March 2 (Bloomberg) -- Ron Johnson, J.C. Penney Co.’s chief executive officer, said he wanted to sell Martha Stewart-branded goods to help transform the retailer’s business, and he needed Stewart to change her agreement with Macy’s Inc.
“I need to pull off Martha,” Johnson wrote in an August 2011 e-mail to a J.C. Penney executive shown by lawyers yesterday at a nonjury trial in New York State Supreme Court in Manhattan. “She wants to do it. I need to propose a deal so she can go to” Macy’s Chairman Terry Lundgren “and break their agreement. That is the only thing in the way of success at this point.”
The e-mail was shown as Johnson testified at the trial over Macy’s lawsuits against Martha Stewart Living Omnimedia Inc. and J.C. Penney.
Macy’s sued New York-based Martha Stewart Living in January 2012 to stop it from going ahead with a sales agreement with J.C. Penney, claiming it had the exclusive right to sell Stewart-branded items in categories including bedding and cookware. Macy’s sued Plano, Texas-based J.C. Penney about three months later.
Johnson is set to return to the stand March 4. Stewart, her company’s chief creative officer and non-executive chairman, is scheduled to testify March 5 at the trial presided over by Justice Jeffrey K. Oing. Lundgren testified earlier in the week.
Johnson testified yesterday that while J.C. Penney was doing “fine” when he was hired in June 2011, he believed it “could do better” and that he had a “mandate to transform” the company with a new strategy.
A centerpiece of his plan was to overhaul Penney’s home department with brands like Martha Stewart, he said. The department had comprised about 20 percent of Penney’s sales over the last decade yet had fallen to about 15 percent when he was hired and continued to drop over the past year, he said.
“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.”
J.C. Penney in December 2011 acquired a 17 percent stake in Martha Stewart Living for $38.5 million as the department-store chain sought to revive sales with new mini-stores.
Sales for J.C. Penney, the fourth-biggest U.S. department-store chain, dropped by more than $4 billion in its latest fiscal year, marking its lowest annual revenue since at least 1987.
Lawyers for Cincinnati-based Macy’s have argued that J.C. Penney is trying to “reap the rewards” of its work with the Martha Stewart Living brand, which it says it rebuilt after Stewart’s release from prison in 2005, when her products were being sold at Kmart.
Martha Stewart Living 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 manner that favors private-label brands. Martha Stewart Living also said Macy’s couldn’t have exercised a five-year renewal option in January 2012 because of the breach.
Martha Stewart Living has argued that its original 2006 contract with Macy’s allows it to design and sell products within the exclusive categories as long as they are sold through the Internet, television or at any retail store branded with the Martha Stewart Living name that’s operated by the company or its affiliates or “prominently” features the brand, according to court filings in the case.
Johnson testified that he first considered a partnership with Stewart when he read that her company had hired Blackstone Group LP in May 2011 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 was the first person from J.C. Penney to meet with Stewart, and he talked to her in person two to three times before the companies became formally engaged, he said.
Johnson said J.C. Penney analyzed the possibility of acquiring all of Martha Stewart Living after Blackstone asked the company to come up with multiple proposals before deciding on the offer that was made.
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 that relationship for J.C. Penney to sell certain types of goods, such as bedding and kitchenware.
In other e-mails from August 2011 shown by Macy’s lawyers, Johnson wrote to a J.C. Penney board member that Stewart “could be the foundation of a reinvented” home department.
“Macy’s deal is key,” Johnson wrote in the e-mail. “We need to find a way to break renewal right in spring 2012.”
In another e-mail shown by Macy’s lawyers from January 2012, Johnson told former J.C. Penney President Michael Francis that “the best way to stop Macy’s from renewing is to make our offensive so strong that they simply pick up their toys and go home.”
Yet when asked whether he wanted Martha Stewart Living to breach its contract, Johnson replied “absolutely not,” and added that he hoped Stewart and Macy’s could “work something out.”
“Our dream was to open our own store but the first priority was to amend the agreement with Macy’s,” Johnson said.
Johnson said he recommended that Stewart herself talk to Lundgren before signing the agreement but that she ultimately decided to tell him the night before the pact was announced.
Lundgren testified that he was “shocked and blown away” when Stewart called him to inform him. He said he hung up on her and hasn’t spoken to her since.
The cases are Macy’s Inc. v. Martha Stewart Living Omnimedia Inc., 650197/2012, and Macy’s Inc. v. J.C. Penney Corp., 652861/2012, New York State Supreme Court (Manhattan).
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