Penney CEO to testify over Martha Stewart pact

Embattled Penney CEO to testify in court over Martha Stewart deal

NEW YORK (AP) -- It's been a tough week to be Ron Johnson. After facing down investors this week over a dismal quarterly performance, the J.C. Penney CEO will be in the spotlight again — in court.

Johnson is expected to testify Friday in New York State Supreme Court in a trial that pits the struggling department store chain against rival Macy's Inc. over a partnership with domestic diva Martha Stewart.

The trial focuses on whether Macy's has the exclusive right to sell some of Martha Stewart branded products such as cookware, bedding and bath items.

Macy's is seeking to block Penney from opening Martha Stewart mini shops in its stores. The shops are part of Johnson's big plan to reinvent the shopping experience at the beleaguered chain.

Penney's shares have now lost nearly 60 percent of their value since early last year when Johnson revealed his plan to scale back most sales in favor of everyday low prices. The stock drop is the latest indictment that Johnson's turnaround strategy is failing on Wall Street as much as on Main Street.

Johnson is counting on the rollout of the shops, particularly Martha Stewart's, to bring back shoppers who have fled to rivals like Macy's.

Johnson's testimony comes four days after Macy's CEO Terry J. Lundgren testified in court that the company had built the Martha Stewart brand to be the biggest name in home items since it began carrying some of the products in 2007.

Martha Stewart, who founded Martha Stewart Living, is expected to take the stand next week.

Johnson's testimony marks a culmination of a legal battle between the three companies that started shortly after the Penney-Martha Stewart deal was announced in December 2011.

Macy's renewed its 2006 pact with Martha Stewart Living in January 2012 but then immediately sued the company, saying it breached a long-standing contract when it penned the 10-year deal with Penney. Penney also invested $38.5 million in a nearly 17 percent stake in Martha Stewart Living. In a separate lawsuit, Macy's sued Penney, claiming it had no regard for the Macy's contract and that Johnson had set out to steal the business that it had worked hard to develop.

Macy's also contends that Johnson "knowingly and purposely demanded and received confidential information" from Martha Stewart about the contract and crafted a deal that was more lucrative than the terms of the Macy's agreement.

The two suits were consolidated for the bench trial. Supreme State Court Judge Jeffrey Oing is presiding over the trial, which is expected to last three weeks.

Penney is aiming at what it believes is a loophole in the agreement between Macy's and Martha Stewart. It's a provision that allows Martha Stewart to sell goods in categories like bedding in Martha Stewart Living's own stores.

According to Martha Stewart, because the Macy's agreement doesn't say the goods under dispute can be sold "only in "stand-alone" stores, the mini shops within J.C. Penney stores do not fall under the exclusive agreement.

Macy's Inc., based in Cincinnati, disagrees. Lundgren argued that a typical definition of a store is that it has a parking lot, is part of a mall or has a sidewalk in front.

Macy's claims substantial damages and said the maneuver by Penney "threatens to inflict incalculable further harm on Macy's." The company claims that "billions of dollars of sales are involved."

But according to a memo filed by Penney, Macy's rights to Martha Stewart aren't nearly as sweeping as it suggests. Under Macy's interpretation of the contract, Martha Stewart Living is "little more than an in-house designer for Macy's," according to Penney.

Last summer, Macy's won a preliminary injunction against Martha Stewart Living that would prevent it from selling housewares and other exclusive products at Penney. Judge Oing granted Penney permission to open Martha Stewart shops, as long as the items under the exclusive contract with Macy's are not sold in them.

Penney plans to open shops featuring designs from Martha Stewart on May 1, but spokeswoman Daphne Avila said that the products like bedding that Macy's has deemed exclusive have been stripped of the Stewart name and instead feature the label "JCP Everyday." Window treatments and paper products like stationery, which are not included in the exclusive arrangement with Macy's, will bear Martha Stewart's name.

But Macy's is also trying to stop Martha Stewart from providing designs to J.C. Penney — whether or not it gets rid of the Martha Stewart name.

The stakes are high for all three companies, but particularly for Penney.

Investors were bracing for a bad fourth-quarter report from Penney, but the staggering losses and revenue drops were far worse than feared.

Penney reported on Wednesday after the markets closed that it widened its quarterly loss to $552 million, or $2.51 per share. Revenue fell 24.8 percent to $12.98 billion.

Results for the full year were even more jaw-dropping. For the fiscal year, Penney lost $985 million, or $4.49 per share, compared with a loss of $152 million, or 70 cents per share, in the year ended January 28, 2012. Revenue dropped 24.8 percent to $12.98 billion.

Macy's, one of the best performing department stores, turned in a solid fourth quarter. Lundgren says home items a key business. Having another major department store sell Martha Stewart towels, pots and other merchandise could hurt its sales in that area.

For its part, Martha Stewart Living is trying to fatten merchandise revenue as it struggles to offset declines in its broadcast and publishing business, a segment that accounts for more than 60 percent of its business.

The stakes also are high for the personalities involved in the suit. Lundgren said that he hasn't spoken with the lifestyle guru since Dec. 6, 2011, when she called him to inform him that she signed a deal with Penney. The next day, Martha Stewart announced the deal to the public. Lundgren testified Monday that he was so shocked when Stewart told him that she had signed a deal, he hung up on her.

"I was completely shocked and blown away," he testified. "It was so far from anything I could imagine."