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Martha Stewart Living Omnimedia, Inc. (MSO), Macy’s, Inc. (M): Sizing Up the Players in This Love(less) Triangle

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Macy’s, Inc. (NYSE:M) and J.C. Penney Company, Inc. (NYSE:JCP) are used to playing rough in the retail business, but their rivalry has recently included a trip to the courts. Macy’s, Inc. (NYSE:M) sued J.C. Penney in January 2012 over the latter’s agreement with Martha Stewart Living Omnimedia, Inc. (NYSE:MSO) to add Martha Stewart Living Omnimedia, Inc. (NYSE:MSO)-inspired boutiques to a portion of J.C. Penney’s store base. Macy’s claims its 2007 agreement with Martha Stewart Living provides for the exclusive distribution of a range of products. With the outcome of the trial up in the air, let’s take a look at the players.

Despite a rich history that dates back to 1902, J.C. Penney is struggling to find its way to profits in the digital age. New CEO Ron Johnson, a former Apple Inc. (NASDAQ:AAPL) retail star, has brought a new product strategy to J.C. Penney, as well as creating branded, in-store boutiques that include Sephora jewelry and Joe Fresh apparel shops. However, the early results have been poor, with big declines in comparable store sales.

In FY2012, J.C. Penney reported weak overall results, with a 25% decrease in revenues and a $1 billion adjusted operating loss. Its gross margin slipped badly due to product markdowns and the costs of introducing a number of new clothing lines. The company has attempted to broaden its brand appeal by partnering with leading designers, such as Michael Graves and Jonathan Adler, but the expected rise in customer traffic hasn’t materialized. In addition, J.C. Penney has heavy legacy pension liabilities that continue to siphon off important cash flow.

Looking ahead, J.C. Penney has bet heavily on the in-store boutique experience and Martha Stewart Living Omnimedia, Inc. (NYSE:MSO) plays a key role in the store transformation process. With almost $3 billion in funded debt, though, the company has a limited timeframe in which to regain profitability and a solid financial footing. One major institutional investor, Vornado Realty Trust (NYSE:VNO), is already getting worried about J.C. Penney’s prospects, as it sold 10 million of its 23 million share position earlier in March. The clock is indeed ticking.

Martha Stewart Living Omnimedia, Inc. (NYSE:MSO) founded her empire with the publication of a single book, “Entertaining,” in 1982. Her partnership with Time, Inc., the publisher of the book, later included a popular live television show and a monthly magazine with roughly 2 million subscribers. Despite Martha Stewart’s sustained popularity, though, Martha Stewart Living hasn’t been able to turn a consistent profit over the past five years.

In FY2012, Martha Stewart Living Omnimedia, Inc. (NYSE:MSO) produced mixed results, with a 10.8% decline in revenues, but a 101.7% increase in adjusted operating income. The company’s revenues were negatively affected by the cancellation of a live television show, as well as the decision to end publication of some of the company’s niche magazines. However, Martha Stewart Living benefited from increased sales of licensed products through its diverse merchandising partners, including Macy’s, The Home Depot, Inc. (NYSE:HD), Michael’s, and Staples, Inc. (NASDAQ:SPLS).

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