Omnimedia to report results that reflect troubles

Firm expected to post its first annual loss Thursday, analysts say

By Anne D'Innocenzio | The Associated Press

4:02 PM EST, March 3, 2004

Martha Stewart enters Manhattan federal court in New York on Feb 24. (AP/Stuart Ramson)

NEW YORK - While the jury deliberated the criminal case against Martha Stewart, the latest verdict in her media empire's performance seemed more certain: Analysts expect Martha Stewart Living Omnimedia Inc. to report its first annual loss when it releases financial results Thursday.

The results are expected to signal a continued erosion in the overall business, which has struggled with skittish advertisers, slumping sales and a depressed stock since Stewart's name was tied to an insider trading scandal in June 2002.

Furthermore, whether Stewart, the former chairman and CEO, is fully acquitted on charges she lied to investigators about a 2001 stock sale or is convicted, many observers believe that the brand will never reclaim the cachet it once had.

Some think the worst case scenario is not a conviction, which carries a jail term, but a hung jury, according to Christopher Byron, author of "Martha Inc.: The Incredible Story of Martha Stewart Omnimedia." A deadlock would prolong the uncertainty, as the government seeks to retry its case.

"You can put your head in the sand, and ignore Martha Stewart's situation. But with or without Martha, the company is going downhill," said Dennis McAlpine, managing partner of the research firm McAlpine Associates, who expects to see a contining slide in business when the company reports its results.

Steve Cohn, editor-in-chief at Media Industry Newsletter in New York, is more optimistic, believing advertisers will return if there's an acquittal, although he didn't expect a complete rebound.

"There is definitely potential," he said.

Elizabeth Estroff, a Martha Stewart spokeswoman, said the company remains hopeful that business "will rebound significantly" if there's an acquittal, but it acknowledged that "in the event of a negative resolution, while achievable, that rebound will be more difficult, take more time and require further investment."

Last year, ad pages for the company's flagship magazine Martha Stewart Living were down 35 percent, and the weak trend continued into this year, with ad pages in the first quarter dropping 34 percent from the year-ago period, according to Media Industry Newsletter.

Traffic at the company's Web site marthastewart.com declined to 1.12 million visitors in January from 1.54 million two years ago, according to the most recent data available from Nielsen/NetRatings, an Internet research company.

All this has taken a toll on the business. For the first nine months of the year, ended Sept. 30, 2003, Martha Stewart Living lost $7.42 million, or 15 cents per share, compared with a profit of $9.27 million, or 19 cents per share, a year earlier.

Revenues were $175 million, down nearly 20 percent from $217.5 million in the first three quarters of 2002.

Analysts surveyed by Thomson First Call Inc. expect the company to report a loss of 2 cents for the year and anticipate a profit of 7 cents for the fourth quarter ended Dec. 31.

While sales of its merchandise, from furniture to towels, have continued to do well, the company has been hard hit by its publishing division, which accounts for about 60 percent of sales.

Still, a lawsuit filed last month against Martha Stewart Living by Kmart, its key retail partner, accusing the company of overcharging for the exclusive rights to sell housewares and other products under the brand, could complicate matters.

While the potential financial impact of the dispute isn't large, it has raised speculation that the deal could be revised or dropped when it expires in 2008.

Kmart only responded that it "continues to value its relationship with MSO and sincerely hopes for a prompt conclusion to this matter."

Meanwhile, the personal details about Stewart that came out of the trial -- from reports of rude phone manners to her greedy expense account habits -- haven't helped either, and sharply contrasts her perfect public image. The trial exposed how Stewart billed her company for a $17,000 personal trip to Mexico, for example.

"Her demeanor and personality came out in an unflattering way," said Seth Siegel, co-founder of The Beanstalk Group, a trademark licensing agency.

Nonetheless, the stock has surprisingly enjoyed a rebound since the beginning of the year, soaring close to 40 percent on the New York Stock Exchange, as some investors speculated Stewart would be acquitted.

But until there's a resolution of Stewart's legal problems, company executives remain in an awkward position. While they continue to publicly support Stewart, they are moving ahead with projects that don't carry her name.

The company added Everyday Food, the company's first magazine not to carry her name, and a new TV show called "Petkeeping with Marc Morrone," both of which have done well.

The company is also testing a new magazine, Organizing Good Things, which features ideas to help consumers organize their homes.

At the same time, executives have maintained that Stewart, who stepped down as chairman and CEO last June but continues to serve as chief creative officer, is still involved in the company.

If she's convicted, however, Stewart would have to resign that position.

On the Net:

www.kmart.com

www.marthastewart.com