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Martha Stewart Living Omnimedia, Inc. (MSO) Testifies in Trial Over Her Brand – Macy’s, Inc. (M), J.C. Penney Company, Inc. (JCP)

NEW YORK (AP) — 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. (NYSE:M) and J.C. Penney Company, Inc. (NYSE: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 J.C. Penney Company, Inc. (NYSE:JCP) 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, Inc. (NYSE:M)’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. (NYSE: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, Inc. (NYSE:MSO)’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 The Home Depot, Inc. (NYSE:HD) 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.

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