Penney Puts Martha Stewart to Bed

It looks like J.C. Penney (NYSE: JCP  ) has finally come around to my way of thinking, as I asked the question earlier this year, "Why bother?"

The department store retailer has been locked in a three-way battle between itself, Macy's (NYSE: M  ) , and Martha Stewart Living Omnimedia  (NYSE: MSO  ) over use of the domestic diva's name on products sold in its stores. Earlier this year it won something of a Pyrrhic victory when a judge said it could temporarily sell the items, but couldn't identify them as coming from Martha Stewart. It was then that I asked, what's the point? If you can't gain any of the halo effect associated with the branding that you're paying for, then it makes no sense to continue fighting -- or financing -- the war.

Realizing there was no benefit, Penney's has finally decided to kick Martha Stewart to the curb. The New York Post reports CEO Mike Ullman was unhappy with how sales were going under the $200 million partnership agreement the company signed, and is jettisoning the whole thing.

No kidding. If you're paying out hard-earned money that you can ill afford to spend right now and are forced to advertise the items as JCP Everyday merchandise instead of Martha Stewart Everyday, shoppers aren't really going to know they're getting something endorsed by the diva instead of the regular pots and pans you already sell.

While the paper also reports that Martha Stewart Living Omnimedia issued a statement saying it's still very much a valued partner with Penney, it's likely the writing is on the wall anyway. The department store chain continues to fight for its financial survival and can't afford to hemorrhage cash and get no return.

Penney is at a crossroads. Along with the ouster of former CEO Ron Johnson, the retailer just saw the man who put Johnson in place, hedge fund investor Bill Ackman, pull out his entire stake in the company. While two other hedge funds stepped in as a vote of confidence of sorts, the company is really on the precipice.

I'd even go so far as to say it's not even a company-specific problem, but one endemic to the department store concept generally. While Macy's received many of the customers who fled Penney's during the meltdown, as did Kohl's (NYSE: KSS  ) , neither one can say it really benefited from its rival's trials.

For example, while Penney's continues to suffer from steep declines in sales and comps, they've barely budged higher at Kohl's. Revenues are up just half a percent, same-store sales are down a like amount, and profits have fallen 4%. Macy's had a strong first quarter that subsequently took a turn for the worse in the second. It says it anticipates recovery in the back half of the year, but the markets appear doubtful, knocking back its shares 10% from their recent highs.

At least in Penney's case, while the situation remains horrible, it's actually less horrible as the months progress -- but obviously you can't sustain a business on a less-bad model. Just as the demise of electronics retailer Circuit City didn't herald a growth opportunity for Best Buy and Linens 'n' Things' bankruptcy didn't spur a spate of achievement at Bed Bath & Beyond, Penney's problems aren't bolstering the bottom line of its rivals.

It may be that the shopping mall anchor concept is a dying one and J.C. Penney, despite its storied history, may have to look at other models -- smaller-footprint stores, multichannel opportunities, etc. -- if it wants to live to fight another day. If the reports are true, then Penney's decision to bury the Martha Stewart deal was a smart one, though it may be too late to effect change to the retailer's ultimate destiny. 

It's not just Penney's and other department store operators that have felt the seismic shift underfoot. The entire retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.


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