Martha Stewart Loss Widens as Publishing Revenue Slides

The company plans to tone down some links with its convicted founder.
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Updated from 8:19 a.m. EDT

Martha Stewart Living Omnimedia

(MSO)

is clearly reeling from the legal woes of its namesake founder, but the company has a strategy to slowly get advertisers to return: toning down its link with the convicted domestic diva.

On a conference call highlighting its disappointing first-quarter results Friday, the company updated analysts on its approach to woo back advertisers, which includes brand-building with one of its newest magazines,

Everyday Food

.

"

Everyday Food

provides a beacon for where we're going and what we're thinking about," said CEO Sharon Patrick.

Earlier Friday, the company announced a first-quarter loss that was twice as wide as analysts were predicting, as it recorded a big reserve against its balance-sheet tax credits. The company also forecast a second-quarter loss significantly wider than current estimates.

The home-advice company, which was rocked six months ago when Stewart was convicted of securities fraud, said its first-quarter loss widened to $20.3 million, or 41 cents a share, from $4.5 million, or 9 cents a share, a year ago. Revenue slumped 30% to $23.9 million.

The latest quarter included a $9.3 million reserve against a deferred tax asset, taken "since the amount and extent of the company's future earnings are not determinable with a sufficient degree of probability," the company said.

The few analysts who continue to try forecasting the company's results were predicting, on average, a loss of 20 cents a share on revenue of $45.2 million for the quarter, according to Thomson First Call. The company also forecast a loss of 35 cents to 40 cents a share for the second quarter, far wider than the 12-cent First Call loss estimate.

The stock was recently down 47 cents, or 4.9%, to $9.23.

Among segments, first-quarter revenue in the firm's publishing unit slid 29.8% from a year ago to $23.9 million in the latest quarter, while revenue in television fell 36.9% to $4.1 million and revenue from Internet and direct commerce fell 20% to $5.6 million. Revenue from merchandising, however, rose 4.5% to $10.8 million.

Net revenue per page in its publishing business declined 21% in the first quarter, the company said. It said it sees total advertising pages down 50% in its 'Martha Stewart Living' magazine through the second quarter and "pressure" at its 'Martha Stewart Weddings' magazine.

Total pages at its 'Martha Stewart Living' magazine declined by 35% to 211 in the first quarter. The company said it did not publish its 'Martha Stewart Weddings' magazine in the quarter, though the magazine will have two issues in the second quarter. The company is also planning on three issues of 'Living,' one issue of 'Martha Stewart Kids,' and one special interest magazine.

The company's main television show, 'Martha Stewart Living' has gone from being in 90% of markets to 52%, predominantly due to the cancellation of CBS-owned and operated distribution, the company said. The 12th season of the show is still slated to begin in September. It is shown on cable's Food Network as 'From Martha's Kitchen.'

Regarding its drop-off in advertising rates, the company thinks it will be a while before advertisers return to the print publications. Advertisers "are still skittish surrounding the events and cloud of uncertainty hanging over Martha Stewart Living. For many advertisers, no matter how attractive the Martha Stewart Living audience is, it ain't over 'til it's over," Patrick said on the call.

"Our research shows that magazine subscribers, in particular, were unfazed by the verdict immediately afterward and remain so roughly six weeks later," the company added. Martha Stewart Living said its research shows that just 9% of subscribers buy its publications because of the Martha Stewart relationship. The company said it has 1.8 million total readers.

In addition, the home-decor company noted surprising loyalty among its magazine readership and said sales from its

Kmart

(KMRT)

partnership have actually risen 6.5% in the wake of Martha Stewart's legal fiasco.

Despite that, the company will redesign its flagship Martha Stewart Living magazine beginning in September, retaining the name but placing "greater emphasis on the name 'Living' as the brand label." It will also remove the tagline from its

Everyday Food

magazine that says: "From the kitchens of Martha Stewart Living."

In the first quarter,

Everyday Food

had total revenue of $4.3 million with an EBITDA loss of $1.5 million.

The company implied that once Stewart is sentenced on June 17 and media attention toward the company calms down, it should start to see a slow rebound in advertising. The media attention "is hard for advertisers that wish that aspect would reduce before getting back involved with the magazine," Patrick said.

Looking forward, the company said: "We are conducting a comprehensive review of all our operating assets. As part of this process, we will evaluate the best options to reduce losses and optimize our cost structure, where doing so will not harm the long-term prospects of the business. Our financial resources remain significant with cash and short-term securities of $170 million."

The company is down to 545 full-time employees, from 575 a year ago.