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BusinessWeek: January 17, 2000 |
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Cover Story
Martha Inc. Inside the growing empire of America's lifestyle queen It's a fitting image. Anyone who spends more than a few minutes with America's most famous homemaker learns that she is one heck of a juggler. On a recent day, Stewart, 58, rose at her usual 5:30 a.m. to work out in Westport before zipping into Manhattan to prepare Greek food with a guest chef, meet with her magazine staff, share dessert with restaurateur Warner LeRoy for the TV show, make a cookie tree on Letterman, and attend a party for her publisher--before jumping in her chauffeur-driven Chevy Suburban for the 90-minute drive back to Connecticut. The dizzying routine seems to be working. Stewart's Web site racked up record Christmas sales, while her holiday TV special reached 7.8 million households. Recently, the former caterer pulled off her best party yet: a hot initial public offering on Oct. 19. Shares of Martha Stewart Living Omnimedia opened at $18 and quickly doubled, to about $36--as Stewart herself served brioches and freshly squeezed orange juice from a striped tent near the New York Stock Exchange. The stock price has since dropped to about $27, in part because of worries that the company relies too heavily on its driven founder. Even so, the offering made Stewart a billionaire on paper. BLUE LIGHTS. Not bad, considering that Stewart's empire is still in its infancy. The domestic queen gained control of her crown jewel, Martha Stewart Living magazine, only in 1997. That's when she bought it for an estimated $75 million from Time Warner Inc., which launched it in 1991. Since then, Stewart has served up impressive gains on her modest base. In 1998, the company made $24 million, on revenues of $180 million--a 71% jump over 1997 net income. Sales for 1999 should exceed $225 million, and analysts expect her to near the $400 million mark by 2003. Last year, Kmart Corp. sold more than $1 billion worth of Martha Stewart Everyday products. Kmart's new BlueLight.com e-commerce venture with Yahoo! Inc., in which Stewart's company has a minority stake, could make those numbers grow. But Stewart isn't ready to rest on her carefully cultivated laurels. The workaholic homemaker wants nothing less than to teach the masses how to create the good life, then sell them all the gear they'll need to do so. "Our market could be as big as everyone who has a house," Stewart asserts, knocking back a shot of vodka after taping a show at New York's Russian Tea Room. While she is famed for esoteric tips such as how to make tinsel teardrops, Stewart's biggest lesson may be in how to build a true multimedia empire. Walk into any color-coordinated corner of Martha Inc., and it's clear that Stewart has turned the traditional business model on its head. She has created a brand that's equally at home--and equally recognizable--in a multitude of forms, from books to bedsheets. None of her rivals, from entrepreneur B. Smith to Meredith Corp.'s Better Homes and Gardens, has been able to match her reach. So how has a woman who looks most at home wearing matching work gloves and galoshes pulled this off? For one thing, her view of her role is decidedly different from that of most media moguls. Stewart sees herself primarily as a purveyor of information rather than as a publisher or merchandiser. Her how-to advice, organized around a handful of core content areas, can show up as magazine articles, Web chat topics, or products on Kmart shelves--and preferably all three. Holding the enterprise together is a rising army of mini-Marthas, experts in their areas, who skate across different media and merchandising channels with the ease of their famous boss. But now, Stewart is facing her toughest challenge since building her business. She must ensure that Martha Stewart the brand can outlive Martha Stewart the person. For a woman who has spent her life pursuing both fame and perfection, stepping back won't be easy. Stories of her obsession with details abound. At CBS, set builders still recall her wrath when she discovered that they failed to follow her specifications for cabinet hardware in her TV kitchen. But with the roaring growth of recent years, Stewart can no longer oversee every detail herself. The problem goes beyond the usual management challenges of a maturing business. Stewart's smiling image dominates her TV show, magazine, and product packaging. If Martha Stewart Living is to outlast her, that has to change. While the company is now playing up other talent--and taking out massive insurance policies on its ubiquitous chief--Stewart remains the walking, talking personification of her brand. No wonder investors are worried about the fate of their stock if Stewart should, say, choke on a bad batch of buttercream. "That's a big risk," says Kevin R. Gruneich, an analyst at Bear Stearns & Co., who still likes the stock. Stewart herself is well aware of the problem and says the changes she's making will take her company to a new level. As she puts it: "We're just getting started." LOYAL FANS. But my, what a start. Not counting the weekly "askMartha" newspaper column, her media properties reach 88 million people a month. Thanks to good demographics and extraordinary fan loyalty, they also command premium ad rates, according to the Publishers Information Bureau. Books and magazines still bring home the bacon, generating 65% of the company's sales, while TV and radio account for 12%. But merchandising royalties have risen to 10% of revenue, up from almost nothing a few years ago. The three-year-old Martha Stewart Everyday line of bedding, bath, paint, and garden supplies is also exploding as new items are introduced. Then there are the other retail deals, the catalog business, and a new kitchen-and-tableware line. What really has investors salivating, though, is Stewart's fledgling Web business. Organized around the core content areas, the site, with more than 1 million registered users, offers traditional how-to advice, chat rooms, and related merchandise. Internet and direct sales accounted for roughly 13% of revenues in 1999. This year, online sales should surpass catalog sales. Still, the Net