Penney CEO emails suggest aim at breaking deal

NEW YORK (AP) -- It's been a tough week to be Ron Johnson.

J.C. Penney's CEO was in the hot seat again on Friday in New York State Supreme Court after facing investors earlier this week over a dismal quarterly earnings performance that marked one year of snowballing losses and sharp sales declines since he came on board.

This time, he was being grilled for four hours by lawyers from rival Macy's Inc. who presented emails that he wrote that they believe illustrate how he plotted to push home diva Martha Stewart to breach an exclusive deal with his rival. They contend he wanted Macy's backed into a corner so Penney would be the sole department store distributor of some of Stewart's goods.

But in cross examination by Penney's attorneys, Johnson, dressed in a dark suit and striped navy tie, rejected their claims and painted a far less devious portrait of himself. He said he just wanted to get a piece of the action while helping the struggling Martha Stewart business grow. And he says that the expanded partnership could be good for everyone, including Macy's.

"Your success is based on a success of a vendor," Johnson testified. "Competition can be your friend."

Penney ended up signing a pact in December 2011 with Martha Stewart Living to open shops at most of its stores in spring 2013. But one month later, Macy's renewed its long-standing exclusive deal until 2018 and then immediately sued Martha Stewart Living and Penney.

The trial, which began Feb. 20, focuses on whether Macy's has the exclusive right to sell some Martha Stewart branded products such as cookware, bedding and bath items.

Macy's is seeking to block Penney from opening Martha Stewart mini shops in its stores. The shops are part of Johnson's plan to reinvent the shopping experience at the beleaguered chain. The stakes are high for all three companies but particularly for Penney.

Penney's shares have now lost nearly 60 percent of their value since early last year when Johnson revealed his plan to scale back most sales in favor of everyday low prices. The stock drop is the latest indictment that Johnson's turnaround is failing Wall Street as much as on Main Street. Johnson is counting on the shops, particularly Martha Stewart's, to bring back shoppers who have fled to rivals like Macy's.

Johnson's appearance comes four days after Macy's CEO Terry Lundgren testified in court that the company had built the Martha Stewart brand to be the biggest name in home items since it began to carry the products in 2007. Having a rival carry similar products would hurt business, he testified.

Martha Stewart, the founder of Martha Stewart Living, is expected to testify Tuesday.

During Johnson's examination Friday, Theodore M. Grossman, an attorney representing Macy's, used a string of emails that Johnson wrote to various people including Bill Ackman, head of Pershing Square Capital Management and Penney board member, Penney executives and others. Grossman's aim appeared to be to show how, since the summer of 2011, Johnson had targeted Martha Stewart because she was the biggest, most recognizable brand in the home business — without any regard to Macy's exclusive agreement that was up for renewal in 2012.

"I need to propose a deal so she (Martha Stewart) can go to Terry Lundgren at Macy's and break the agreement," according to one email Johnson wrote to an Penney executive in August 2011.

In one email that Johnson sent to Ackman on Dec. 7, the day the deal went public, he wrote, "We put Terry in a corner. Normally when that happens and you get someone on the defensive they make bad decisions. This is good."

Johnson, looking tense with his hands clasped, acknowledged that getting a deal with Martha Stewart was critical but stopped short of saying his goal was to break the exclusive agreement. He said he knew there would have to be "an amendment" to a deal between Macy's and Martha Stewart so that Penney could move forward.

Johnson's testimony marks a culmination of a legal battle between the three companies that started shortly after the Penney-Martha Stewart deal was announced on Dec. 7 2011.

Macy's renewed its 2006 pact with Martha Stewart Living in January 2012 but then immediately sued the company, saying it breached a long-standing contract when it penned the 10-year deal with Penney. Penney also invested $38.5 million in a nearly 17 percent stake in Martha Stewart Living.

In a separate lawsuit Macy's sued Penney, claiming it had no regard for the Macy's contract and that Johnson had set out to steal the business that it had worked hard to develop.

The two suits were consolidated for the bench trial. Supreme State Court Judge Jeffrey Oing is presiding over the trial, which is expected to last three weeks.

Penney Co. Inc., based in Plano, Texas, is aiming at what it believes is a loophole in the agreement between Macy's and Martha Stewart. It's a provision that allows Martha Stewart to sell goods in categories like bedding in Martha Stewart Living's own stores.

According to Martha Stewart, because the Macy's agreement doesn't specify that these Martha Stewart stores have to be 'stand-alone' stores, the mini shops within J.C. Penney stores do not fall under the exclusive agreement.

Macy's Inc., based in Cincinnati, disagrees. Lundgren argued that a typical definition of a store is that it has a parking lot, is part of a mall or has a sidewalk in front.