In December 2011, Ron Johnson hailed J.C. Penney Co.’s $38.5 million investment in Martha Stewart Living Omnimedia Inc. as "transformational."
Almost two years later, Johnson is gone as chief executive officer and J.C. Penney yesterday rolled back an agreement tied to the investment in the homemaking maven’s company. Under an amended deal, the partnership will end in June 2017 instead of 2021 and the parties will stop making products in categories at the center of a lawsuit brought by Macy’s Inc. (M:US)
J.C. Penney, based in Plano, Texas, will also give back the 11 million shares it bought for $3.50 each and the right to board representation at Martha Stewart Living, it said in a statement yesterday.
Macy’s sued the companies last year, saying it had exclusive rights to sell Stewart-designed items in categories including bedding, bath and cookware. After the suit, J.C. Penney rebranded the Stewart goods in those disputed categories “JCP Everyday.” Macy’s then pushed for the sales of those items to be stopped because they were designed by Stewart’s company.
The new agreement between J.C. Penney and Martha Stewart Living, which includes the continuation of the department-store chain carrying Stewart-branded window treatments and holiday goods, hasn’t persuaded Macy’s to drop its case.
The announcement showed the old deal was “illegal” and Macy’s case for damages remains before the court, Jim Sluzewski, a spokesman for the Cincinnati-based chain, said in an e-mailed statement.
“We are not dropping our claims,” Sluzewski said.
J.C. Penney rose 2 percent to $6.55 at the close in New York. The shares have sunk 67 percent this year, compared with a 23 percent gain for the Standard & Poor’s 500 Index. Martha Stewart Living, based in New York, advanced 5.3 percent to $2.38, and has fallen 2.9 percent this year.
The century-old retailer is trying to revive sales after revenue collapsed during Johnson’s failed attempt to transform the chain into a destination for younger and wealthier shoppers. During his 17-month tenure, he alienated longtime customers by cutting back on discounting and swapping out well-liked brands for new merchandise. He also spent heavily on remodeling more than half the chain’s 1,100 stores.
Those higher costs coupled with sinking sales led to losses and an eroding cash position. Since reclaiming the CEO job in April, Mike Ullman has raised $3.89 billion to shore up the chain’s balance sheet.
J.C. Penney reached the new agreement with Stewart’s company as it works to revamp its home department. The “JCP Everyday” items had been heavily discounted for months as the retailer tried to liquidate excess merchandise.
The overhang of the lawsuit has also been considered by analysts as an obstacle to improving the results in the home department. The original deal, announced Dec. 7, 2011, was designed to generate at least $200 million in revenue for Martha Stewart Living over 10 years. Sales at Stewart’s company were $179.3 million in the past four quarters through June 30.
“We are moving forward with the successful parts of Martha Stewart,” Kristin Hays, a spokeswoman for J.C. Penney, said in a telephone interview. She declined to comment on the Macy’s statement or the financial terms of the new deal.
New York State Supreme Justice Jeffrey Oing said during a hearing in the case last month that a decision was “forthcoming” and he would rule shortly. The judge gave J.C. Penney and Martha Stewart Living until Oct. 25 to resolve their differences or he would issue a ruling, the New York Times reported Oct. 18.
A clerk in Oing’s courtroom declined to comment on the case yesterday. The two sides aren’t scheduled to return to court in the dispute. The ruling “remains in the judge’s hands,” Sluzewski said in an e-mail.
“Today’s announcement by MSLO and J.C. Penney confirms Macy’s exclusivity in Martha Stewart housewares and ended an attempt by MSLO and Penney to find a loophole,” Theodore M. Grossman, an attorney with Jones Day in Cleveland representing Macy’s, said in a telephone interview yesterday. “It was a total vindication of Macy’s rights going forward. The only issue that remains is reimbursement for the substantial fees and damages Macy’s suffered in the period until now as the result of MSLO and Penney’s conduct.”
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