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The Martha-Macy's marriage: A good thing?
Coming soon to Macy's: sheets and plates from Martha Stewart. Here's a look at the new deal's winners and losers.
By Robert Walberg
First Martha Stewart was everywhere -- magazines, TV, satellite radio, prison, etc. Now she's expanding her housewares empire, too.
In a deal applauded by investors and analysts alike, Martha Stewart Living Omnimedia (MSO, news, msgs) announced that it will roll out an exclusive line of home goods for Macys starting in the fall of 2007. The stock responded to the news by removing its shackles and running up 12%.
So investors again are caught up in Martha-mania. But lets take a closer look at the deal and what it means for all the players involved.
A safety net for Martha
As for Martha Stewart Living, the deal with Macys is positive for three main reasons:
- It expands the companys reach by offering the Martha Stewart Collection of sheets, dinnerware, towels, etc. to a more upscale clientele.
- It serves notice to Kmart that it will have to pay up to keep the popular brand in its stores once the current deal with Kmart parent Sears Holdings (SHLD, news, msgs) ends in 2010.
- It insulates Martha Stewart Living from the diminished payments it is scheduled to receive from Sears in the later years of their contract. Martha Stewart Living is due to receive a guaranteed payment of $59 million this year, regardless of sales. By the final year of the deal, that payment falls to $15 million.
Aligning itself with Macys also protects Martha Stewart Living. While Kmart continues to struggle to win back market share from Wal-Mart (WMT, news, msgs) and Target (TGT, news, msgs), Macys is expanding its reach as parent Federated streamlines its chains and focuses on a few successful brands.
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Though the deal announcement focused on branding synergies and not numbers, the deal with Macys should provide a considerable long-term boost to Martha Stewart Livings revenue. Unlike at Kmart, where the Martha Stewart Collection is the top housewares line, Martha Stewart will have much stiffer competition at Macys. But the Martha brand carries enough cache to steal a significant share of Macys nearly $4 billion housewares market -- and thats a nice addition to the Kmart business. Of course, this assumes that the company will continue its relationship with Sears Holdings beyond the current term.
The power of the brand
As for Macys parent Federated (FD, news, msgs), the deal is a no-brainer. Orchestrating an exclusive relationship with an established, popular brand such as Martha Stewart not only gives the company an edge against the competition, but it provides tremendous cross-promotion opportunities. Whether you like Martha Stewart or not, theres no denying the power and scope of the brand.
Not only can Martha Stewart hawk products on her television show, but there are also the magazines and now her satellite radio program on Sirius Satellite Radio (SIRI, news, msgs). No doubt the advertising and promotional opportunities created by Martha Stewart Livings multimedia were of great attraction to the folks at Federated.
The loser, if there is one, in todays announcement is Kmarts parent company, Sears. Martha Stewart Living has now shown that it has other options for branding and distributing its merchandise. Consequently, the company will be bargaining from a much stronger position if, and when, it renegotiates terms with Sears.
Until this point, Sears management has been reluctant to expand the scope, or improve the terms, of its deal with Martha Stewart Living. To continue on that path risks losing one of Kmarts strongest attractions -- a fate the struggling chain can ill afford.
While the deal with Macys looks like a winner, that doesnt mean that Martha Stewart's stock will be a winner -- at least not over the intermediate to long-term. It is important to remember that the deal with Macys doesnt kick in until the fall of next year. Martha Stewart Livings valuations are too high, its competition too intense and its reliance on one figure still too great for the stock to be a buy. If you own the stock, consider selling if it moves above $21.
At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.
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