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Dec 8, 2011
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Penney adds Martha Stewart brand in shot at Macy's

By
Reuters
Published
Dec 8, 2011

JC Penny, Macy's
Martha Stewart / Photo: Corbis
J.C. Penney Co Inc (JCP.N) took a large stake in Martha Stewart Living Omnimedia Inc (MSO.N) and plans to open Martha Stewart shops within its stores in 2013, in the first big deal announced by its new chief executive and a challenge to rival department stores like Macy's Inc (M.N).

Chief Executive Ron Johnson has been lauded in the retail industry for building up Apple Inc's (AAPL.O) store chain. He took the helm at Penney, which has lost market share in recent years, last month saying he wanted to "transform" Penney.

The 10-year deal, the first glimpse at his strategy, calls for store-in-stores to open in February 2013 that will sell home products designed by the doyenne of home decor and cooking, and for an e-commerce site for the brand.

The companies estimate the deal would bring Martha Stewart Living more than $200 million in royalties, design fees and advertising revenue over the life of the contract, giving it a much needed shot in the arm.

Calling Martha Stewart "a national treasure" Johnson told Reuters in an interview that the collection will be broad enough to cater to shoppers of various income levels.

"To be America's favorite store, you've got to be a store for all customers - lower, middle and upper income customers," Johnson said. He is set to lay out Penney's new strategy at a meeting in New York next month, but did note that store-in-stores would be a key component.

Penney has suffered four straight months of same-store sales declines and Johnson said it's crucial in a tough economy for stores to entice shoppers with different merchandise and innovative in-store experiences.

"We've got to do our job to make the store more exciting," he said."

Stewart, whose company has been losing money for years, said in a statement that the deal puts her products "within easy reach of an even broader consumer audience."

But the deal threw into question Martha Stewart's exclusive line of home products at Macy's Inc (M.N), which said it would review their arrangement. A Martha Stewart Living spokeswoman said the company will still work with Macy's.

It is the second time in recent years Penney has muscled in on Macy's deals. In 2009, Penney lured away the Liz Claiborne brand from Macy's to become the exclusive department store to carry the label.

Penney bought 11 million newly issued shares of Martha Stewart Living for $3.50 per share, or a 12 percent premium to the stock's closing price of $3.12 on Tuesday.

That investment, totaling $38.5 million, gave Penney a 16.6 percent stake of the media company, makes it the largest shareholder, and gives it two seats on the Martha Stewart board. Martha Stewart Living also plans to pay shareholders a special dividend of 25 cents a share.

Johnson said Penney was not planning to buy the rest of the company or the Martha Stewart brand separately.

Martha Stewart Living's shares finished the day up 33.3 percent at $4.16, while Penney rose 0.6 percent to $33.51.

JAZZING UP PENNEY

Martha Stewart Living's revenues fell by more than a quarter between 2007 and 2010. But in the nine months ended September 30, revenue from merchandising rose 13.7 percent to $35.5 million from a year earlier. Most company revenue comes from its magazines.

Meanwhile, Penney has struggled against chains like Macy's and Kohl's Corp (KSS.N).

But it has sought to jazz up its merchandise and stores and draw in younger, fashionable shoppers with deals that made it the exclusive U.S. department store for cosmetics brand Sephora and Spanish fast fashion company M by Mango.

The cornerstone of Penney's exclusive brands is Liz Claiborne, which it bought for $267.5 million in October.

One analyst said the Martha Stewart deal was a welcome way for Penney to reach a bigger audience and not just focus its new lines on younger shoppers.

"For J.C. Penney to be successful, they really need to target a broad audience," Macquarie Research analyst Liz Dunn told Reuters.

Martha Steward Living, which in May said it would look at strategic options, said the deal with Penney ended that process.

Martha Stewart Living Chief Financial Officer Kenneth West told Reuters on the sidelines of a conference in New York that the deal has a three-year "standstill" provision preventing Penney from increasing its stake. He also said there are no other potential minority investors lined up right now.

Blackstone Advisory Partners was the financial adviser to Martha Stewart Living, while Peter J. Solomon Co advised Penney.

(Reporting by Phil Wahba in New York; Additional reporting by Nadia Damouni and Martinne Geller in New York and Jessica Wohl in Chicago, and Rachana Khanzode and Ranjita Ganesan in Bangalore; Editing by Hans-Juergen Peters, Viraj Nair, Lisa Von Ahn and Bernard Orr)

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