Martha Stewart testifies she was trying to offer shoppers more opportunities with Penney shops

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Martha Stewart arrives to court in New York, Tuesday, March 5, 2013. Macy's Inc. is suing the media and merchandising company Stewart founded for breaching an exclusive contract when she signed a deal with J.C. Penney in December 2011 to open shops at most of its stores this spring.(AP Photo/Seth Wenig)

NEW YORK, N.Y. - Home decor and food guru Martha Stewart testified in court on Tuesday that she did nothing wrong when she signed an agreement to open shops within most of J.C. Penney's stores across the country.

Stewart testified in New York state court in a trial over whether the company she founded breached its contract to sell cookware, bedding and other items exclusively at Macy's when she inked the deal with Penney.

During three hours of testimony, Stewart, who founded Martha Stewart Living Omnimedia Inc., denied Macy's allegations that she did anything unethical and said she was only looking to expand her brand.

In fact, Stewart said it's Macy's that didn't uphold its end of the agreement to try to maximize the potential of her business. She said her brand had grown to about $300 million at Macy's, but the business was now "static" at the department store chain. She said she had hoped the business would exceed $400 million.

"We were disappointed," Stewart, 71, wearing a light brown tunic and a mini skirt, testified. " We got to a certain dollar amount and struggled and never got any further."

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.

Penney signed a pact in December 2011 with Martha Stewart Living to open shops at most of its 1,100 stores by this spring. A month later, Macy's renewed its long-standing exclusive deal with Martha Stewart until 2018, then it sued both Martha Stewart Living and Penney.

Macy's is trying to block Penney's from opening the shops. The company also is seeking to stop Martha Stewart from providing any designs to Penney — whether or not they carry the Martha Stewart label.

Martha Stewart and Penney are using what they believe is a loophole in the agreement between Macy's and Martha Stewart to move forward with their deal. It's a provision that allows Martha Stewart to sell some of the products that it offers in Macy's stores at Martha Stewart stores, too.

According to Martha Stewart lawyers, because the Macy's agreement doesn't specify that Martha Stewart stores have to be "stand alone" stores, the mini shops within Penney's stores would not violate the contract. Stewart said in court Tuesday that even Amazon.com could be considered a store, given that shoppers are shifting more to online buying.

"I don't think you need walls to be a store," she said.

The trial has revealed some of the drama that took place behind-the-scenes between Stewart and the CEOs of Macy's Inc. and J.C. Penney Co.

During his testimony on Friday, Penney CEO Ron Johnson rejected claims by Macy's lawyers that he plotted to push Martha Stewart to breach her deal with Macy's with the goal of eventually becoming the sole carrier of some of Stewart's products.

Johnson, dressed in a dark suit and striped navy tie, said during his testimony that he just wanted to get a piece of the action while helping the Martha Stewart's business grow. He also said that the expanded partnership could be good for all parties involved, including Macy's.

Macy's attorneys, meanwhile, have portrayed Stewart as someone who turned her back on a good friend, Macy's CEO Terry Lundgren, to broker a deal with a rival company. During testimony earlier in the trial, Lundgren, who wore a suit, said that he hung up on Stewart after she told him about the deal she'd reached with Penney. He said he hasn't spoken to her since.

"I was quite taken back by his response and when he hung up on me I was quite flabbergasted," Stewart testified Tuesday.

Stewart also testified that she couldn't discuss the impending Penney deal with Lundgren sooner because the negotiations were "confidential." But Theodore Grossman, an attorney representing Macy's, presented an email on Tuesday that showed that Stewart had discussed it with Millard Drexler, CEO of the J. Crew clothing chain, before the deal was complete.

Stewart's testimony comes as the company she founded continues to struggle. Martha Stewart Living just finished its fifth straight year of losses. The company has also had steep sales declines.

Martha Stewart Living had taken a when Stewart was convicted in March 2004 of lying to prosecutors about a stock sale. After Stewart's release, business began to recover as advertisers who had fled returned. But in the past few years, Martha Stewart Living has been grappling with a consumer shift to the Web and mobile devices to get the latest recipes and other food tips.

Martha Stewart Living has been trying to bolster its merchandising business, which represents 30 per cent of the company's annual revenue, to offset declines in its broadcast and publishing divisions. The biggest opportunities for Martha Stewart Living are in selling products for the home, including bedding, bath and kitchen merchandise. That's because as the housing recovery gains momentum in the economic recovery, people likely will put more money into their homes.

During her testimony on Tuesday, Stewart said she always wanted to open big shops within Macy's stores, but the retailer never embraced that concept. Instead, she said the merchandise in Macy's stores is just "here and there."

That's why she said that a proposal from Penney's Johnson to create shops filled with home merchandise was appealing to her.

"We hoped this business would be growing," Stewart said. "It just boggles my mind that we're here sitting in front of you, judge."