Martha Stewart Living Omnimedia's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Martha Stewart Living Omnimedia, Inc. (MSO)

Q2 2012 Earnings Call

July 30, 2012 8:30 am ET

Executives

Katherine Nash – Vice President - Communications and Investor Relations

Lisa Gersh – President and Chief Executive Officer

Kenneth L. West – Chief Financial Officer

Analysts

Michael Kupinski – Noble Financial Capital Markets

David Bank – RBC Capital Markets

Michael A. Kupinski – Noble Financial Capital Markets

Presentation

Operator

Good morning and welcome to the Martha Stewart Living Omnimedia Second Quarter 2012 Earnings Conference Call and webcast. Your host for today’s call are President and Chief Executive Officer, Lisa Gersh and Chief Financial Officer, Ken West.

All participants will be in a listen-only mode until the question-and-answer session of the call. At the request of Martha Stewart Living Omnimedia, this call is being recorded, anyone with objection should disconnect at this time.

At this time it is my pleasure to introduce, Katherine Nash, VP of Communications and Investor Relations of Martha Stewart Living Omnimedia. Katherine, you may begin when ready.

Katherine Nash

Thank you and good morning everyone. Welcome to Martha Stewart Living Omnimedia's second quarter 2012 earnings conference call.

Before we begin, let me remind you that discussions will contain forward-looking statements, which are made pursuant to the Private Securities Litigation Reform Act of 1995 as amended. These statements are not guarantees of future performance and involve certain risks and uncertainties which are difficult to predict. Actual future results and trends may differ materially from what is forecast in forward-looking statements, due to a variety of factors, many of which are described in our SEC filings. Also, non-GAAP numbers are reconciled to GAAP in an attachment to our press release, which appears on our website at marthastewart.com.

Thank you, and now I'll turn the call over to Lisa.

Lisa Gersh

Thank you Katherine and good morning everyone. Our second quarter results were pretty much in line with our expectations.

Highlights include strong margins in Merchandising, as well as continued solid revenue growth and a modest profit in Broadcasting. Our Publishing results were weaker as we communicated they would be. More important is how we see the second half of the year as we execute on all of our turnaround plans, and I'll update you on where we are across each of our businesses. After that, I'll turn the call over to Ken and then we’ll take your questions.

I’d like to start with Merchandising. We had a solid quarter overall with adjusted EBITDA margins about 70%. Leading contributors to revenue growth in the quarter included J.C. Penney, where we continue our early design work as we prepare for the launch of that partnership in the first quarter of 2013. The Martha Stewart Home Office line with Avery sold exclusively at Staples in the United States, and now, the UK and strong performance in our pet’s line at Petsmart. Overall, our growth was offset by softness of the Home Depot relative to our expectations primarily in the soft flooring category.

I’d like to focus for a moment on recent developments with respect to J.C. Penney. First, we announced the substantial expansion of the commercial partnership, including additional product categories and an increase in the minimum guarantee. We will now receive a minimum of about $288 million over the course of the 10 year agreement, an increase of $110 million from what was originally planned. The opportunity to amend this agreement has been in place since the beginning. The decision to act on it now is a reflection of the great opportunities we and J.C. Penney see as the relationship builds.

The second development stems in the litigation underway with Macy’s. As you know, on July 13, the court granted Macy’s request for preliminary injunction with respect to certain categories of products. I want to take the opportunity here to clarify a few facts about this ruling and how it relates to our business with both Macy’s and J.C. Penney.

First, MSLO will be launching our products both in-store and online with J.C. Penney in the first quarter of 2013 as planned. Nothing about this ruling changes that. This case is primarily a contract dispute over how certain products are branded and sold, not about the validity of the partnership with J.C. Penney.

Second, the minimum guarantee under the J.C. Penney commercial agreement including the increase we just announced is not directly affected by the ruling. We are planning to be in J.C. Penney stores with a wide array of products for consumers early next year. And we are in ongoing development of categories and products as we typically are with all of our partners.

Now, let’s turn to publishing, our performance was largely in line with what we anticipated. We’ve talked in recent calls about our aggressive strategy to improve publishing performance. It is our largest business by revenue and turning it around is key to restoring profitability at MSLO in the near-term. Over the first three months of the year, we completed a transformation of our ad sales team bringing in considerable talent and setting our course to sell our print and digital inventory in the right way to engage marketers.

We are also supporting this team with an editorial strategy designed to broaden the categories they can sell. With the full team now in place and engaging in the advertising community, we are now receiving feedback on our plans and what we can expect to accomplish. On a number of levels we feel good about the engagement the team has secured in the marketplace and the response marketers are having as we modify our print and digital offerings. But on the financial level the turnaround we are seeking will not unfold as quickly as we would like.

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