Martha Fans See Light

The latest quarter looks weak, but a changing media business could play to the company's strengths.
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Some fans continue to see a bright future for

Martha Stewart Living Omnimedia


. But days like Tuesday make it clear there will be a few dark moons yet before the light becomes visible.

Martha Stewart shares sold off Tuesday morning in the wake of the media company's latest weak earnings report. The stock, which is already 40% off its 52-week high, dropped 4% early on before recovering to trade down fractionally early in the afternoon.

For its first quarter ended March 31, Martha Stewart lost $19 million, or 37 cents a share, from continuing operations. A year ago Martha Stewart lost $19.3 million, or 39 cents a share, on the same basis. Revenue fell 13% from a year ago to $38.7 million.

The latest-quarter numbers fell short of expectations. Analyst projections don't look good for the next two quarters, either.

But some media watchers say the company's more in tune with the shape of the changing media business -- and the wants of the consumer -- than the market is giving it credit for.

In the past, the company did business primarily online and via retail, television and publishing. "It is now extending itself to emerging distribution systems and has found new traction, including satellite radio," says Lee Westerfield, media analyst for Harris Nesbitt. Westerfield doesn't cover MSO.

Martha Stewart Living defines itself based on brand and audience traction rather than distribution, he adds. The Street has been reluctant to see Martha as more than a one-trick lifestyle pony. That is about to change, given the volume of deals she is making across multiple distribution channels.

Chief Executive Susan Lyne, speaking on Tuesday's earnings call, brought up two new deals, one with


(SIRI) - Get Report

inked last week and another one with Warner Home Video. Both could serve as indicators of strong revenue growth down the line.

The latter deal, to produce DVD sets starting in the fourth quarter of this year from the Martha Stewart library, will focus on house and home. "We see real opportunities in new distribution channels," said Lyne. When asked about advertising cross-placements, Lyne said the ability to maximize advertisers' messages through a number of media is "a very valuable tool."

In the past, media was defined by pathways such as radio, cable, broadcast TV, Westerfield says. But in the future, media will be "defined more by audience relationships like home entertainment, sports and other affinities common to large segments of the population who are mobile and insensitive to rigid programming schedules." That's what Martha Stewart is in the process of doing.

As the old pathways fade, they will give way to fractionalized media outlets where the consumer is ultimately in control of an on-demand media universe wherever and however the consumer wants it. Ultimately, satellite and new TV deals auger well for the MSO brand -- consumer appetites matter most and Martha Stewart understands that.

There's "no finite level to this," Westerfield adds. "Martha is first among media in the future."