How Tasty Is Martha's Ipo?

Turning plain circles of cork into beautiful beaded coasters, as Martha Stewart recently demonstrated on TV, is the last thing you'll ever catch me doing. I wouldn't know a glue gun from a Glock. But when I recently heard that Martha has begun crafting an initial public offering for sometime this fall, I had to wonder: Could this be a good thing?

Just one look at the securities filing for her company, Martha Stewart Living Omnimedia, makes quite an impression. Her two magazines reach nearly 10 million readers. Her Emmy-winning TV show can be seen six times weekly across the U.S. Her 27 books have sold more than 8.5 million copies, her radio show reaches 1.5 million listeners each weekday, and her column appears in 233 newspapers. Martha as an Internet play? Her Web site,, each month hosts 627,000 visitors.

Brilliantly, Martha has exploited her omnipresence by "omnimerchandising." That's Martha-speak for selling some 2,800 items, from towels and linens to house paint and $39 garden clogs, every which way--via her Martha by Mail catalog, the marthastore at her Web site, or through such big retailers as Kmart and Sears. Last year, her company took in total revenues of $180 million and posted operating income of more than $27 million. That was good enough for John Doerr, who is to venture capital what Martha is to hors d'oeuvres. With his partners at Silicon Valley's Kleiner Perkins Caufield & Byers, backers of such miracle stocks as, Doerr in July put $25 million into the company. He also joined the board, where he is set to guide Martha's budding E-commerce business.

Led by Morgan Stanley Dean Witter, the underwriters have yet to set a price or the number of shares to be sold. At whatever price, I have little doubt the stock will prove popular--at least at first. That is exactly why most investors need to take care with this deal: Any quick gains will go to the few investors lucky enough to get shares at the initial offering price--a prize reserved for brokerage firms' best customers. That's certainly not me, and it probably isn't you, either.

BLIP OR OMEN? A better bet may be simply to wait. Yes, you risk cursing your caution if the stock goes cyberspheric. But you'll have a few facts to comfort you: The company's financial statements show that its rapid growth is slowing (table). Revenue gains of 36% last year tailed off to 26% in this year's first quarter. Worse, operating income, which in 1998 surged 65%, grew less than 7%, as costs rose and margins narrowed. A blip? Martha Stewart declined to comment, but her company's securities filing notes: "We expect these expenses to continue to increase through the remainder of 1999." After the hype of the IPO wears off, these financial realities could bear down on the stock.

If you're still eager to grab shares in Martha, it's also worth recalling another once-coveted IPO, the June, 1997, deal that brought Polo Ralph Lauren public. There may, in fact, be no better analog for Martha than Ralph: By dint of their own style and smarts, each has created enduring and richly profitable brands. And since going public, Polo Ralph Lauren hasn't rested on its sterling money clip: It keeps investing, and profits keep growing. Yet the stock, first priced at $25, closed no higher than $32.38. It plunged last year to $16. Today, it bumps along around $20. In his IPO, it seems, Ralph got full price.

Would you expect Martha to do one whit worse? Me neither. So I'm zeroing in on how Doerr valued Martha's company. He wasn't around to comment, but in July, his firm's $25 million bought 5%, plus a warrant allowing it possibly to cash in on Martha's Internet operation. Doerr's deal indicates a value of about $650 million. Linda Killian, a manager of the IPO Plus Aftermarket Fund, thinks the offering will create a market value of at least $1 billion. Keep in the back of Your mind the gap between those two numbers if you find yourself wondering at what price Marthastock is a good thing.

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