J.C. Penney CEO Sought to ‘Pull Off Martha,’ E-Mail Shows

Friday, 01 Mar 2013 01:48 PM

 

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J.C. Penney Co. Chief Executive Officer Ron Johnson sought to “pull off Martha” as part of a transformation strategy, according to an e-mail shown at the trial of a dispute with Macy’s Inc. over the right to sell Martha Stewart goods.

Macy’s sued Martha Stewart Living Omnimedia Inc. in January 2012 to stop it from going ahead with a sales agreement with J.C. Penney, claiming the exclusive right to sell Stewart-branded items in categories including bedding and cookware. Macy’s sued J.C. Penney about three months later.

Johnson testified in New York state court in Manhattan, where Justice Jeffrey K. Oing is conducting a non-jury trial of both suits. Cincinnati-based Macy’s CEO Terry Lundgren testified Feb. 25. Stewart is also expected to take the stand.

“She wants to do it,” Johnson said in the August 2011 e- mail. “I need to propose a deal so she can go to Terry L. at Macy’s and break their agreement.”

J.C. Penney in December 2011 acquired a 17 percent stake in New York-based Martha Stewart Living for $38.5 million as the department-store chain sought to revive sales with new mini-stores dedicated to Martha Stewart and other brands.

One centerpiece of the strategy, he testified, was to “transform” the home department with brands like Martha Stewart’s. The department, which had made up about 20 percent of the Plano, Texas-based chain’s sales over the past decade, was down to about 15 percent when he got there and sales fell more over the past year, Johnson said.

‘Stewart’s Influence’

“Martha Stewart’s influence on home was greater than any one designer in the apparel industry,” Johnson said. “I thought our middle-class customers would be very responsive to Martha Stewart.”

Johnson, the former Apple Inc. retail chief, has lost customers as he implemented an everyday low pricing strategy in place of coupons and sales and started transforming most of the company’s stores into collections of boutiques. Sales for the fourth-biggest U.S. department-store chain dropped by more than $4 billion in its latest fiscal year, marking J.C. Penney’s lowest annual revenue since at least 1987.

19,000 Jobs

Johnson said today that 19,000 of his employees have lost their jobs in the past year. The company employed 159,000 people as of January 2012, according to data compiled by Bloomberg.

Macy’s, the second-biggest U.S. department-store chain, has argued that it contracted with Martha Stewart Living in 2006 as Stewart was being released from prison and her company’s goods were associated with the “significantly downscale” Kmart.

Johnson testified that he first considered partnership with Stewart when he read that her company had hired Blackstone Group LP to explore strategic alternatives.

“I thought, ‘Martha must not be performing well and there might be an opportunity to do something together,’” Johnson said. He said that he was the first person from J.C. Penney to meet with Stewart, her company’s chief creative officer and non-executive chairman, and that he met with her in person two to three times before the companies became formally engaged.

Relationship ‘Change’

Johnson said that while he didn’t read Macy’s contract with Martha Stewart Living, he knew there would have to be a “change” in their relationship for J.C. Penney to sell certain types of goods.

Martha Stewart Living, based in New York, has defended its agreement with J.C. Penney, accusing Macy’s of breach of contract and saying the retailer stocked and priced Martha Stewart products in a way that favors private-label brands. Martha Stewart Living also said Macy’s couldn’t have exercised a five-year renewal option because of the breach.

Johnson said Martha Stewart Living employees he spoke to told him they were “very disappointed” with the Macy’s relationship.

© Copyright 2014 Bloomberg News. All rights reserved.

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