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Are Better Days Ahead for Martha Stewart?

Domestic divas rejoice! The lawsuit between Martha Stewart Living Omnimedia (NYSE: MSO  )  and Macy's (NYSE: M  ) has been finalized.

Macy's brought suit against Stewart's company when she agreed to sell her merchandise at J.C. Penney (NYSE: JCP  ) through a store-in-a-store concept at the retail giant. When Macy's learned about Martha Stewart Living's contract with J.C. Penney, it filed suit and claimed Macy's prior agreement with Martha Stewart Living gave it exclusive rights over certain types of merchandise sold by the company.

While the terms of the deal were not disclosed, Martha Stewart Living and Macy's mentioned that the settlement would not have a material effect on their respective businesses. For Macy's, the dust has settled as far as Martha Stewart Living is concerned, but its suit against J.C. Penney is still ongoing. Shares of Stewart's company received a boost after the news, and there's a sense that the company will be better able to reorganize its business and return to profitability with the resolution of this issue.

J.C. Penney scales back merchandise
After Macy's filed suits against both companies in 2012, the issue of exclusivity of Martha Stewart Living's merchandise has been dissected privately among the parties involved and in court. In October 2013, Martha Stewart Living and J.C. Penney decided to modify their agreement and Penney eliminated from its stores Martha Stewart Living cookware, bedding and bath products, and other merchandise. Macy's claim stated it had exclusive rights to these core home-décor products, which analysts' estimate may have earned more than $100 million in revenue for Penney. J.C. Penney also gave up its 17% ownership stake in Martha Stewart Living     .

Stewart's publishing segment is a drag on the bottom line
Martha Stewart Living has had double-digit revenue losses in the past three quarters. For the quarter-ended Sept. 30, 2013, the publishing business has dragged down results, while merchandise revenue increased at a declining rate. The company has brought in a new CEO, Dan Dienst, whose operating background is expected to drive long-term, sustainable performance and bring financial discipline to the company.

Total revenue for fiscal 2013's third quarter was $33.8 million, down 22% from $43.5 million reported a year ago. Publishing revenue decreased 29.6% to $19.4 million. The decline reflected operating decisions made in 2012 to stop publishing two print titles and to end production of live TV programming. Martha Stewart Living merchandising revenue rose 7% to $14.2 million and reflected royalty revenue earned from the arrangement with J.C. Penney.

Macy's awaits court decision regarding J.C. Penney
With the lawsuit out of the way, Macy's looks forward to a "continued [and] successful partnership" with Martha Stewart Living. However, Macy's suit with J.C. Penney is far from over. According to The Wall Street Journal, J.C. Penney and Macy's have held talks but have not been able to reach an agreement on monetary damages. Macy's wants reimbursement for lost profits related to Penney's contract with Stewart's company and attorneys fees. The two parties are currently not talking, and they may need the New York State Supreme Court to step in and arrive at a resolution.

My Foolish conclusion
For Martha Stewart Living Omnimedia, upgrading its publishing business and introducing digital brands may prove to be key to returning to profitability. The company is already scaling down on its print titles and turning some of its print publications into digital media. The more profitable merchandising segment should continue to be popular with consumers and drive company profits over the long term.

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8/27/2015 4:02 PM
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