Martha Stewart Living on Slippery Footing

Make no mistake, the company has been busy on the branding front. It has Christmas CDs packaged with Martha recipes coming soon, along with the launch of her Sirius(SIRI Quote) channel this fall, a homebuilding pact with KB Home(KBH Quote), a home video deal with Warner Home Video and other developments in the magazine division. Meltz points out in his note that "MSO has done a good job developing new revenue opportunities in 2005" and sees additional merchandising partnerships on the horizon. Even so, there seems little near-term reason to buy the stock.

Two major catalysts for this company may present themselves in the next phase of chief executive Susan Lyne's plans. Lyne has said recently that the most crucial priority for the company next year will be to launch a major Web presence. Stewart and Lyne need to figure out how to best capitalize off online advertising and merchandising sales through the Web. Expect Lyne to be deliberate and execute properly on launching a major new online initiative. When they do, the revenue picture is going to improve.

As Meltz puts it, "We believe the longer-term prospects look good for Martha Stewart Living Omnimedia. Since Susan Lyne became CEO back in November 2004, she has breathed new life into the company via a strengthening of the management team, launch of new products and partnerships, and successful efforts to get advertisiers back to Martha Stewart Living." He says the company "has always been unique in its ability to effectively leverage content across its various assets. While the television initiatives may be disappointing from a ratings perspective, they have definitely highlighted the immense power of the 'Omnimedia' model."

A strong Internet play, along with the potential for a re-engineered deal at the retail level with the Kmart unit of Sears (SHLD Quote), could be two positives that should propel this company looking forward.