Martha Stewart Is Too Big to Fail

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Left to right: Johnson, Stewart, Lundgren. Photo: Corbis, Getty Images

Yesterday, when Martha Stewart took the stand at the New York State Supreme Court to testify in the bitter legal battle between Macy's and J.C. Penney,  she exuded the loose confidence of a domestic doyenne on top of her game. According to the New York Times and other news reports, the 71-year-old former Chanel model and self-made billionaire got rave reviews by wearing Lanvin, putting on lip gloss during courtroom breaks, referring to herself as "the über-designer" of her eponymous housewares company, and cracking wise about her then-controversial decision to sell her upscale products in Kmart years ago. ("The garden club of Greenwich canceled my speaking engagement.")

Stewart's chatty courtroom behavior was a far cry from her last big court appearance — her 2004 insider-trading trial — at which she didn't testify, and issued only a terse, apologetic statement on her website after being convicted on four counts. But her post-prison élan is understandable. The battle between Macy's and J.C. Penney, after all, is chiefly a tug-of-war between two companies who are desperate to ride Stewart's designer coattails to massive profits. No matter which one wins in the end, the lesson to observers is clear: When it comes to selling housewares, Martha matters, possibly now more than ever before.

The basic question in the trial is whether Stewart broke an exclusive agreement with Macy's by striking a deal in 2011 to sell Martha-branded housewares in J.C. Penney. It's a fairly routine contract dispute, as white-collar cases go, but because of the flamboyant personalities and internecine warfare involved — Stewart and Macy's CEO Terry Lundgren, for example, were old friends, meaning that Stewart's embrace of Lundgren's main rival was considered a personal betrayal — has given it extra bad blood.

Macy's contends that J.C. Penney CEO Ron Johnson conspired to woo Stewart by offering her a huge deal that would make her company up to $500 million by allowing it to set up her own stores-within-stores inside every J.C. Penney outlet. Johnson and Stewart say there's nothing wrong with that, since Stewart's Macy's contract allowed her to open up her own branches. But Macy's sees Martha's J.C. Penney deal as illicit corporate polyamory and is seeking an injunction to keep her from selling her products there.

The landscape for all this fighting is that both Macy's and J.C. Penney are at crucial inflection points. Macy's has been steadily making money for years, and its stock price is on a slow climb, but its financial performance apparently underwhelmed Stewart, who was making only $300 million a year through her deal with the chain. J.C. Penney is in much, much worse shape. It was recently reinvented in a flashy overhaul led by Johnson, a former Apple retail guru who came up with the Genius Bar, but has been hemorrhaging money and losing customers, and in many respects appears to be in real danger of shrinking to the point of oblivion. Martha Stewart's company has also been struggling financially, with $56 million in losses in 2012 and declining revenue.

Despite her struggles, Stewart — who, in contrast to her gentle TV persona, has a cutthroat business attitude — clearly has the leverage here. Both Lundgren and Johnson have testified that being able to sell Martha Stewart home products in their stores is a make-or-break proposition. She's the 800-pound gorilla of home products — which is why, when she called Macy's Lundgren to tell him that she was seeing J.C. Penney on the side, he hung up on her, and hasn't spoken to her since.

"I was completely shocked and blown away," Lundgren testified. "I was literally sick to my stomach."

Johnson needs Stewart for a different reason: She might help him keep his job. J.C. Penney's board is rumored to be considering firing Johnson after a recent earnings disaster, and hedge-fund manager Bill Ackman — who made a huge gamble on the flagging store — has lost hundreds of millions of dollars on his investment so far. When it comes to housewares, the Martha Stewart name — and possibly only the Martha Stewart name — could change J.C. Penney's fortune, which is why Johnson sounded so thrilled at the prospect of getting the Stewart bump.

"Terry might have a headache tonight,” he e-mailed a lieutenant in 2011, after inking the deal with Stewart.

Stewart, too, has a stake in the judge's decision. She wants to sell her wares at both Macy's and J.C. Penney, and an injunction preventing the double-dip would erase a profitable line of business. But make no mistake: She's the economic powerhouse here, the golden goose that has reduced a pair of giant retail companies to bickering teenagers.

Martha's courtroom swagger means she knows it, too.

“Why do you think the headlines are pitting me against J.C. Penney’s and Macy’s?” she asked, jauntily, in court yesterday. “They’re fighting over something, and it’s not just home."