Economy, Stock Scandal Erode Martha Stewart Direct Operations

A sluggish economy, taint of scandal surrounding its founder/chairman/CEO and media antagonism have taken a toll on Martha Stewart Living Omnimedia Inc.

The New York home furnishings and media company yesterday announced its first quarterly loss since going public in 1999. An undisclosed number of staff were laid off as part of a new restructuring in the company.

“Although I'm increasingly hopeful that my personal legal situation will be resolved in the near future, it is still inappropriate for me to discuss anything related to them on this call,” Stewart said in an earnings call.

Steep declines in broadcasting, catalog and Internet revenue, plus the ongoing investigation of Stewart involving insider dealings, resulted in a $2 million loss for the three months ended Dec. 31. Profit for the same quarter of 2001 was $5.7 million.

Stewart is under investigation for her role in selling biotech company ImClone Systems Inc.'s shares just before their collapse. ImClone chief Sam Waksal is alleged to have tipped off Stewart. She claims no wrongdoing. Federal regulators are investigating.

A key barometer of Martha Stewart's ill health is the falling newsstand sales of the flagship Martha Stewart Living magazine. Ad revenue compared with other home-related titles is weak, too.

Another victim of this mess is the Internet and catalog division. Fourth-quarter revenue from the division fell almost 20 percent to $13.7 million, from $16.7 million in the year-ago period.

As a result, the company has decided to restructure the Internet and catalog division. It will swallow a restructuring charge of $7.7 million from the write-down of inventory and Web site development costs.

“Keeping focused on our commitment to reach break-even in our Internet/direct commerce segment, we have decided to significantly scale back the operations of that business segment,” Stewart said in a statement released four hours before the earnings call.

Circulation of Martha Stewart catalogs will be reduced. Product assortment will be focused on higher-end items, more branded and seasonal in nature.

The company's Web sites will be better exploited to support subscription acquisition and renewals for Martha Stewart Living and other sibling magazines. The sites also will play a promotional role as part of the company's merchandising, publishing and television businesses.

However, there was some positive news for the company.

Merchandising revenue in the fourth quarter was 11 percent higher at $11.8 million, and up 38 percent for the year 2002. This softened the 10 percent drop in TV revenue — attributed to the lack of a holiday TV special — and falling direct sales.

The new Martha Stewart Everyday Holiday product line was successful, as was the benefit from a higher royalty rate from Kmart Corp., which sells its Everyday line.

Also, consumer and advertiser response was positive to the test of Everyday Food, the company's new digest-sized magazine that does not carry the Martha Stewart name. Even the new Martha Stewart Signature Furniture line was received well by the industry.

All said, fourth-quarter 2002 revenue was $77.6 million, down from $82.7 million in the year-ago period. But 2002 revenue was $295 million, up 2 percent from $288.6 million in 2001. Net income for 2002 fell 66.8 percent to $7.3 million.

That said, the outlook for this year is tough despite $179 million in cash and investments as of Dec. 31, no debt and little need for outside capital. First-quarter 2003 losses are projected at 6 cents to 8 cents a share.

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