Martha Stewart testifies in trial over her brand

NEW YORK Eight years after Martha Stewart was released from prison for lying about a stock trade, the home diva is now facing another legal mess that may not be easy to clean up.

Stewart, 71, took the stand in New York State Supreme Court Tuesday morning. She is at the center of a bitter legal battle between two of the nation's largest retailers -- Macy's Inc. (M) and J.C. Penney Co. (JCP).

Macy's sued the media and merchandising company Stewart founded for breaching an exclusive contract when she signed a deal with Penney in December 2011 to open shops at most of its stores this spring.

Macy's, which has sold Martha Stewart products including towels and pots since 2007, is trying to block Penney from selling those products.

The trial is clearly more than a vanilla contract dispute. It's a courtroom drama that's unfolding about disloyalty and greed.

Testimony has portrayed Stewart as someone who turned her back on her good friend and Macy's CEO Terry Lundgren so she could enrich her company.

Such allegations only reinforce her reputation as a ruthless businesswoman and could hurt her brand and her image, brand experts say. The allegations come when the business is struggling to fatten merchandising revenue as it tries to offset declines in its broadcast and publishing divisions.

"On the one hand, you have two retailers fighting over the brand. That could breathe life into the brand," said Michael Stone, president of The Beanstalk Group, a global brand licensing agency. The danger? "Consumers may get weary of her, and they're going to believe she only thinks of herself. She doesn't care about her friends."

He said Stewart needs to regain sympathy with consumers when she takes the stand Tuesday -- or else they could start to look elsewhere.

Martha Stewart Living Omnimedia Inc. (MSO) just finished its fifth straight year of losses and has suffered a string of annual revenue declines. In the latest year ended Dec. 31, the company had revenue of $197.6 million, down nearly 11 percent from the previous year's $221.4 million.

Losses widened to $56 million from $15.5 million the year before.

The company's shares are now trading around $2.50, down more than 90 percent from $36 in February 2005. That was when Martha Stewart was finishing up her five-month prison sentence and investors pushed up the stock.

Martha Stewart Living Omnimedia's publishing and TV business had taken a big hit when Stewart was convicted in March 2004 of lying to prosecutors about a stock sale. After Stewart's release, business began to recover as advertisers who had fled returned.

But in the past few years, Martha Stewart Living has been grappling with a consumer shift to the Web and mobile devices to get the latest recipes and other food tips.

Last November, the company announced that it would downsize its magazines and cut publishing jobs to focus on online video and other digital content.

Martha Stewart Living has been trying to bolster its merchandising business, which totaled $57.5 million in the latest year, nearly 30 percent of the company's revenue. The company has a collection of paints and cabinets sold at Home Depot and teamed up with pet supply chain Petco for a line of bowls, collars, toys and clothes for pets.

Still, Beanstalk's Stone said the big opportunities for Martha Stewart are in the home category as the housing recovery gains momentum and consumers look to plow money into their homes.

That's why the stakes are so high for Macy's and Penney.

Macy's Lundgren said his company had built the Martha Stewart brand to be the biggest in the home business. That's a big feat considering the brand was reeling over Stewart's personal legal issues and had been cheapened by its partnership with Kmart when it signed the Macy's deal in 2006. Kmart's licensing deal ended in 2009.

Sales for the Martha Stewart brand at Macy's rose 8 percent last year, double the sales increase for the entire company. Lundgren said that while home items don't sell as quickly, they bring different types of shoppers into stores.

"I need the Martha Stewart business to be exclusive," Lundgren testified last week. "I don't have a substitute."

In the last few days of the trial, it became clear how much Penney's CEO Ron Johnson was out to woo Stewart, even initially proposing a deal that would include a personal licensing fee for Stewart herself equal to 2 percent of revenue.

Penney ended up investing $38.5 million for a nearly 17 percent stake in Martha Stewart Living. The media company is expected to receive more than $200 million over the 10-year deal.

Penney, based in Plano, Texas, is in the middle of a turnaround plan that's faltering. The company has reported big losses and sales declines for four straight quarters since it started a strategy to get rid of most of its sales in favor of everyday low prices last year.

Penney, which started to roll out mini-shops tied to popular brands in its stores last fall, has been counting on a reinvented home area to attract shoppers. It had planned to use the Martha Stewart brand as the anchor.

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

Penney said it plans to sell products that are part of Macy's exclusive agreement in May. The goods will be branded "JCP Everyday," a new brand reserved for the Martha Stewart's merchandise.

Penney also plans to sell products like curtains and stationery that are not a part of the exclusive Macy's contract under the label "Martha."

As for Lundgren and Stewart, he considers their friendship over. During the testimony last week, Lundgren described how he hung up on Stewart after she informed him on Dec. 6, 2011, that she brokered a deal with Penney. She said an expanded partnership would only be good for Macy's. He hasn't spoken to her since. He even appeared choked up at times.

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