Macy's Mess
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Macy’s (NYSE: M), like most of mainstream retail, is in a tricky transition period. What it does now to create excitement about its merchandise, attract new customers, and integrate brick and mortar with online will determine if it stays in business or disappears like Borders and Circuit City. By the stock price – 35.68 with a 52-week range of 22.50 to 36.37 – Macy’s seems to be winning. However, by its choice of one particular partner, decision how to handle disputes, and public commenting in the media about a competitor, it appears to be undermining its current position of strength.
The first question investors should be asking is: why did it decide to do business with Martha Stewart Living Omnimedia (NYSE: MSO)? That company had a track record for inept management. For example, it has been known for higher-than-average administrative expenses. That eats into margins. And, that got worse. After founder Martha Stewart went to prison for insider trading in 2004, the company never returned to its status as a premier brand or its earlier financial performance. In 2011, when the five-year SEC ban on Stewart serving as Chief Executive Officer was lifted, Arquitos Capital Management President Steven Kiel observed in CRAIN’S NEW YORK that the company was “a declining business.” Specifically, Kiel cited declining revenues and earnings as well as brand equity. More recently, The Motley Fool analyst Seth Jason examined its cash conversion cycle and concluded the company had a weak cash position. A troubled company can often prove out to be trouble. Some opine that Stewart has been making the recent decisions she has about partnering because she needs the money.
There are many other brands out there which Macy’s could have partnered with. Target (NYSE: TGT), which has become a model of how to do it right in retail, has thrived through partnerships with Missoni, Alexander McQueen, Jason Wu, Mulberry, and Liberty of London. The biggest "fallout," if that's what it should be called, from any of that was the time Target’s online server crashed because of so many orders for Missoni fashion. Of course, that news reinforced Target’s brand identity for affordable design.
Not a big surprise, the Stewart partnership blew up. In detailing the J.C. Penney (NYSE: JCP) turnaround plan Chief Executive Officer Ron Johnson announced that one of its stores within the store would feature the Martha Stewart brand. Macy’s sued both, contending an alleged exclusive agreement and that they were violating it. More recently, Stewart has countersued Macy’s. She contends her contract with Macy’s does not block her company from designing products for others. She also accuses Macy’s of using her collection as bait for customers to enter the store with the switch that Macy’s brands are more prominently featured and priced lower. This week, Staples announced it partnered with Stewart on a line of products for the home office.
In addition, Macy’s has also gotten catty. Influential NEW YORK Magazine reports that Macy's has categorized J.C. Penney as not as upscale a retailer as it is. This meow mix is not a smart rhetorical move for a supposed upscale retailer. Ironically, this might work out great for Penney. Like Target, it seems to be positioned as affordable merchandise for smart shoppers, not upscale.
Getting in bed with the wrong partner creates messes, including the distraction, cost, and bad publicity from litigation. When News Corp (NASDAQ: NWS) found itself in that kind of pickle because of the hacking scandal, it pushed for settlements. There have been two rounds of those and likely there will be a third. Among media companies, News Corp is one of the few which is thriving. Recently it hired on as general counsel legal giant Gerson Zweifach. Zweifach is best known for winning on behalf of his client former New York Stock Exchange head Richard Grasso against then-New York Attorney General Eliot Spitzer.
Like News Corp, Macy’s has to clean up this legal mess, which is getting plenty of negative media attention, before investors can take the stock seriously again. And during the crisis, like News Corp leader Rupert Murdoch, it should be circumspect about what it says. Meanwhile, one has to wonder if J.C. Penney and Staples are re-thinking their partnerships with Stewart.
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