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Better, but Not Good, at Martha

Martha Stewart Living turns a profit, but warns red ink will flow again in the third quarter.

Updated from 7:56 a.m. EDT

The second quarter was better than expected at

Martha Stewart Living Omnimedia

(MSO)

, but that doesn't mean it was good. Nor are things likely to improve in the near future.

Instead of the loss the company had projected and analysts were expecting, the decoration-advice and recipe provider posted an unexpected profit on Monday. But the profit was far below last year's mark. And it came amid plunging revenue and much lower guidance for the rest of the year, as the company continued to struggle with the aftershocks related to the indictment of its namesake founder on charges related to insider trading.

The company's upside surprise wasn't all that shocking, said one buy-side analyst, adding that the company likely offered conservative guidance for the second quarter. The better-than-expected results are not anything to get excited about, said the analyst, who asked not to be named.

"They're not going to go out of business tomorrow," said the analyst, whose firm is short Martha Stewart Omnimedia. "But their results are going to look lousier and lousier."

Doubling Down

The company essentially confirmed that assessment, projecting much deeper losses in the third quarter and for the rest of the year than analysts were expecting. Martha Stewart Living expects to lose 15 cents a share in the current quarter and a full-year loss of 18 cents to 20 cents per share.

Analysts surveyed by Thomson First Call were expecting a third-quarter loss of 6 cents a share and full-year loss of 9 cents a share.

Meanwhile, setting aside the expectations question, the company's results already look lousy compared with the same period last year.

In the second quarter, Martha Stewart Omnimedia earned $1.2 million, or 2 cents a share, from continuing operations. Net profits were down nearly 85% from the year-ago period.

Profits were held back by slumping sales. Total revenue fell 16% from the year-ago period to $65.8 million.

Pyrrhic Verse

To be sure, those results did beat the company's projections and Wall Street's expectations. Analysts surveyed by Thomson First Call were expecting Martha Stewart Omnimedia to lose 4 cents a share on $61.2 million in revenue. Meanwhile, the company had estimated it would lose 3 cents to 5 cents a share in the quarter.

But the victory is hollow, given that revenue fell in each of the company's four operating segments, while costs as a portion of sales jumped.

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Publishing revenue fell 16% from the year-ago quarter to $39.6 million. The result would have been worse if not for the publication of the company's new

Everyday Food

magazine, which launched earlier this year, and an extra issue of

Martha Stewart Weddings

magazine. Through the end of July, advertising pages have declined 30.6% and advertising revenue has slipped 26.8% at the company's core

Martha Stewart Living

magazine.

Revenue for the company's other operations has also fallen precipitously. Television revenue dropped 9% in the quarter to $6.6 million, merchandising revenue fell 26% to $11.8 million, and Internet and catalog revenue fell 3% to $7.8 million.

Costs Rev

Although overall operating costs at Martha Stewart Omnimedia fell 1.9% to $64.3 million, costs as a portion of sales increased 14.4 percentage points to 97.7%.

Driving that surge in costs was a absolute increase in the company's selling and promotional costs, as well as in its general and administrative expenses.

Corporate overhead before depreciation and amortization was $9.9 million, up from $7.6 million, an increase the company laid on "higher legal and professional fees incurred as a result of corporate issues resulting from investigations into a personal sale of non-company stock by Martha Stewart."

The reference is to Stewart's sale of 4,000

ImClone Systems

shares in late 2001, a trade that led to her indictment in June and her stepping down as Martha Stewart Living CEO. She's currently awaiting trial.

Despite posting a series of quarterly losses, the company's financial position remains healthy, with $172 million in cash and short-term investments at quarter's end, down from $178 million on Dec. 31.