With Martha Stewart reporting back to work Monday for an emotional reconnection with her namesake company, her stock appears to be losing some luster.
Martha Stewart Living
were recently down $2.56, or 8.3%, to $28.19. They have lost more than a quarter of their value since topping out in late February, after rampant anticipation about her comeback, plus a short squeeze, drove the stock to heights that Wall Street analysts
deemed irrationally exuberant.
Volatility has become the norm for shares, so big, day-to-day swings in the stock are not unusual. But the last two weeks of selling marks the biggest sustained decline in the stock since the domestic diva was convicted for lying to federal regulators one year ago. Dennis McAlpine, managing director with McAlpine Associates LLC, said this could be the beginning of a correction that he thinks should knock the stock back down to about $10.
"This stock ran away on anticipation that something spectacular was going to happen after she was released from prison," McAlpine said. "Now she's gotten out, and nothing has happened, so why should it stay up there? It doesn't have the earnings to support a $30 stock price, and her release does nothing to clean up all the problems that exist."
The shares perked up slightly in the afternoon after Stewart offered a tearful greeting to a crowd of cheering employees at Martha Stewart Living in a nationally televised company meeting.
"It's really wonderful to be back. I've missed you, as you can imagine. I've thought about you every single day," Stewart said to employees after they gave her a standing ovation.
Stewart came to work as part of a 72-hour period that she was granted, following her release from prison last Friday, to set up a meeting with a probation officer and start her five-month period of home confinement. She will soon be fitted with an electronic anklet that will allow authorities to monitor her location.
During the confinement, Stewart will be allowed to spend 48 hours a week at work. The rest of her time will be spent restricted to her palatial home in Bedford, N.Y.
Despite all her optimism, McAlpine is skeptical that Stewart's company can manage a turnaround that will match the expectations that were priced into the stock during her stay in prison. He points to the company's ad sales, which have plunged around 70% since its founder's legal troubles began, as the biggest hurdle facing the company.
In the fourth quarter of 2004, revenue at the publishing unit, the company's largest in terms of sales, fell 21% from the year before to $26.1 million as advertisers continued to shun
Martha Stewart Living
, the magazine. It had to cut ad rates as circulation fell to 1.89 million at the end of December, 20% lower than a year earlier. Ad sales at the magazine fell 56% to $71.7 million in 2004, according to the Publishers' Information Bureau, which tracks advertising for the Magazine Publishers of America.
Meanwhile, revenue at the television division, the company's smallest by sales, plunged 82% to $1.07 million after Martha Stewart Living stopped producing its daily show. Sales at the catalog and online division were little changed at $9.33 million.
The only bright spot was a slight uptick in the merchandising unit, which licenses the Martha Stewart brand to
and other retailers. The division boosted sales 6% to $23.7 million, partly due to guaranteed payments from Kmart, the company said.
The company is not expected to post a profit until at least the fourth quarter of this year. McAlpine said the only way he could foresee any upside to his $10 estimate for the stock is if the company managed to bring ad sales back to around 15% of what they used to be. That's a tall order considering the sizeable drop-off that continues to widen now and the increased competition from new magazines like
Bulls point to the mass publicity and brand recognition that Stewart is expected to enjoy, culminating in her own version of "The Apprentice," a smash hit prime-time show on NBC that was pioneered by Donald Trump. Couple that with a syndicated, daily talk show starring Stewart in her old role as an instructor for homemakers, and optimists say advertisers could be lured into a mass exodus back to her brand that could eventually make the company even more profitable than its heyday in 1999.
Still, the lion's share of the NBC show's proceeds will go to
NBC unit, the show's producers and Stewart herself. The major benefit to Stewart's company will be brand exposure, but the degree to which that will translate into profits and eventually benefit shareholders is difficult to quantify.
"Anything is possible, but I don't think there's much that's going to happen to make that work," McAlpine said. (He does not own a position in shares of Martha Stewart Living, and his firm does no investment banking with the company.)