J. C. Penney Bets on Martha Stewart - Analyst Blog

The economy is struggling, and so is J. C. Penney Company Inc. ( JCP ). The company has been trying every means to uplift itself, and the latest move of acquiring a 16.6% stake in Martha Stewart Living Omnimedia Inc. ( MSO ) is just an another step towards that direction.

J. C. Penney is betting hard on New York based Martha Stewart, for it to be a fortune changer. It has invested $38.5 billion (or $3.50 per share) to buy 11 million newly issued shares of Martha Stewart Living and become a major stockholder and owning two seats in its board.

The news was enough to encourage an upward movement in the shares of Martha Stewart that jumped 33.3% to close at $4.16 on Wednesday. However, the market reacted in a subdued manner towards the shares of J. C. Penney that only nudged up 0.6% to close at $33.51.

An Insight into the Deal

The tie up between J. C. Penney, the retailer of apparel and footwear, accessories, fashion jewelry, beauty products and home furnishings, and Martha Stewart Living, an integrated media and merchandising company, calls for a 'store-within-a store' concept.

This means that next time you are in search for an extensive range of home and lifestyle merchandise designed by Martha Stewart, you can even visit a nearby J. C. Penney shop. This is because J. C. Penney plans to open Martha Stewart retail departments within its stores in February 2013 under a mutual 10-year pact.

Both companies will also launch an e-commerce site in 2013 to reach out to a larger audience and place themselves on a more competitive platform in this turbulent environment.

J. C. Penney has also incorporated Sephora departments, stores of MNG by Mango and Call It Spring by The ALDO Group in its store suite but these failed to breathe life into its sagging sales.

Martha Stewart has hired Blackstone Advisory Partners as its financial advisor and Paul, Weiss, Rifkind, Wharton & Garrison LLP as its legal advisor. On the other hand, J. C. Penney has appointed Peter J. Solomon Company as a financial advisor and Skadden, Arps, Slate, Meagher & Flom LLP as its legal advisor.

Will the Deal Move the Wheel?

The question that immediately arises in ones mind is whether the deal has enough power to turn the wheel of J. C. Penney around, but only time can give the answer. We can only wait and watch how the retailer moves ahead - whether it walks the growth trajectory or continues to trail. However, it is evident that the deal will help J. C. Penney to attract the Martha Stewart fans into its stores.

Ron Johnson, the Chief Executive Officer of J. C. Penney and the person who spearheaded the retail operations of Apple Inc. ( AAPL ), remains optimistic about the contract and view this as a turning point for the company.

J. C. Penney has been losing its foothold in the market as it struggles against retail chains such as Macy's Inc. ( M ) and Kohl's Corporation ( KSS ). It has been witnessing falling comparable-store sales since last four months. Comps declined 1.9% in August, 0.6% in September, 2.6% in October and 2% in November. In the last reported quarter, the company's top line slipped 4.8% and comps dropped 1.6%.

What's there for Martha Stewart Living?

For Martha Stewart Living, J. C. Penney's investment came as a welcome note. The company was looking for strategic options since May 2011, and this deal brought an end to its search.

The contract will fetch Martha Stewart Living an amount of $200 million in royalties, design fees and advertising commitments over its initial period. The company, which operates through three divisions Publishing, Broadcasting and Merchandising, has long been grappling with waning sales, and the deal might help regain its lost pace.

Further, Martha Stewart Living declared that a special dividend of 25 cents a share will be paid on December 30, 2011 to stockholders of record as on December 19.

Macy's Stance on the Deal

The recent accord between J. C. Penney and Martha Stewart Living may have a direct impact on the relationship that the latter shares with Macy's. Since 2007, Macy's has been selling an exclusive line of home products by Martha Stewart under a five-year deal, slated to expire in 2012. With the J.C. Penney deal underway, it remains to be seen whether Macy's will renew its contract with Martha Stewart Living. For the time being, Macy's will sell the products but whether it will renew or terminate the contract is not clear. On the other hand, Martha Stewart Living showed interest in continuing to work with Macy's.

Wrapping Up

If all goes well, we believe that the deal will help the company to gain lost ground and provide an impetus to its weakening sales. Currently, we have a long-term 'Neutral' recommendation on the stock. Moreover, J. C. Penney holds a Zacks #3 Rank that translates into a short-term 'Hold' rating, and correlates with our long-term view.

APPLE INC ( AAPL ): Free Stock Analysis Report

PENNEY (JC) INC ( JCP ): Free Stock Analysis Report

KOHLS CORP ( KSS ): Free Stock Analysis Report

MACYS INC ( M ): Free Stock Analysis Report

MARTHA STWT LIV ( MSO ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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