Tickers in this Article: MSO, JCP, M, DDS
Shares in Martha Stewart Living (NYSE:MSO) jumped around 30% this morning on the news that retailer J.C. Penney (NYSE:JCP) had acquired a 16.6% stake in the company. The agreed deal calls for J.C. Penney to buy 16.6% of the company for $38.5 million or $3.50 a share. After news of the deal, shares in Martha Stewart popped to $4 a share. Long-term, the combination of J.C. Penney and Martha Stewart looks like a solid match.

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The market seems to view this deal as a win-win for both companies. Shares in J.C. Penney responded positively to the news. Even though the $38 million share purchase by J.C. Penney is a relatively minor purchase for the $7 billion company, the stake in Martha Stewart is likely the beginning of a greater investment for the company. As part of the deal, Martha Stewart will develop mini stores to be located inside J.C. Penney locations beginning in 2013. This deal puts J.C. Penney on a path of offering more reputable brands in its stores, as the company has struggled recently amongst the stiff retail competition. (For related reading, see The 4 R's Of Investing In Retail.)

A Turnaround to Watch
J.C. Penney came to the attention of the retail world when activist investor Bill Ackman took a significant stake in the company earlier this year. Since then, the company has made bold moves to revitalize its brand. The company's new CEO, Ron Johnson, was the brilliant retailing mind behind Apple's (Nasdaq:AAPL) retail stores. His move to J.C. Penney was a huge coup for the company. Johnson's focus has been on adding newer brands to revitalize the business. For years, the company has lagged behind other mall-based retailers like Macy's (NYSE:M) and Dillard's (NYSE:DDS). The company's 4.86% operating margins are nearly half the 8.85% operating margins that Macy's generates. The move with Martha Stewart appears to be a very cost effective way to get a popular brand inside of its stores, which is meant to drive traffic and increase sales.

The Bottom Line
J.C. Penney stores are ripe for improvement. Management's focus of adding strong, popular brands should help drive sales and improve margins. The end result should be a substantial improvement in profitability, which would be a boom for investors today. (To learn more, read Value Investing: Finding Value In Income Statement.)

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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.

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