Challenges Loom for Martha Stewart - TheStreet

Challenges Loom for Martha Stewart

The media conglomerate is poised to continue its comeback this year, but 2008 may be dicey.
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Updated from 12:15 p.m. EST

Martha Stewart's namesake company looks poised to continue its impressive comeback this year, but its biggest challenge looms in 2008.

Martha Stewart Living Omnimedia

(MSO)

posted fourth-quarter earnings that blew past Wall Street's estimates on Wednesday, and it forecast more profit gains for 2007.

But the lion's share of its fourth-quarter profitability came from its merchandising partnership with

Sears Holdings'

(SHLD)

Kmart -- a deal that drops off in value after this year. Some investors have speculated that the company will go private before then and reward them with a hefty premium, but the company's CEO, Susan Lyne, continues to say there's

no plan for a buyout.

"We are not focused on going private in any way shape or form," said Lyne on a conference call with analysts following the release.

For the fourth quarter, the company's net income climbed to $16.2 million, or 31 cents a share, from $2.9 million, or 6 cents a share, a year earlier.

Revenue rose 15% to $97 million from $84.6 million inthe fourth quarter of 2005. The increase was partly driven by revenue guaranteed to the company through its contract with Kmart, even though actual sales of its Kmart line declined amid weakness in the soft home category.

Revenue from Martha Stewart's merchandising business, which includes Kmart, jumped 25% to $35.2 million from $28.1 million a year earlier.

Analysts polled by Thomson Financial had expected earnings of 25 cents a share and revenue of $94 million.

For the first quarter, Martha Stewart Living expects to report revenue of $62 million to $66 million, with an operating loss of $18 million to $19 million.

For all of 2007, the company predicts revenue of $330 million to $340 million, up from its 2006 revenue of $288.3 million. Operating income is expected to total $5.5 million to $8.5 million, compared with a loss of $2.8 million in 2006.

But what about 2008?

According to the company's public filings, the minimum payments guaranteed by the Kmart deal shrink by nearly 70% to $20 million next year. In the fourth quarter, high-margin revenue from Kmart accounted for all of the company's operating income before corporate expenses, since a $2.2 million loss from its publishing business more than wiped away the $47,000 profit at its broadcasting division and the $219,000 gain from its Internet business.

Meanwhile, the company's corporate expenses, coupled with the losses from its publishing unit, whittled its $29.5 million profit from its merchandising business, most of which came from Kmart, down to an overall operating profit of $14.6 million.

So, even if Martha Stewart Living Omnimedia posts an operating profit for 2007, can those profits continue in 2008 when the Kmart deal shrinks dramatically? Lyne says the company can fill in the gap with its new merchandising partnerships with

Federated's

(FD)

Macy's chain,

Lowe's

(LOW) - Get Report

and Michael's Stores.

"In the coming months, we will be launching many of the new Merchandising initiatives announced in 2006, including our Martha Stewart Collection of home products at Macy's and on macys.com in late summer; our Martha Stewart Crafts line at Michaels' more than 900 arts & crafts stores in May; and our Martha Stewart Colors paint program with Lowe's beginning in March," said the company in a press release.

On the conference call, Lyne said investors should not expect the new partnerships to start contributing to the company's financial performance until the back half of 2007.

Elsewhere, the progress that the company has made since its business took a hit from its founder's legal troubles is apparent in its top line.

Revenue at the company's publishing business rose 5% to $43.1 million from $41.1 million, led by an 11% increase in ad pages at its flagship magazine,

Martha Stewart Living

, and a 36% increase in pages at

Everyday Food

.

Advertisers largely abandoned its magazines after Stewart was sent to prison in 2004 for lying to investigators about a stock sale. And while the business is still not profitable, the company has invested heavily in launching

Blueprint

, a new magazine targeting a younger audience that the company hopes will offer a new growth opportunity.

Internet revenue rose 24% to $5.4 million from $4.3 million. The company is approaching a launch for an online makeover.

"We are also introducing our new Web site -- offering a rich multimedia experience, with enhanced search and guided navigation to expose the most relevant content from our site and the web," said the company. "Our digital offerings will continue to evolve throughout 2007 with features that allow for greater personalization as well as social networking and community."

Shares of Martha Stewart recently were up 29 cents, or 1.6%, to $18.34.