Updated from 11:15 a.m. EDT

Wall Street was pleased with third-quarter results from

Martha Stewart Living Omnimedia

(MSO)

before Friday's opening bell, but that was before the company unveiled the pork.

The stock opened Friday up 2% as investors cheered a narrower-than-expected loss from the company, but the optimism dissipated quickly as the company reduced its revenue guidance for 2007 due to the crisis in the U.S. housing market.

Furthermore, the company said its much-anticipated merchandising deal with

Costco

(COST) - Get Report

will amount to one product this holiday season -- a smoked ham.

"Many people consider ham the ultimate holiday entrée -- you know Martha's ham will be the ultimate of the ultimate," the company's CEO Susan Lyne said on a conference call with analysts. "In January we'll launch with soups."

MSLO shares recently were trading down 79 cents, or 6%, to $12.34 -- close to where the stock was at the beginning of 2004, when Stewart was facing allegations that she lied to federal regulators about her sale of

ImClone

(IMCL)

stock.

For the third quarter, the media and merchandising conglomerate reported a loss of $4.4 million, or 8 cents a share, for the quarter. That compares with a loss of $25.2 million, or 49 cents a share, in the same quarter last year. Revenue climbed 13% to $69.3 million.

Those results beat analysts' expectation for a loss of 13 cents a share and revenue of $68.5 million, and MSLO said it's on track to return to profitability and free cash flow in 2007.

But Howard Hochhauser, MSLO's chief financial officer, said on a conference call with analysts that the company now expects revenue of $330 million for 2007. Previously, the company had forecast revenue of $330 million to $340 million.

Hochhauser attributes the downward revision to the effects of trouble in the housing market on its merchandising deal with Los Angeles-based homebuilder

KB Home

(KBH) - Get Report

, along with a decline in TV ratings. Analysts had expected the KB Home deal to contribute roughly $3 million to $4 million to the company's annual revenue.

"Nobody knew exactly how deep this housing softness really would turn out to be," said Lyne on the conference call.

Merchandising is a touchy subject for MSLO, since the business has long been its chief source of operating income, thanks to a multiyear deal with

Sears Holdings'

(SHLD)

Kmart chain. Guaranteed royalty payments from that deal for MSLO's branded line of home-furnishings products are set to drop from $65 million to $20 million next year.

Those payments have increased steadily since 2001 to become the company's chief source of profitability, so that decline will leave a hole in the company's financials that will likely have to be filled with new merchandising deals.

New deals have been announced with the likes of

Macy's

(M) - Get Report

, Costco and

Lowe's

(LOW) - Get Report

, but investors have no idea how much revenue those agreements will produce.

The most promising new merchandising deal for the company is the one with Macy's, which launched about six weeks ago and contributed roughly three weeks' worth of revenue to third-quarter results.

The merchandising business posted $11 million in revenue for the quarter, up from $9 million last year, excluding a one-time gain. Most of that $2 million year-over-year increase probably came from Macy's -- an impressive performance for such a short time and a period long before the holiday selling season.

However, investors have little assurance that that level of momentum can continue for the duration, particularly since the retail sector is being increasingly squeezed by the downturn in the housing market.

"There's a lot of uncertainty in the overall retail market," said Lyne on the conference call. "We're doing what we anticipated

at Macy's at this point, but there's enough uncertainty about it that we are not going to give any numbers about it at this point."

Meanwhile, the company shifted the focus to its publishing business, which laid claim to the lion's share of its third-quarter income.

Publishing posted a 27% gain in revenue to $46.2 million. Operating income nearly tripled to $6.2 million from $2.2 million last year. Ad revenue was up 40%.

The company's Internet division logged a 18% increase in revenue for the quarter while its operating loss widened to $2.1 million from last year's loss of $800,000. Its bottom line performance reflected, in part, investments in Marthapedia, a Web project under development.

Its broadcasting unit posted a 13% decline in revenue to $8.8 million while its operating loss shrunk to $900,000 from last year's $1.8 million.

The company also hinted in a press release that it may take on more debt to repurchase its shares. It said it's "seeking to augment growth and stockholder returns with improved capital efficiency by putting our strong balance sheet to use."

Hochhauser said on the conference call that there are no plans for a stock buyback at this time, but it's something that's being considered.