Macy’s and Martha Stewart Living Reach Settlement

NEW YORK — Macy's and Martha Stewart Living Omnimedia say they have settled a breach-of-contract lawsuit involving J.C. Penney.

But Macy's said the settlement does not impact its lawsuit against J.C. Penney Co., which is still ongoing.

Macy's Inc. and Martha Stewart Living Omnimedia Inc. said Thursday that their settlement terms are confidential and not material to their businesses. Both companies said that they look forward to "a continued, successful partnership together."

Macy's has had an exclusive merchandising contract with Martha Stewart since 2006, including items like bedding and bath products.

Stewart's company and Penney signed a merchandising deal in December 2011 to develop mini Martha Stewart shops. That prompted Macy's to sue both companies for violating its exclusive agreement with Martha Stewart.

Martha Stewart Living Omnimedia and J.C. Penney have already scaled back their partnership. In October the department store chain said it would no longer sell a broad range of home and bath products designed by Martha Stewart Living Omnimedia but would continue to sell a smaller batch of Martha Stewart items, including window treatments, rugs and party supplies.

Martha Stewart is looking to boost merchandising sales as it continues to grapple with a weak publishing business amid sluggish advertising sales. In October it said its quarterly net loss narrowed, though revenue fell 22 percent to $33.8 million, hurt by weakness in its broadcasting and publishing divisions.

Macy's, meanwhile, has been seeing strong sales. In November it said quarterly net income rose 22 percent will revenue rose 3 percent to $6.28 billion.

J.C. Penney spokeswoman Daphne Avila said the company had no comment on the Macy's settlement with Martha Stewart Living Omnimedia.

In morning trading Thursday, Macy's shares rose 40 cents to $53.80, Martha Stewart Living Omnimedia rose 19 cents to $4.39 and J.C. Penney slipped 11 cents to $9.04.

Martha Stewart Living and Macy’s Settle Dispute and Keep Partnership

On Thursday, Macy’s and Martha Stewart announced that they had settled the breach-of-contract case, saying the details were confidential and not material to either company. They said their partnership would continue, but declined to comment further.

Macy’s larger suit against J. C. Penney still remains. Macy’s said the settlement with Martha Stewart Living would not affect that case.

Macy’s and Martha Stewart Living joined forces in 2006 with an agreement to sell “Martha Stewart” branded products in Macy’s stores, including exclusive items like kitchenware and bedding. The partnership has done well over the years, accounting for $250 million in sales in 2012.

But Martha Stewart Living and J. C. Penney announced a deal in 2011 to sell home décor products out of Martha Stewart store-within-a-store locations at Penney’s stores. The move was part of a broader turnaround effort by J. C. Penney’s previous chief executive, Ron Johnson, who was fired last year as losses mounted at the retailer.

After the deal was announced, Macy’s sued them both, saying the deal violated the terms of its original contract with Martha Stewart Living. The retailer called for pulling certain items off Penney’s shelves and demanded compensation for loss of profits. Penney and Martha Stewart Living countered that their agreement fell into an exception carved out in the Macy’s contract.

Days before a judge was expected to rule on the Penney case, Penney and Martha Stewart Living backed down, revising their agreement to exclude kitchen, bed and bath products, items that the Macy’s suit said were exclusive. In effect, J. C. Penney gave up many core home décor products and was left with items like rugs and window treatments.

Theodore M. Grossman of the Jones Day law firm, the lead counsel for Macy’s in the case, said at the time that the new agreement “was a complete surrender.”

With the settlement, Martha Stewart Living puts to rest a costly and contentious case. In October, Martha Stewart Living reported a disappointing third quarter, partly because the diminished relationship with J. C. Penney had cut into revenue. J. C. Penney has shown some signs of improvement in recent months, although it continues to post losses.

Macy’s has been a standout. The company’s earnings per share increased 31 percent over the same period the year before, easily beating analysts’ expectations.

Penney’s and Macy’s Battle Over Martha Stewart Products

In one corner is Ron Johnson, the chief executive of the embattled J. C. Penney. In the other is Terry Lundgren, the chief of Macy’s. Both want the home diva’s housewares, and this week some of their maneuvers were laid bare in a courtroom in Lower Manhattan.

