Martha Stewart: J.C. Penney deal didn't violate Macy's contract (+video)

Johnson, who was dressed in a dark suit and striped navy tie, testified 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 the idea in the summer of 2011 with Millard Drexler, CEO of the J. Crew clothing chain. Stewart called Drexler a "helpful adviser."

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 took a hit when Stewart was indicted in 2003 on charges that included making false statements and obstruction of justice related to a personal stock sale. She was convicted in March 2004 and was sentenced to five months in prison. After Stewart's release in March 2005, business began to recover as advertisers who had fled returned.

"I stumbled in 2003," Stewart said Tuesday, adding that "We emerged from that whole and healthy."

Still, in the past few years, Martha Stewart Living's broadcast and publishing divisions have been grappling with a shift by people to getting their recipes and food tips on the Web and on their mobile devices. As a result, the company, based in New York City, has been trying to bolster its merchandising business, which represents 30 percent of the company's annual revenue.

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. She called Johnson a "visionary."

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

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