|Martha Stewart on Friday entering federal court in Manhattan where her trial has been under way.
Kmart's 11-page legal filing
MARTHA STEWART MAGAZINE LOSES MORE GROUND
Ad Pages Drop 34.6% in 2003; Advertisers Continue Move to Other Publications
'MARTHA STEWART LIVING' MAGAZINE CUTS RATE BASE 22%
Guaranteed Circulation Goes From 2.3 Million to 1.8 Million
MAJOR ADVERTISERS DROP FROM 'MARTHA STEWART LIVING'
Many Big 2002 Spenders Place No Ads in 2003
MARTHA STEWART OMNIMEDIA EARNINGS PLUMMET
Second Quarter Net Income Down 86.4%
Partners face off
The move publicly pits the financially troubled retail giant against its legally troubled star product endorser and partner.
In 2001, the Michigan-headquartered Kmart, which operates stores in 49 states, signed a seven-year agreement with Ms. Stewart's company to market the "Martha Stewart Everyday" brand of home and garden products.
Security and Exchange Commission filings show Kmart accounted for 17% of Omnimedia's 2002 revenue, or about $50.2 million.
In the new legal action, filed as part of its own continuing bankruptcy proceeding in U.S. Bankruptcy court for the Northern District of Illinois, Kmart is challenging the licensing fees it pays and the amount of advertising it has to run in Martha Stewart Living Omnimedia publications.
On Friday, Ms. Stewart's company issued a press release on the matter, explaining to the financial markets that Kmart was trying to "reduce the total guarantees" of royalty payments that were due the Martha Stewart enterprise for the year ended Jan. 31, 2003.
Later that day, Kmart rebutted with a news statement of its own, saying Omnimedia's claim "does not accurately reflect Kmart's position" and that Omnimedia was "seeking to force Kmart to make payment in excess of the contractual requirement." The wording of the Kmart legal brief charges that the retailer is being "victimized" by Ms. Stewart's Omnimedia.
Omnimedia said Kmart wants to cut its obligation for the year by $4.5 million to $47.5 million and to cut annual ad spending in Martha Stewart magazines by $1 million to $2 million a year.
However, in a November 2003 filing with the SEC, Ms. Stewart's company indicated it expected at least $47.5 million in revenue from Kmart merchandise sales for the fiscal 12 months ended Jan. 31, based on minimum guaranteed payments it said were due from Kmart.
Beyond the points of legal contention, observers also see the spat as evidence of the further fraying of the relationship between Ms. Stewart, who is currently on trial, and the financially strapped national retailer that has heavily promoted her celebrity and products.
In July 2002, just six months after Kmart declared bankruptcy and began the process of reorganizing its business, the SEC announced it would charge Ms. Stewart with fraud. At that time, Kmart issued strong support for its star endorser, saying her products were selling well and that Kmart would continue its planned spending for advertisements in Ms. Stewart's magazines.
In June 2003, when Ms. Stewart was indicted on charges of fraud and obstruction of justice, Kmart took a more neutral tone. It issued a press statement saying, "This is a matter between law enforcement authorities and Martha Stewart as an individual and therefore, it would be inappropriate for Kmart to comment."
Two months later, AdAge.com reported that "sales of Martha-branded goods at Kmart registered declines even after factoring out discontinued products and Kmart store closings. Merchandising revenues for the quarter fell 26.4% to $11.8 million."
Two weeks later, AdAge.com reported that major advertisers were abandoning Ms. Stewart's magazines and that the latest available information indicated that retail sales of Ms. Stewart's Everyday Kmart line declined on a same-store basis, and ran below minimum guaranteed royalty levels.
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Bradley Johnson contributed to this report.