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.

Interim Martha Stewart Ruling Favors J.C. Penney

Beleaguered J.C. Penney got a piece of good news on Friday, when a judge ruled it could — at least temporarily — sell a plethora of Martha Stewart-designed housewares under the JCP Everyday label.

Justice Jeffrey K. Oing of New York State Supreme Court, where Macy’s is suing J.C. Penney over its plans to sell Martha Stewart’s housewares, cited this week’s dismissal of the Penney chief executive, Ron Johnson, as one factor in his decision, describing him as “the architect of this entire dispute.”

In considering whether to stop Penney from selling the housewares, “I cannot ignore the reality of the harm to J.C. Penney, even if it is the result of its own acts, but the acts, I believe, were spurred on by their former C.E.O.,” Judge Oing said. The judge denied Macy’s motion for a preliminary injunction against Penney and declined to broaden an existing injunction against the Martha Stewart company.

Had Penney lost the ruling, it would have meant potentially getting rid of already produced items – at a loss of up to $100 million, according to an estimate in a Citi research report – along with having empty shelves when it unveils its new home departments in May.

The trial resumed on Monday after Penney, Martha Stewart Living Omnimedia and Macy’s — which is suing them both on claims they violated a contract over where the branded goods could be sold — failed to reach a settlement during a court-ordered monthlong break.

Macy’s, which has sold Martha Stewart products since 2007, argues that its contract prevents Ms. Stewart’s company from selling her home goods to competitors. However, there is an exception for sales at Martha Stewart stores.

Penney and Ms. Stewart’s company argue that, because Penney’s will set up boutiques within its department store for the products, that satisfies that exemption. They also argue that Penney should be able to sell housewares products designed by Ms. Stewart without her name on it.

Penney is still not allowed to sell Martha Stewart-branded products in housewares categories, and it has not produced any of those. But it can sell the JCP Everyday products without using the Stewart brand name in advertising those products, Justice Oing said. “I don’t want to see it in advertisements, in any brochures or promotions. You are to stay away from the Martha Stewart brand,” he said.

Penney does not get a total pass – it is just allowed to sell the products for the time being, and the judge left the door open for Macy’s to come back and claim harm once the actual sales data came in. And, of course, the final ruling could either allow Penney to or prevent it from selling any housewares designed by Ms. Stewart’s company. (Penney is already selling some Martha Stewart-branded items in categories Macy’s does not have an exclusive agreement over, like window treatments and stationery, which are mostly not at issue and the ruling Friday did not deal with.)

In making the ruling, Judge Oing declined to broaden a preliminary injunction from July that prevented the Martha Stewart company from producing goods with Ms. Stewart’s brand on them for J.C. Penney. That July injunction halted a central part of Penney’s strategy, which was to build stores-within-a-store featuring Ms. Stewart’s name and products. The boutiques have not been built, and J.C. Penney has no Martha Stewart-branded items in production.

As a workaround, given the injunction, Penney developed a brand called JCP Everyday to put on housewares designed by Ms. Stewart’s company. Macy’s is trying to get the court to reject those as well. Macy’s argues it has an exclusive contract with Martha Stewart to sell certain categories of housewares — including bed, bath and kitchen products — and Penney should not be able to sell either Stewart-branded products or Stewart-designed products in those categories.

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.

Media Decoder Blog: Publishing Loss Weighs on Martha Stewart Earnings

Martha Stewart Living Omnimedia announced a big third-quarter loss on Friday morning, driven largely by the poor performance of its publishing unit. The net loss was $50.8 million, or 85 cents a share, compared with $9.7 million, or 36 cents a share, in the same period the year before.

“Our performance in the quarter was in line with our expectations but not our ambitions for the company,” Lisa Gersh, the company’s president and chief executive, said in a statement.

The company’s three-pronged business, which depends on revenue from publishing, broadcasting and merchandising, benefited from a modest rise in revenue from its merchandising operation. But they were not enough to compensate for the losses incurred by its magazines. Revenue in the publishing division fell to $27.6 million, from $33.2 million in the same period last year, and operating losses totaled $51.3 million, including a $44.3 million noncash write-down.

The announcement capped a rough week for the company, which lost its power at its Manhattan offices and had to use phone and e-mail to inform the staff about layoffs and cutbacks at two of its four magazines. On Thursday afternoon, the company said it would lay off about 70 of its 600 employees. It also announced it would cut back publishing the magazine Everyday Food from 10 issues to five and no longer sell it as a standalone magazine. It is becoming a supplement that will be sold with Martha Stewart Living.

The company is also selling Whole Living Magazine. If it does not find a buyer, the company will stop printing Whole Living by the year’s end.

Michael Kupinski, director of research for Noble Financial Capital Markets, said he was more optimistic because he had a clearer perspective of the company since “they’ve gotten rid of so many money-losing assets.”

He added: “The loss came in a little bit better that I was anticipating. To me this is probably one of the best opportunities to take a good look at Martha Stewart.”