Martha Stewart’s Shrinking Empire

Macy’s Inc. (NYSE: M) filed a suit because its management felt that some of the products that Stewart and J.C. Penney decided to sell exclusively were covered by an earlier contract with Macy’s. The deal with J.C. Penney was part of the legacy of failed CEO Ron Johnson. He apparently decided to ignore the Macy’s agreement for reasons that were never adequately explained. Whatever the reason, the J.C. Penney deal with Martha Stewart Living Omnimedia has been altered in a way that almost certainly will cut the licensing fees the media company will get from the retailer.

Additionally, as part of the agreement revision, J.C. Penney will sell back the 11 million shares it bought in Stewart’s company. J.C. Penney paid $35.8 million for the stock, and the agreement could damage the media company’s balance sheet.

Stewart tried to put on a brave face, and one that largely ignored the damage that will be done to her company:

The amended agreement covers a more focused range of product categories over a shorter period of time (through June 30, 2017) than the original agreement, dated December 6, 2011. Under the amended agreement, MSLO will continue to design Martha Stewart branded products for JCPenney in the following categories: window treatments and hardware, lighting, rugs, holiday and celebrations.

In this case, more focused product categories means fewer ones.

The part of the new agreement with J.C. Penney that really hurts Stewart is that it undermines the strength of the only division at Martha Stewart Living Omnimedia that is doing well — merchandising. Last quarter, merchandising revenue rose to $16.1 million from $14.5 million in the same quarter the year before. Operating income rose to $11.7 million from $10.2 million. The success was not enough to offset horrible results from the public corporation’s two other units — publishing and broadcasting.

It has been years since Martha Stewart Living Omnimedia posted any good news — with the exception of the J.C. Penney licensing agreement. This has driven the company’s stock to near a multiyear low at $2.25, down from more than $8 in September 2009. The next step will be down toward $1. Things at Martha Stewart Living Omnimedia are that bad.