Blog Post

MSLO And J.C. Penney Bake Up A Strategic Deal That Actually Makes Sense

Some “strategic” investments and partnerships leave you scratching your head looking for the rationale — and questioning the viability of a real payoff for either party. That’s not the case when it comes to the $38.5 million bet J.C. Penney is making by acquiring 16.6 percent of Martha Stewart Living Omnimedia (NYSE: MSO) as part of a 10-year deal that the two say should pay MSLO at least $200 million over a decade.

In addition to the merchandise revenues, J.C. Penney also will make advertising commitments. The investment gives it a stake in the company’s success across the board.

The deal, which gives MSLO a cash infusion, should put to rest the notions of an outright sale raised when MSLO brought in Blackstone Advisory Partners in June “to review and respond to various parties that have expressed interest in potentially partnering with or investing in the Company, as well as exploring other opportunities.” Wednesday’s announcement marked the end of Blackstone’s role with the company.

Blackstone was part of a sweeping series of moves announced at the same time, include the hiring of Oxygen alum Lisa Gersh as president and COO with the goal of making her CEO by early 2013. Coincidentally, June is also when Ron Johnson left as the head of Apple’s phenomenally successful retail operations to take the helm as CEO of J.C. Penney.

Martha Stewart also rejoined the board of directors of the company she founded. The two women appeared together Wednesday at the annual UBS media conference, where they stood out because of the buzz around the deal — and because companies led by women are still an exception. The session was scheduled for Tuesday but was postponed at the company’s request for what turned out to be good reason. (Much better news for MSLO than for THQ; (NSDQ: THQI) the gaming company canceled, then announced a 25 percent cut in its net sale estimates for the quarter.)

The J.C. Penney announcement comes as Gersh finished her first six months. The next six and beyond will be about making it pay off, along with the company’s other major retail partnerships, while continuing to push the publishing and broadcasting segments to perform to capability. Despite numerous iterations, reorgs and personnel changes, MSLO has yet to find a way to turn up the flames on all burners at the same time. A healthy cross platform matters not only for revenues but for the ultimate success of merchandising, which relies on the personal brand of Martha Stewart and MSLO’s reach across its sites, apps, magazines, TV shows and radio.

Analog and digital: The agreement with J.C. Penney is both analog and digital, calling for Martha Stewart retail stores in the majority of jcpenney department stores and a jointly developed new e-commerce site planned to launch in 2013. Each includes a focus on “how to” advice in addition to selling merchandise.

This is where Johnson’s background at Apple (NSDQ: AAPL), where he opened more than 300 stores over a decade, and previously at Target, where he launched the Michael Graves line that helped give the discount chain a sophisticated veneer, comes into play. Johnson understands how to blend retail and e-tail. As important, he knows what’s it’s like to work with an iconic perfectionist.

He also gets the human component of sales. As Apple retail chief, Johnson suggested a way to bridge the concierge experience a guest might expect at the Ritz-Carlton with in-store customer service. His suggestion was the Genius staffed with the “smartest Mac people.” In his bio Steve Jobs, Walter Isaacson says the Apple co-founder called the idea crazy: “You can’t call them geniuses. They’re geeks. They don’t have the people skills to deliver on something called the genius bar.” The next day Johnson heard Jobs ordered up a trademark on the name. As anyone who has been to an Apple store can tell you, the Genius Bar is the hub. Jobs was right about the geek component — not every geek is cut out to help people — but he was also wrong — a lot of geeks are great at it.

The idea for Martha Stewart is to help people use the merchandise in ways that work for them, just as the Genius Bar helps people learn to use new shiny objects to show off family pictures, make movies or do schoolwork. We can’t all be Martha Stewart and buying a Martha Stewart plate doesn’t mean you know how to set a festive table. They promise trained staffers for each retail outlet with lifestyle expertise.

Done right, it should boost the publishing and broadcasting segments as well.

In a brief interview Wednesday as she left UBS, Stewart told me they have yet to settle on a name for the service. (Note trademark mention above for one reason why it won’t be a Genius Bar.) But the way she spoke of Johnson suggested a comfort level working with him that could bode well.

Stewart also was careful not to leave other retailers out of the conversation — Macy’s, Home Depot and Staples (the Martha Stewart office collection) — but given Johnson’s aspirations and the chains head-to-head competition in malls, it’s easy to see why Macy’s might not be keen. Indeed, according to the WSJ, the department store chain that has had an exclusive line since 2007, said Wednesday that it is reviewing potential changes. The paper also reported that Macy’s was told about the new pact the night before it was announced. The five-year deal with Macy’s expires at the end of 2012 with a renewal option; if that isn’t picked up it would be a blow for MSLO and its investors, including J.C. Penney. MSLO promises the lines will be different. Will that be enough — and will Macy’s really want to feature Martha Stewart as prominently as it has in marketing?

Having spent considerable time in various Macy’s Martha Stewart spaces, I can safely say the chain hasn’t come close to creating the kind of experience Johnson envisions. The collections blend in to various departments instead of truly standing out and despite the engaging ad campaign that highlights Stewart’s contributions and some in-store events, it rarely feels connected to other elements of the MSLO empire. And I’ve never had the sense anyone wants to show me how to use a bundt cake pan.

All about the execution: We’ve all seen deals that sound great go sour and promises that look good on paper fail to deliver. They have about 18 months to set the foundations to really make this work. Johnson knows what it takes to create a great retail experience for electronics in today’s environment. That has to translate in a consumer world that’s far more tech savvy and comfortable with mobile and e-commerce but inside a mid-range department store chain. You aren’t going to see stone floors from Italy and floating staircases in these stores. J.C. Penney also will have to deal with the same issue of anyone basing a strategy on a key figure: it has to be able to work without Martha Stewart, too. Johnson knows this all too well but while Apple and Steve Jobs were synonymous, he was not “the” brand.

Boost for the stock: The stock popped in June on expectations that Blackstone would deliver. It popped again Wednesday on the deal news and word of a special dividend for shareholders on record as of Dec. 19, rising more than a dollar to close 33 percent higher at $4.16 although it didn’t get back to the June high of $5.49.