JC Penney's risky gamble on Martha Stewart

Two struggling companies won't create a stronger one.

By Jonathan Berr Dec 7, 2011 12:14PM
Rubberball/Mike Kemp/Rubberball/Getty ImagesJ.C. Penney (JCP), whose shares have plunged more than 56% over the past five years, is joining forces with Martha Stewart Living Omnimedia (MSO), whose shares have plummeted nearly 85% during that same period of time. This is corporate America's answer to a shotgun wedding.

J.C. Penney Wednesday agreed to acquire a 16.6% stake in Martha Stewart's media empire for $38.5 million. It's a steal. New York-based Martha Stewart has a market capitalization of about $173 million, a fraction of the $1.87 billion value the company had in February 2005. Shares of the media conglomerate soared on the news. Before the announcement, they were down more than 29% this year even though the company hired Blackstone Group (BX) in May to "review proposals from parties interested in partnering or investing in the company."

J.C. Penney is not in great shape either. New CEO Ron Johnson, who joined the Plano, Tex. company from from Apple (AAPL) in November, figures that adding more name brands will attract more shoppers to the venerable retailer. Comparable store sales for the third quarter at J.C. Penney declined 1.6%. For the year, they are "expected to be flat to up slightly to last year," the company said. Martha Stewart alone won't be able to reverse this trend. The brand is spread thin already.

Martha Stewart's merchandising business is the only bright spot in the company's dismal results thanks to its high profile partnerships with Macy's (M), Home Depot (HD) and Petsmart (PETM), along with others. In the third quarter, it was the only profitable business. The others, broadcasting and publishing, are struggling because the popularity of Martha Stewart the person is fading. Martha Stewart Living recently revamped its TV business to address the ratings decline. 

Unless Martha Stewart the executive can create a magic wand with common household supplies, joining forces with J.C. Penney won't do much to address the glaring weaknesses at both companies.

Jonathan Berr is a freelance writer whose work appears on numerous websites.


1Comment
Dec 7, 2011 1:41PM
avatar

J.C. Penney seems to be caught in the retail vortex between Wal-Mart, Kohl's, and Macy's. Their stores are generally very nice and not depressing caves like Sears, and their pricing is very competitive with attractive sale pricing. It's not sure that they can bring back their high-end income buyers any more, even though their best soft goods offering quality compares well to Macy's or Kohl's and are clearly better than Wal-Mart or Costco.

 

If Penney's has a weak spot, it could be their traditional allegiance to the "department store" model, both in stores and online. For example, selling cheap price, bad quality furniture cannot be improved by a great customer service policy. The cheapo stuff should just be dropped and let the low-end/high volume guys handle that junk. If furniture and large appliances are dragging down the business (just a guess) then shorten the scope and sell to specific commodities with intent. The general department store is not dead, but if it isn't on discount wars plus groceries, it cannot compete.

 

I like J.C. Penney and hope that these moves work out. They provide a bargain alternative for clothing, house wares and small appliances for shoppers who are not interested in big box shopping.

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