Martha's Company Could Dodge Her Woes

Even if the CEO is indicted, Martha Stewart Omnimedia has a stable of solid products that consumers will likely keep flocking to

By Jane Black

Martha Stewart was all smiles when she arrived at the Waldorf Astoria for the Magazine Publishers of America's Hall of Fame awards on Jan. 29. Swathed in an oversize fur coat, the 61-year-old domestic diva looked fabulous. Perhaps it was an attempt to end a run of unflattering photos of her. That, according to a Feb. 3 profile in New Yorker magazine, is one of her beefs about media coverage of her legal problems. Feds are probing into whether she obstructed justice or violated insider trading laws surrounding her sale of nearly 4,000 shares of ImClone, a biotech startup, in December, 2001. Or maybe she wanted to show the assembled power elite that her troubles are behind her -- despite recent published reports that the Justice Dept. is turning up the heat.

The crowd did notice the spring in Martha's step, say people present at the event. But equally obvious was how exhausted Sharon Patrick looked. As president and COO of Martha Stewart Omnimedia (MSO ), Patrick oversees day-to-day operations of Stewart's media empire, and things have been tough.

Ad pages for the flagship magazine Martha Stewart Living are down 19.9% year-to-date. Its major retail partner, Kmart, is trying to claw its way out of Chapter 11. And ratings for her syndicated TV show are flat. Luring advertisers in a sluggish economy is hard enough without the overhanging threat of a criminal indictment of the CEO.

"FOLLOW THE CUSTOMER."

  Yet the outlook for Martha Stewart Omnimedia isn't as bleak as it might appear, experts say. Even if Stewart is indicted, MSO likely can bounce back. "Consumers learned a long time ago to separate their feelings about Martha Stewart the person and Martha Stewart's products," says Porter Bibb, former publisher of Rolling Stone magazine and founder of Technology Partners Holdings, a private technology-investment firm in New York. "Corporate advertisers and retail partners always follow the customer."

Some analysts believe the worst may be over for MSO (presuming a war with Iraq is short and victorious). Its profitability took a beating last year. For 2002, the consensus estimate is that it'll likely end up posting 33 cents a share profits on revenues of $330 million, compared to 45 cents a share on revenues of $295 million a year earlier. The stock likely won't soar from here, but it's certainly a lot cheaper than it was just a year ago. Now trading at just under $8 a share, that's well below the high of around $20 reached before the Imclone scandal hit in October and dragged to stock to just under $6.

On first glance, the latest advertising figures look bleak. MSO derives 63% of its revenues and 62% of its profits from publishing. So it was pretty bad news when year-over-year ad pages for Martha Stewart Living were down 30.5% in January and 15% in February. Compare that to peer title Better Homes & Gardens, which saw ad pages rise 25.1% in January and 27.4% in February. Ladies Home Journal's ad pages soared 34.1% and 45% it those two months, respectively.

ACCURATE PULSE.

  However, the numbers for MSL seem dreary only until you examine magazine advertising cycles. As a rule, monthlies stop selling ads anywhere from 8 to 10 weeks before the magazine hits the newsstands. That means the January, 2003, issue would have closed in mid to late October -- at the height of outrage over Stewart's alleged misdeeds. By the time the February issue closed in mid to late November, news of l'affaire Martha was off the front page. The result: Living's ad execs cut declines in half.

One New York ad agency's January focus groups revealed Stewart's personal troubles are having no impact on consumers' decision to purchase her products. MSO's new magazine, Everyday Food, a TV Guide-size magazine filled with easy recipes, has attracted such top advertisers as General Motors, Campbell Soup, and Kraft Foods. It's also winning rave reviews from media watchers, who applaud the company for keeping its finger on the consumer pulse.

"The beauty of Everyday Food is that it has the upscale look mixed with the budget feel -- a definite trend...where you live rich and spend smart," says Samir Husni, also known as "Mr. Magazine" and a professor of journalism at the University of Mississippi in Oxford.

PLUMP MARGINS.

  Questions still linger about whether Patrick can continue to deliver growth in MSO's profitable merchandise division, which hawks everything from sheets and towels to garden hoses and outdoor furniture. In the first nine months of 2002, merchandise sales rose 32%, to $37.1 million from $27.9 million in the same period of 2001. The importance of the task can't be overstated: In 2002's first three quarters, merchandise sales made up 17% of revenues but contributed 34% of profits. Do the math, and you realize that margins on Martha merchandise are around 70% -- not bad for retail. MSO declined comment for this story.

Kmart's bankruptcy, however, has cast a pall over the division's prospects. On Jan. 14, Kmart announced it would shut 326 stores, bringing closures to more than 600 since it filed for bankruptcy 13 months ago. But MSO's contract with Kmart guarantees it a minimum royalty until 2008 in exchange for the exclusive right to sell Martha Stewart's Everyday products. Even if Kmart fails to emerge from Chapter 11, other retailers such as Target (TGT ) or Sears (S ) likely would be happy to sign up to sell Stewart's products, which continue to fly off the shelves.

What about Stewart's personal fate? "It has never really been about Martha." says Laura Richardson, vice-president for equity research at Boston-based investment firm Adams, Harkness & Hill. "She doesn't come up with all the new recipes and decorating ideas." After all, that's what keeps the fans coming back.

WRIST SLAP?

  More important, no one has said Stewart did anything untoward in dealings with her company -- in contrast to some of the other recent high-profile CEO scandals. At worst, she would probably find herself in a minimum-security prison. More likely, if she were indicted and convicted, as a first-time offender she would get a wrist slap, legal experts say. While speculation that she would be arrested has picked up in recent days, so far she hasn't been charged with a crime.

If customers like the product, they can be quite forgiving of the CEO's peccadillos. Witness the revival of shoe retailer Steve Madden (SHOO ). In September, its former chief executive and namesake began a 41-month jail term for securities fraud and money laundering. A month later, the company announced record revenues of $247 million and profits of $15.6 million, a jump of 16.2%. Even better, the stock has rebounded to prescandal levels. And as Stewart would say, that's a good thing.

Black is a writer for BusinessWeek Online in New York

Edited by Beth Belton

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