It's Getting Worse at Martha Stewart Living

The company's revenue plunges and its loss widens, partly because of the CEO's legal woes.
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Updated from 10:07 a.m. EDT

The legal troubles engulfing Martha Stewart is increasingly a nightmare for investors in the company bearing her name.

On Wednesday

Martha Stewart Living

(MSO)

said first-quarter revenue plunged and its loss widened due in large part to the bad publicity created by allegations of insider trading by its CEO -- as well as the cost of defending her from them.

Most alarming to investors was a 28% decline in advertising pages at its flagship

Martha Stewart Living

magazine, a development that caused revenue from publishing -- by far the company's biggest segment -- to plunge 21% to $34.1 million. Overall, Martha Stewart Living saw revenue tumble 15% to $58 million, and its loss swell to $4.5 million, or 9 cents a share. That's 3 cents wider than analysts were forecasting.

The company lost $234,000 in the year-ago quarter because of an accounting charge. Excluding that, it earned $2.9 million, or 6 cents a share.

The company has been reeling since revelations came to light that Stewart dumped shares of

ImClone Systems

(IMCLE)

in late 2001, just days before a regulatory setback caused the stock to plunge. Stewart, who was friends with former ImClone CEO Samuel Waksal at the time, denies that the stock sale was prompted by any inside information.

During the company's fourth-quarter earnings call

last month, Stewart expressed hope that the investigation into her stock sale would be resolved in the near future.

"Obviously, that has not happened and we can make no predictions as to when it will," Stewart said on a conference call with investors Wednesday. "Our business results reflect the pressure related to the continuing investigation. Once the investigation is resolved, we will assess the appropriate steps necessary to improve our financial results."

Company officials projected that Martha Stewart Living's trouble will continue, at least for the near future. The company expects to lose 3 cents to 5 cents a share from continuing operations in the current quarter. Analysts had been predicting a profit of 5 cents. "The single biggest thing impacting our business is the lingering lack of resolution on the Martha situation," said Sharon Patrick, the company's president, on the conference call. "It impacts every aspect of our business."

Although the company's publishing segment was the hardest hit in terms of revenues in the quarter, it wasn't alone. Revenues fell throughout the company, declining within each of its business segments.

Television revenue from the company's syndicated and cable television programs fell 1.4%. A drop in ratings and the cancellation of Stewart's appearances on

CBS's

"The Early Show" led to the sales decline, the company said.

Meanwhile, revenues from the company's Internet and catalog operations dropped 0.8% to $7 million, as online advertising sales fell.

While Martha Stewart Living attributed much of those declines to the investigation, the company's revenues were also hit by its relationship with

Kmart

.

The company's merchandising revenue, where the company licenses the Martha Stewart name for products ranging from baby blankets to living room furniture, dropped 6.7% to $10.3 million. The decline stemmed in part from the closure of Kmart stores, as well as lower same-store sales of Martha Stewart products, said James Follo, the company's CFO, on the conference call.

Meanwhile, Martha Stewart Living has begun to recognize the actual sales of products sold in Kmart stores, rather than the minimum guaranteed revenue, Follo said. The actual sales are running below the minimum guarantee from Kmart, which is currently in Chapter 11 bankruptcy, he said. Martha Stewart Living will recognize the difference between the minimum guarantee and the actual sales when it can determine that amount, which should be around the fourth quarter of 2003, Follo said.

While revenue fell at Martha Stewart Living, many of the company's costs increased, further deteriorating its bottom line.

Sales and marketing expenses, for instance, jumped 20% to $12.8 million. During the quarter, the company increased its marketing spending to promote its syndicated television shows and its new line of Martha Stewart furniture.

Compared to the prior-year period, the company's general administrative costs increased 28.4% to $15 million. Follo blamed the increase in part on the $1.2 million in legal fees the company paid related to the investigation of Stewart's stock sale, as well as an $800,000 increase in the company's directors' and officers' insurance costs.

Although the company is watching its cost structure, it doesn't plan on any radical changes, Follo said.

"Certainly we're trying to take steps to reduce

our expenses as our revenue is pressured," he said. "But until

the investigation is resolved, I wouldn't expect us take significant steps either way."

In terms of individual business segments, the firm's publishing unit produced operating income of $5 million in the latest quarter, down from $15.2 million a year ago. The company's foray into Internet and direct marketing continued to be costly, too, as revenue in that segment dipped slightly and its operating loss ballooned 12% to $8.2 million.

The company listed cash and short-term investments of $119.3 million at the end of the most recent quarter, down from $131.6 million just three months earlier. Accounts receivable fell by about $10 million to $27.8 million, and inventory rose by about $550,000 to $9.2 million.

Martha Stewart Living shares closed off $1.11, or 11.3%, to $8.68.