Only days after J. C. Penney stunned Wall Street with news of a big loss, Mr. Johnson described how the hobbled chain was trying to win over Ms. Stewart. He was willing to offer lucrative inducements, worth a potential $500 million in all, to persuade her to sell her branded and designed products in Penney stores.

E-mails in court documents suggest Mr. Johnson was keenly anticipating the reaction of Mr. Lundgren, whose chain has an exclusive contract with Ms. Stewart’s company, Martha Stewart Living Omnimedia, to sell certain housewares.

“Terry might have a headache tonight,” Mr. Johnson wrote to top lieutenants on Dec. 7, 2011, the day the deal between Penney and Ms. Stewart was announced.

“We put Terry in a corner,” he wrote to the Penney investor William Ackman the same day. To Penney’s president, he wrote, “He now has to work again,” of Mr. Lundgren.

Beyond the drama, which is expected to continue with Ms. Stewart’s testimony next week, the trial underscores how competitive the middle-market home goods category is and how much one brand like Martha Stewart can matter.

Home is not the sexiest of categories. It is things like sheets, towels, pots and toasters that are broadly available, low-margin and slow selling. Both Mr. Johnson and Mr. Lundgren said home goods rang up remarkably few sales per square foot. Mr. Johnson said that the category made $185 per square foot in 2007, but now made less than $80. And Mr. Lundgren said that at Macy’s, home was “generally the least profitable part of the store.”

Macy’s, which has been selling Ms. Stewart’s housewares for six years, filed suits last year against both Martha Stewart Living Omnimedia and Penney’s to stop the deal to bring her housewares into that retailer.

The fight over the dud home category might seem counterintuitive. But analysts say it is crucial to a department store’s offerings, and is particularly important now.

“The housing market is rebounding,” said Michael Brown, a partner in the consumer and retail practice at A. T. Kearney, “therefore the home products category is going to be in demand over the next 18- to 24-month period.”

Home departments bring in traffic, particularly from consumers who don’t want to make a separate trip to big-box competitors that are dedicated to home products only, Debra Mednick, home industry analyst for the NPD Group, said in an e-mail. Plus, she said, it brings in a wide range of demographics and ages. Most people need a pan at some point in their lives. Because high-end stores like Saks and Neiman Marcus sell few housewares, it is also a chance for the midrange stores to snag wealthier shoppers, Mr. Lundgren testified Monday.

Home-goods sales have been struggling as they tend to rise or fall in concert with the housing market, and new competition has been introduced from online-only vendors like One Kings Lane.

Exclusive products, like the Martha Stewart lines that Macy’s and Penney’s are fighting over, are particularly important in the home category. “The competitive advantage really lies with private label brands,” Mr. Brown said. “What drives consumers to a physical store is, is there something different?”

Ms. Stewart is the biggest vendor to Macy’s home department, and Mr. Lundgren said that Macy’s had nothing lined up to replace her line.

In a deposition, Mr. Johnson said that there was no other supplier to Penney’s that he expected to have the sales that Ms. Stewart would.

Sales are desperately needed at J. C. Penney, which has been in business for 111 years. Penney’s this week announced a $552 million loss and steep sales declines in the fourth quarter, as well for the year.

And Mr. Johnson, the former retail chief at Apple who took over the chain in 2011, is under increasing pressure to turn the retailer around. Ms. Stewart’s brand is a centerpiece of that strategy.

Penney is renovating an average of 19,000 square feet in each store to feature its new store-within-a-store home emporiums. It has signed up housewares designers like Michael Graves and Jonathan Adler. And Mr. Johnson told investors that when the home departments are unveiled in May, the company should see improved customer traffic.

On the stand on Friday, he said that Ms. Stewart was popular with middle-class shoppers, which fit Penney’s demographic, and that the Martha Stewart stores-within-a-store would serve as a showpiece for other vendors. “What a perfect example to show other vendors what these shops could be,” he said.