the past five years.

Maintaining exclusive rights to the MSO line would give investors something to applaud following lackluster sales over the recent critical holiday season. And since Macy’s target audience is slightly more affluent than Penney’s, sole rights to Martha Stewart’s items are key for the elite crowd that peruse Macy’s stores.

Should J.C. Penney win, not only would it take profit and revenue from Macy, it also stands to be handsomely rewarded. Securing a Martha Stewart line would add some panache to the struggling retailer, and more importantly, revenue--which has been sorely missing.

J.C. Penney shares got pinched when it reported downright awful Q3 results of a loss of 93 cents a share. That was not the kind of turnaround that was expected after Ron Johnson took the helm as CEO. Johnson has an impressive resume. He held stints as a senior VP at Apple and various management positions at Target. With some 20 years of retail and merchandising experience under his belt, his prowess in the sector was believed to be the dressing up Penny’s pined for. To date, he hasn’t gussied up stores and shares enough, leaving both consumers and investors shopping elsewhere. 

But if there is a silver lining in the limp performance from Penney it's that it has stirred chatter that Penny’s is a potential target for a leverage buyout. Such a move would afford the company time to change its appearance in an effort to make it again attractive to investors. Highlighting the possibility is the sizable position held by activist hedge fund investor William Ackman of Pershing Square.

Also making it attractive as an LBO candidate is the fact that although Penney’s revenue drop has added up to more than 20% over the last three quarters, the company actually loses very little money. In the most recent quarter, the company reported a loss of $123 million on revenue of $3 billion. Plus, in a rock-bottom, historic low interest rate economy, its $2.9 billion debt is highly manageable.

So, win or lose in court, Penney looks poised to emerge as the real diva in this domestic goods dispute.

 


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