All Martha, All the Time

Expect to see Stewart's namesake outfit launching a slew of projects. But even though the stock has soared, analysts don't see a miracle cure for red ink

By Pallavi Gogoi

Anyone familiar with the saga of Martha Stewart knows that the balcony has always been filled with naysayers. And as the doyenne of gracious living prepares to shed her ankle bracelet on Aug. 31, ending her home confinement after being convicted in the ImClone Systems (IMCL ) stock-trading case, doubters abound once more.

One look at the recommendations from Wall Street analysts that track Martha Stewart Living Omnimedia (MSO) (MSO ) says it all -- they have either a "sell" or a "hold" recommendation on shares in the company Stewart founded as the crowning achievement of her celebrity.


  But as she often has done in the past, Stewart may well have the last laugh. In a sense, she already has. Shares of MSO more than tripled in value -- from a depressed $11 a share in July, 2004, right after her sentencing in the middle of that month, rising to $31 a share at the time of her release from a West Virginia prison on Mar. 4 of this year. Now shares are trading at around $26-$27 (closing at $26 on Aug. 8) -- but that's still more than double what it was same time last year.

Most analysts think MSO shares are still very overvalued. But consider this: Stewart has just had the longest break in a 30-year career she has ever had to think things through -- five months in prison and five months in home confinement. And next month, she returns with a vengeance, launching at least eight new projects through which she aims to make up for lost revenues of the past year. Her celebrity -- and popularity, some surveys show -- have never been higher. Plus, her company has a new executive lineup with recent successes under their belt.

Stewart steps back into the limelight as summer is coming to a close. Starting Sept. 12, a new nationally syndicated daytime show, Martha, will premier for NBC Universal. Stewart will interact with people live in front of a studio audience, where she will have famous friends chat, cook, and do crafts with her. This replaces Stewart's previous show that was canceled at the height of her legal troubles last year -- eliminating a key revenue-generating division of the company.


  On Sept, 21, The Apprentice: Martha Stewart -- a prime-time spin-off of Donald Trump's reality series being produced by Mark Burnett of The Apprentice fame -- goes to air with the first of 12 episodes. The winner will be hired to work for Martha Stewart Living Omnimedia.

Stewart will be paid $666,000 for the show. And it will feature a whole array of Martha Stewart products, which the company hopes will attract people to stores.

Next up, Martha Stewart Living radio, a 24/7 radio channel, goes live on the Sirius Satellite Radio (SIRI ), guaranteeing a payment of $7.5 million a year for four years, along with licensing fees to MSO. Then, the domestic diva's new book, Martha's Rules, which will dispense advice for entrepreneurs about building a business, is set for release in October of this year. It comes with an upfront advance of $2 million for the convicted felon, plus future royalties.


  She also has a new line of DVDs and a baking book that will hit stores in November. As if those ventuires weren't enough, Martha Stewart Living Omnimedia has also partnered with Discovery Communications to develop new lifestyle programming in 2006 and is working to create merchandizing deals a la Stewart's Kmart (SHLD ) agreement.

Already some of MSO's second-quarter earnings numbers, released last month, reflect a surge. While much of media languished, advertising pages in Martha Stewart Living increased 42% in the quarter ending June 30, with Everyday Food seeing a 65% increase. That helped the outfit report its first year-over-year increase in revenue since 2002, to $31.7 million, vs. $23.7 million in second-quarter 2004.

Growth could continue if the company can bundle up its advertising on different venues, MSO believes. "We are working on numerous multiplatform opportunities that allow us to offer a common brand with loyal audiences across print, broadcast, and Internet," says CEO Susan Lyne, in her latest conference call with analysts on July 27.


  The company still has been unable to post a profit. The net loss for the second quarter doubled from last year, to $33 million, as it paid out stock options to producer Mark Burnett for advising and producing her TV shows.

In a report that recommended a "strong sell," Standard & Poor's (MHP ) analyst Gary McDaniel says he expects costs to continue to exceed revenues in 2005. "We continue to think the shares are overvalued," he says in an Aug. 6 report. And Stewart's print competitors Real Simple and Oprah Winfrey's O magazine are always hovering to snatch away advertising. "There is no miracle cure to earnings here," says Morgan Stanley's (MWD ) Doug Arthur.

It's unclear how audiences will receive Stewart as the Boss of The Apprentice or in her new daytime-TV format. A lot depends on whether Stewart can rekindle her old magic or reinvent herself for a new fan base. "The real test for her business is if she can use the loyalty of her consumers to pull back corporate advertising into her show," says Peter Cohan, author and head of a management consultancy in Marlborough, Mass.


  But Stewart has plenty of experience among her new staff to assist in rejuvenating her business. CEO Lyne, who joined MSO last November, was formerly at ABC (DIS ), where she was credited with fostering the development of two of that network's key hits -- Desperate Housewives and Lost. Chairman Charles Koppelman, formerly CEO of EMI Record Group's North American division, was the brains behind Stewart's deal with Sirius Radio's (SIRI ) 24-hour channel featuring cooking, gardening, and entertainment programming for women. Robin Marino, a former executive for designer Kate Spade and recently named president of merchandising, is working out new deals.

Naturally, Stewart is determined to prove the naysayers wrong. Despite her legal woes, her merchandise remains a popular brand at Kmarts across the country. And on Wall Street, some investors are betting on her company coming back stronger than ever.

Most notable among them is Fidelity Investments, which purchased 1.6 million shares of the company stock in March, despite the stock price reaching a 52-week high of $37.45 in February. As goes Martha Stewart, so goes the company, it seems -- and right now, things are looking up.

Gogoi is a reporter for BusinessWeek Online in New York

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