Ads Still a Big Problem at Martha Stewart Living

The company says it's focusing on buyers who are willing to 'wait and see.'
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Martha Stewart Living

(MSO)

isn't having much luck wooing back advertisers, and it doesn't expect that to change until its founder is let out of prison or something else causes the bad publicity to wane.

In the meantime, the company said, the magazine and merchandise house will do what it can to move its brand association away from Martha Stewart, who was sentenced to five months in prison for lying to federal prosecutors about a 2001 stock trade. The 63-year-old Stewart will be allowed up to 48 hours of work-related activity out of her estate in upstate New York, where she plans to serve the second half of her sentence, the company said Tuesday.

New York-based Martha Stewart Living earlier reported that it swung to a $19 million loss in the second quarter, reflecting across-the-board revenue declines and particular weakness in publishing. It also forecast losses in both the third and fourth quarters, as it tries to spend its way out of the hole created by Stewart's legal entanglements.

The shares were lately down 29 cents, or 2.5%, at $11.11.

The second-quarter loss equaled 39 cents a share, compared with earnings of $931,000, or 2 cents a share, last year. Revenue slid 33% from a year ago to $44 million, reflecting a 40% decline in publishing revenue to $23.7 million. Advertising pages in its flagship magazine decreased 53% in the quarter.

Two analysts surveyed by Thomson First Call were expecting a second-quarter loss of 33 cents a share on revenue of $45.8 million.

Television revenue fell by more than half to $3.1 million, due to lower licensing and advertising revenue from its syndicated TV program, Martha Stewart Living, whose distribution has been cut to 50% of U.S. households.

And merchandising sales dropped to $10.9 million from $11.8 million in the quarter, with same-store sales down 6.6%, hurt in part by

Kmart

(KMRT)

store closures in early 2003. The discount retailer sells a line of Martha Stewart Living home goods, of which Martha Stewart Living receives an annual royalty payment.

"Our second-quarter results, while reflecting losses due to the negative effects of Martha Stewart's personal legal situation primarily on the company's advertising performance, were nevertheless in line with our expectations and previous guidance," said Chief Executive Sharon L. Patrick in a statement. "Given the recent developments in Martha Stewart's legal situation, we are moving ahead with a substantial amount of the uncertainty behind us."

But the company said in a post-earnings conference call that it does not expect a quick rebound in advertising revenue. "We are focusing on our advertisers that are taking a 'wait and see' approach," said Patrick.

Among ways to de-emphasize its relationship with its founder, the company has a new logo for its flagship magazine, as well as an updated design. Both will appear beginning with its September issue, which will hit newsstands in August. And both will emphasize the word "living," although Stewart's name will still be on the cover, Patrick said.

For

Everyday Food

, the tag line "From the kitchens of Martha Stewart" will be eliminated from the cover and the magazine also has its own publisher, said Patrick.

Looking forward, Martha Stewart Living is forecasting a loss of 50 cents a share in the third quarter, wider than the 33-cent Thomson First Call mean. The company said its expected fourth-quarter loss would narrow sharply from the third "due to the significant amount of revenue to be recognized by our merchandising segment as a result of certain minimum royalty guarantees."

The company also said it would shut its direct catalog unit, called Living, by the end of 2004 and announced a deal in which its

Everyday Food

television show will run on

PBS

. In the latest quarter, net income from the company's direct catalog unit fell to $6.4 million from $7.8 million in the year earlier due in part to falling circulation. Martha Stewart Living said it will continue to operate the floral business of the catalog, marthasflowers, where it said sales have risen.

Severance and other charges related to closing the direct catalogue unit should not exceed $1 million, the company said.

The direct catalog unit will now focus on "how-to" content through the company's Web site and help drive subscription magazine orders. It will also explore licensing and other alternative distribution opportunities through the company's merchandising segment.

The new, half-hour

Everyday Food

show will feature an ensemble of cooks and will run nationwide beginning in January. The company hopes the show enhances interest in its

Everyday Food

magazine.

Meanwhile, the Martha Stewart Living television show is currently on hiatus, but past hour-long episodes are currently shown on the

Style

network. The

Style

network will show the program in daytime and primetime and also launch a "best of" series.

Due to the many changes in affect at the company, its total number of full-time employees has fallen to 474 at quarter end, down from 558 at the beginning of the year. The company expects to have 450 employees by year-end.