Martha Shares Overcooked

Those operating profits are more than wiped out by the company's corporate expenses. Martha Stewart Living, which will report its fourth-quarter results later this month, is expected to post a loss of 3 cents a share for 2006, according to Thomson First Call.

This year, Wall Street expects the company to return to profitability, but in 2008, the minimum payments guaranteed by the Kmart deal shrink by nearly 70% to $20 million, which means the bulk of Martha Stewart Living's most profitable business will go away.

That leaves the company with the task of filling in the Kmart falloff just to get back to where it is now -- mired in red ink.

To remedy the situation, Martha Stewart Living has announced a string of merchandising deals with the likes of KB Home (KBH Quote), Federated's (FD Quote) Macy's chain and Lowe's (LOW Quote).

Given the newness of these deals, the company hasn't recorded much in the way of revenue from them yet. Martha Stewart will be hard-pressed to sign a deal on terms that are anywhere near as favorable for the company as the Kmart agreement and its royalty minimums, but Lyne says the new relationships have big potential.

On a recent interview on Bloomberg TV, Lyne said the new deals will result in 2008 merchandising EBITDA, or earnings before interest, taxes, depreciation and amortization, that is roughly equivalent to 2006 EBITDA from merchandising. That suggests a decline for the company's most profitable business in 2008 compared to 2007, but it also displays optimism that the new deals will make up some ground relatively quickly.

"So we feel our ability [is] to manage through that gap quite comfortably," she said.