Kmart's Program Not in Martha's Control

New York — Stating that her company has "no control" over the breadth of Kmart's buys in its exclusive Martha Stewart Everyday program, Martha Stewart Living Omnimedia (MSLO) president and ceo Susan Lyne said MSLO will nonetheless aim for a fresh merchandising start with the fall season.

Lyne, seeking to keep Wall Street expectations in line with the reality of the slowing royalty stream from the big Kmart program, told analysts on the MSLO second-quarter earnings call that Kmart has in fact removed from its assortment several product categories that were "big for us," including lawn and garden and ready-to-assemble furniture pieces.

"We continue to do beautiful design work for them, and yet we have no control over the breadth of their buy," Lyne said.

MSLO reported an operating loss for the second quarter of $7.8 million, compared to the $1.8 million loss in the same period one year ago. Sales of $73.4 million were up 7.7% from $68.2 million last year.

Howard Hochhauser, cfo, said the company will maintain its full-year guidance range of $330.0 million to $340.0 million, and operating income guidance in the range of $9.5 million to $12.5 million.

Any merchandising-related revenue gains MSLO accumulated during the second quarter from its crafts collection based at the Michael's chain, its paint line with Lowe's, and its rug program with Safavieh were offset by the declining sales of the company's Everyday home furnishings program at Kmart.

"It's been a long time since soft home was completely refreshed," Lyne said. In preparation for the new fall product mix, she pointed out, Kmart is clearing out old and outdated Everyday soft goods, "dropping it down to nothing," to make room for the new.

But Lyne warned that, unlike its other retail partnerships, MSLO has "no control over inventory levels in [Kmart's] stores, whether it's new or old categories, and we're not involved in their visual presentation."

The Kmart license pays MSLO a schedule of yearly guaranteed minimum royalties, which are to peak this year at $65.0 million. The guaranteed minimum level will drop precipitously to $20.0 million in the next retail year, which ends Jan. 31, 2009.

"In our own planning, we do not plan for much more than the basic guarantee," Lyne said. "We have to look at it that way."

On the positive side, Lyne noted, MSLO is looking to "close the gap" in 2008, when revenues from the in-the-works 2,000-sku Martha Stewart Collection program with Macy's begin flowing in. Macy's nationwide are currently being outfitted with the new Collection.

"The products and presentation are fantastic … it will really knock your socks off," Lyne said. The official launch date, September 10, will see Macy's kick off a "huge" multimedia marketing campaign for the program. "Macy's has been an extraordinary partner ... they know our brand and the product assortment well. This is a huge win for them. It is really differentiated product that only Macy's will be able to offer people, so they're putting a lot behind it both in their stores and in their marketing."

MSLO also offered updates on its recently forged alliance with Costco to launch a co-branded prepared foods line. In December, one product will be introduced; then starting in January 2008 Costco and Martha Stewart will roll out new products and categories monthly. The complete program is expected to comprise about 50 skus.

"It's going extremely well for us," Lyne said. "If you ask our food group, it's been a love fest. They are enjoying the intelligence of Costco's team in terms of creating an assortment."