New Merchandising Onslaught Looms for Martha Stewart

New York — Sales of Martha Stewart licensed merchandise at Kmart continue to downtrend, but the stage is set elsewhere for a strategic advance, in line with the company's overall approach, which Martha Stewart Living Omnimedia (MSLO) president and ceo Susan Lyne characterized as a move "to diversify our product line and broaden our distribution channels."

Speaking to analysts during the MSLO third quarter conference call, Lyne said the diversification plan applies across all four business segments — publishing, broadcasting, merchandising, and internet.

Lyne pointed to the recent and coming launches of:

• Martha Stewart Colors interior and exterior paint color program due in all 1,275 Lowe's stores in early 2007;
• The 2007 launch of Martha Stewart Collection at Macy's with up to 1,400 products;
• The 2007 debut of floor coverings, lighting and bathroom fixtures, kitchen cabinets and closet organizers in KB Studios;
• The recent area rugs license with Safavieh;
• Martha Stewart Crafts Collection to launch in April with 37 linear feet in the more than 900 Michaels stores;
• The current re-launch of the internet site, including e-commerce functions, and key alliances with Google Video and Yahoo Lifestyle.

Lyne noted that revenues from many of these initiatives will not be forthcoming until the second half of 2007 — but also noted that MSLO often can derive 70% margins from its licensed merchandising programs.

MSLO cfo Howard Hochhauser said that comp store sales of Martha Stewart products at Kmart for the quarter were down 7.2%, and for the year to date dropped 3.4%. He said that soft home was the most difficult area, while garden and housewares were trending up.

But looking beyond the Kmart partnership, third quarter results showed ample evidence of the stage being set for major growth.

Fueled by strong gains across each business segment, including a big 75% jump in magazine advertising sales, MSLO pushed third-quarter sales up by 47.7%, to $61.1 million, and continued to narrow its losses.

The diversified media company recorded a loss of $25.2 million, or $0.49 a share, a small improvement over a year-ago deficit of $26.1 million, or $0.51 a share. But much of the damage done to the bottom line this quarter was in the form of a one-time charge of $18.2 million, as the company set aside cash in anticipation of settling a lawsuit. Pull that one item out of the equation, and the third-quarter loss was a much smaller $0.13 per share, about a fourth of the prior-year loss.

Each MSLO business unit recorded strong gains in the quarter — publishing rose 31.5%, to $36.3 million; broadcasting revenues more than tripled, rising 244.4% to $10.1 million; merchandising, including the key business with Kmart, climbed 28.2%, to $11.9 million; and internet sales soared higher by 81.8%, to $2.8 million.

That $18.2 million charge for settlement costs was noted in a filing last week with the Securities and Exchange Commission, in which MSLO reported that it will pay $15 million, Martha Stewart herself will ante up $5 million, and the company's insurers are expected to pay the last $10 million, all to settle a class action suit brought in the wake of Stewart's 2004 conviction on insider trading charges.

The MSLO filing noted that the settlement is subject to final negotiation and to court approval. MSLO anticipates "that a hearing to consider approval of the settlement will be held in late 2006 or early 2007."