A Flop For Martha's Investors

It's tempting still to treat Martha Stewart as a joke. Indeed, the gags keep coming: Martha's next book? Doyenne on Ice. Or, did you hear about the New Orleans Kmarts (SHLD )? Looters took everything except the Martha Stewart stuff. Yet as the omnimediatrix returns to the airwaves, for some people it's no laughing matter.

I say that on behalf of recent buyers of shares in the public company Stewart controls, Martha Stewart Living Omnimedia (MSO ). From under $20 in May, MSO now is above $33. The latest propellant? Anticipation of Stewart's Sept. 21 prime-time debut in NBC's (GE ) The Apprentice: Martha Stewart. It's sure to offer some laughs, as Stewart does her take on Donald Trumpian reality TV, sorting among 16 contestants who want to work for her. In a promotional video, Stewart promises: "Money can't buy what you're going to learn here." Maybe. But as usual, I'm focusing instead on the fine print.

MSO, WHICH STEWART directs via 91% of the voting shares, last year lost nearly $60 million on $187 million in revenue. Since March, however, when Stewart exited a federal penitentiary after serving five months for conspiracy, obstruction, and lying to investigators, the company has advanced on several fronts. Its flagship magazine, Martha Stewart Living, is enjoying nice gains in ad sales. MSO also is hopeful about a line of "how-to" DVDs, a satellite radio channel, plus a syndicated TV show starring Stewart that began Sept. 12.

Most of all, there's Martha's turn in prime time with The Apprentice. For investors, unfortunately, it comes with a catch. Even if the show is a smash, MSO stands to gain only indirectly. As its filings put it, "While MSO will not have a direct financial ownership interest in the prime-time program, MSO expects to benefit from promotion of the Company's brands, products and its businesses. We expect that this program will expose the brand to a wider audience of viewers, consumers and business partners." Yet I wonder: How many will see Martha Stewart as a fresh face? The company told me that it's pleased with the cross-promotional revenues The Apprentice is generating for MSO's own print, syndicated-TV, and online ventures. Are those revenues big enough to prove financially meaningful? MSO declined to say.

If the extent of those benefits is unknown, the costs are not. In 2004, MSO signed a broad consulting deal with Apprentice producer Mark Burnett. His end included helping MSO create its new syndicated TV show plus a prime-time program. In return, MSO gave Burnett a warrant to buy 2.5 million shares of stock, which vest in three parts. In the second quarter, as plans for MSO's daily show jelled, Burnett's first slice vested. Cost to MSO: $16.8 million. Now, with The Apprentice, the second part is vesting. And as MSO's stock rises, so does the cost of Burnett's shares, since it's reckoned on the vesting dates. The final tab of his Apprentice-linked shares is a moving target, but recent stock prices indicate $20 million to $22 million.

This is a noncash expense, yet for a company that netted a first-half loss of nearly $53 million on $85 million in sales, it's out of whack. Meredith (MDP ), publisher of such rival magazines as Better Homes & Gardens, has six times MSO's revenues. It spent an annual average of $11 million over the past three years on all of its stock-based pay. Nor does the cost of The Apprentice to MSO end with Burnett. Stewart gets her own cut -- in cash. For each Apprentice edition she winds up on, MSO will pay her at least $500,000. This is atop her annual $900,000 salary as MSO's founder, annual bonus of $495,000 to $1.35 million, and a $200,000 signing bonus for agreeing to go on the air. Beyond usual reimbursement of business expenses, MSO is giving her $100,000 a year as a "non-accountable expense allowance." Add it all up. The only laugh you'll hear is Martha's.

By Robert Barker

    Before it's here, it's on the Bloomberg Terminal.