Martha Shares Overcooked

The company's relationship with Kmart dates to before Stewart's fall from grace and before hedge fund star Ed Lampert rescued the retail chain from bankruptcy and merged it with Sears Roebuck.

Now, the Martha Stewart deal is little more than a headache that Lampert has to endure as he cuts costs out of his retail empire and squeezes out cash. But for Stewart's namesake company, it's the main engine of profitability, at least until next year.

Amid store closures and same-store sales-declines, sales of Kmart's Martha Stewart Everyday Living line of household products have fallen short of its expectations. The retailer, however, is still required to pay Stewart's company minimum guaranteed royalties in return for the merchandise.

The amount of those royalty payments has grown steadily since 2001, and this year it will jump to $65 million, up 10% from last year's $59 million.

In the first three quarters of 2006, revenue from Martha Stewart's merchandising business, the majority of which comes from Kmart, totaled $34.3 million, or 18% of its total operating revenue. The lion's share of its revenue, $113.4 million, came from the publishing business.

Merchandising, however, is much more profitable than the media business. The merchandise division accounted for 61% of the company's operating profits for the first nine months of 2006.