Martha Finally Makes Amends

The stock surges 10%, reversing a months-long slide.
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A revival on the publishing side gave

Martha Stewart Living Omnimedia

(MSO)

a much-needed boost Wednesday.

The New York media company saw its shares jump 10% in midafternoon trading after it swung to a fourth-quarter profit, driven by improvements in its publishing arm. The company said it is investing in its online business and reported no developments in a contract standoff with

Sears

(SHLD)

.

The strong report came at a good time for investors, who have seen Martha Stewart shares languish since last summer's runup in advance of some high-profile TV shows featuring the company's namesake founder. A steady selloff has taken the stock back into the teens even as the company rolled out big partnerships with the likes of

Sirius

(SIRI) - Get Report

and

Time Warner

(TWX)

.

"Directionally I believe the company is in excellent shape," CEO Susan Lyne said on a midday conference call.

Martha Stewart Living earned $3 million, or 6 cents a share, in the quarter, compared with a loss of $7 million, or 15 cents a share, a year ago. A spokesperson said Martha Stewart Living earned 19 cents a share in the latest quarter before stock-based compensation expenses, putting it 4 cents ahead of estimates. Fourth-quarter sales rose 40% from a year ago to $84.5 million.

Shares rose $1.61 to $18.10

On the Internet, the company says it is making a $3 million investment to upgrade its sites. Lyne touted the breadth of the Martha Stewart multimedia library. "We're well positioned to make the Internet a significant revenue driver," said Lyne. She said now is a good time to make the strategic investment to improve the search function, digital templates and projects on the company's various sites.

The company saw a 41% rise in unique users in the latest quarter and believes it can benefit from a "more robust ad model." That plan will focus on "ad-driven free content," as opposed to a catalog business. "Where it is more effective to partner than to build we will do that and we will partner to build traffic," says Lyne.

Where merchandising is concerned, the company said it will focus on categories where the MSO brands carry equity. She cited an expanded

KB Home

(KBH) - Get Report

deal as a good arrangement because there is no inventory or capital cost to the company. Martha Stewart Living concluded an agreement Wednesday to expand the initiative to an additional 1,200 Martha-branded homes in Atlanta, Houston, Orlando and Daytona Beach, Fla., bringing the tally to over 1,800 houses by the end of 2006. If all homes are sold, the venture should bring revenue in the $11 to $15 million range, according to Lyne.

But it is the contentious relationship between Sears and the company that at least one analyst on the call was most interested in. Asked about the state of negotiations with Sears, Lyne said there is "nothing to report there. As we've said before, we have a very strong Kmart contract. If we would be able to strike an agreement with Sears that is good for shareholders, we would do that."

The Chicago Tribune

reported last month that Stewart and Sears Chairman Edward Lampert are negotiating over a modified contract that would allow the Martha Stewart Everyday line to be sold in Sears stores. Citing sources close to both sides, the Tribune said Lampert "wants to pay Stewart less than she is entitled to under the current agreement ... while Stewart is pushing for an extension of her current contract, which carries large financial guarantees."

Martha Stewart said Wednesday it is investing $5 million on its new young- women's lifestyle magazine,

Blueprint

. The first issue is due in May with an initial ad rate base of $250,000 per page.

By segment, publishing revenue rose 57.4% from a year ago to $41.1 million; merchandising revenue rose 18% to $28 million; broadcasting revenue rose 18% to $11 million, and Internet and direct commerce revenue fell 53% to $4.3 million.

Within publishing, advertising pages at

Martha Stewart Living

rose 133% in the quarter, while

Everyday Food

showed "more profitable circulation" and higher advertising revenue. Publishing's operating loss before interest, depreciation and amortization was $300,000 in the quarter, compared with $11.1 million a year ago. The company expects the strong growth in ad pages and revenue to continue into 2006.

Overall for the company, Martha Stewart Living expects to generate revenue of $60 million in the first quarter and an operating loss before interest, depreciation and amortization of $3 million to $3.5 million. For the year, the company sees revenue of $270 million to $280 million and operating income before interest, depreciation and amortization of $10 million to $12 million. One analyst surveyed by Thomson First Call was estimating first-quarter revenue of $62 million. Two analysts produced a mean 2006 revenue estimate of $272 million.