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Muddy Outlook for Martha Stewart

Shares hit fresh 52-week lows as investors worry about strength in the brand.
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For Martha, it's all about

Macy's

(M) - Get Macy's Inc Report

.

Shares of

Martha Stewart Living Omnimedia

(MSO)

dropped to a 52-week low on Wednesday after the domestic diva's company reported a wider second-quarter loss.

Its sales and earnings results were largely in line with expectations on Wall Street, but a decline in ratings for Stewart's daily syndicated TV show prompted one Wall Street analyst to voice doubts about the strength of her brand name.

"This may be sign of waning interest by consumers in the Martha Stewart brand name," said Morgan Stanley analyst Lisa Monaco in a research note.

Those are harsh words in the context of MSLO -- a company whose profits were wiped out for years after Stewart was convicted and sent to prison for allegedly lying about a stock trade. Since her release, investors have been betting on a big turnaround for the company based on Stewart's public profile and the strength of her brand.

Advertisers have returned to the company in full force, but the main engine of profits for the company is its merchandising division. Major retailers, such as Macy's and

Costco

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, have teamed up with the company recently, but investors have little visibility into the profits that these partnerships will eventually generate.

"The stock will not move materially higher until there is some indication about the success of the new Macy's line in September and there was little in today's release to conclude one way or the other about the success of new partnerships such as Costco," said Monaco.

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Those new partnerships are key, because after this year, the profits derived from MSLO's longstanding merchandising deal with

Sears Holdings'

(SHLD)

Kmart chain will drop precipitously on the basis of contractual agreements.

Meanwhile, the credit markets are in flux because of rising default rates from consumers, and this has the stock market in a tailspin. The timing couldn't be worse for Martha Stewart Living Omnimedia as it prepares to replace its profitability from Kmart with new deals.

The company posted a loss of $6.7 million, or 13 cents a share, for the second quarter. That compares with the loss of $1.2 million, or 2 cents a share, a year earlier. Excluding one-time items, the loss was 9 cents a share, compared with a loss of 7 cents a share in the prior-year period. Revenue rose 7.7% to $73.4 million from $68.2 million.

Analysts, on average, expected the company to lose 9 cents a share, before items, on revenue of $71 million, according to average analyst estimates reported by Thomson Financial.

MSLO's publishing revenue rose 16.1% to $47.5 million in the quarter, driven by ongoing growth in advertising revenue. Pages increased 12% at Martha Stewart Living and 22% at Everyday Food, while total ad revenue rose 23% in the quarter.

Merchandising revenue fell 4.6% to $10.4 million, even though the results included revenue from new partnerships, including the Martha Stewart Crafts line at Michaels stores and on marthastewartcrafts.com, the Martha Stewart Colors paint palette at

Lowe's

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, and the Martha Stewart Rugs program with Safavieh.

Broadcasting revenue fell nearly 12% to $10.4 million, due largely to the erosion of Stewart's daytime viewing audience. Also, last year's quarter included revenue from the cable distribution of the show.

Internet revenue rose 12% to $5.2 million, boosted by growth in advertising revenue. MSLO Chief Financial Officer Howard Hochhauser said in a press release that the company would be diverting some of its investments from publishing to Internet to build its Web presence.

"We're on track to return to profitability this year and foresee a strong second half," said MSLO President and Chief Executive Susan Lyne in a statement. "Advertising sales are thriving and our Martha Stewart Collection exclusively at Macy's is currently rolling into stores."

Shares of MSLO were down 29 cents, or 2.1%, to $13.12 late Wednesday. The stock has been hovering near year lows since the beginning of the summer; it traded at a 52-week high of $23.21 in December.