remains a money-loser because of heavy investment in staff and site development. Also, critics say it's thin on fresh content. But even detractors admit that MarthaStewart.com is a hit with advertisers and consumers. It's a recipe that appeals to fund manager Zack Shafran of Waddell & Reed Financial Inc. in Overland Park, Kan. He savors the "real dot.com flavor" of her business, although he won't say how much he owns. Stewart is also getting key support from Silicon Valley venture capitalists Kleiner, Perkins, Caufield & Byers, which invested $25 million and holds a 5% stake. Partner L. John Doerr, who sits on Stewart's board, argues that the Web will finally let "Martha create the perfect, personalized how-to experience in a direct way with her audience." Besides helping to lure fans to the Web, Doerr's company could be critical in finding West Coast talent--cyber-Stewarts who can translate her vision online. Even those who scoff at Stewart's perfect-housewife image admit that she's a stunningly savvy entrepreneur. Her company, which raised $149 million in its IPO, posted record sales of $49.8 million in the third quarter, although the investment in e-commerce shrank profits to $1.9 million, down from $4.7 million a year earlier. Stewart controls 60% of the shares and 96% of the votes. Company President Sharon Patrick owns 5%, and a further 12% is in the hands of hundreds of employees or "founders" who have worked for the company at least a year. Rewarding staff was, Stewart says, a primary motive in going public. Foremost among those founders is Patrick, who along with Stewart sets the strategy for the empire. The duo met while climbing Mt. Kilimanjaro in 1993 and quickly became inseparable, plotting Martha Inc. as they scaled the final peak. "I admired her ability to put everything down in a clear business plan," says Stewart. While Stewart may have seen a synergistic domestic-arts empire as her destiny from the start, outsiders credit Patrick with helping to package the vision for investors and execute it. "She complements Martha's strengths," says Don Logan, chairman and CEO of Time Warner's Time Inc., who dealt with Patrick in the protracted negotiations to sell Stewart majority ownership of her magazine. "What Sharon does is chase the details and do the deals." Not that she's a Martha clone. One merchandising executive calls her "a wild woman, this whirlwind who talks in sentence fragments and is hell-bent on getting product on the shelf." But Patrick, a former McKinsey & Co. consultant and Cablevision Systems Corp. executive, does share Stewart's vision for creating original, high-quality content that can cascade through various media, retail outlets, and cyberspace. They believe the result will be shared costs, cross-promotions, and ultimately higher revenues and earnings. "If you're committed to content instead of the vehicle, you can do so much more," says Patrick, excitedly flipping through charts from the company's recent pre-IPO road show. The trick is translating that rhetoric into an actual business. Each of the core content areas that make up the Martha Stewart brand is managed by its own team. Each leader must be equal parts writer, product designer, and--increasingly--TV personality. Margaret Roach, who joined as garden editor five years ago, points to a magazine article on Martha's rose garden. Roach used that as the basis for a TV segment, to help design garden tools for Kmart, and as how-to information on the Web. Like her boss, Roach thinks big, saying: "We want to change the way America gardens." "NOT ABOUT ATTITUDE." Team Stewart also relies on an army of marketers, designers, and other professionals who can carry their skills across the different media and merchandising outlets. "The culture is pervasive," says Lauren Rich Fine, a media analyst at Merrill Lynch & Co., who sees Stewart's depth of talent as a key to her long-term success. Indeed, staffers are inculcated with a sense of both the brand and the customer. Stephen Drucker, editor-in-chief of Martha Stewart Living magazine, visualizes the typical reader as a supremely confident 40-year-old woman with a part-time job, a nice house, and a family in the suburbs. "One of the things about Martha is self-reliance," says Drucker. He says that you'll never find articles in the magazine about getting a man, dieting, or fixing your hair. "[Martha Stewart] doesn't remind you that you're 10 pounds overweight." And like a starched schoolmarm, she has no time for urban sophistication or overly clever prose. "It's not about attitude," says Drucker. "It's about information." Stewart believes the real key to capitalizing on that content, though, is to own it. She realized from the start that Martha Stewart could live up to its Omnimedia potential only if it controlled every piece of information passing through its universe. She had long produced and owned rights to her TV show, broadcast specials, books, syndicated column, and radio spots, but Time Warner controlled the flagship Martha Stewart Living magazine. As a mere editor--albeit a highly paid one--she couldn't mine the magazine for content to repackage or leverage for cross-marketing deals. "They owned it, but they weren't interested in funding anything else," recalls Stewart, whose references to Time Warner seem tinged with "I told you so" bitterness. "Our whole business plan started with how to buy the magazine back." Time insiders say that forays into merchandising and other areas simply weren't part of their plan for Martha Stewart. Logan says that the split was amicable and that he had long suspected Stewart might one day want control. "When we were originally discussing the idea, we assumed that could be one of the outcomes," says Logan, noting that Time Inc. now has a 5% stake in Stewart's company. FLOOD OF MAGIC. What gave Stewart the capital to buy her independence was a new arrangement with Kmart, which guaranteed millions in royalties. She had joined the discounter in 1987 as a consultant, but the deal spawned only a few sheet patterns and intense frustration. "They were very Midwest," says Stewart, cringing at the memory. "This was Kmart. This was maroon and black and dark green. It was bad." In 1995, just as Stewart was broaching the idea of a buyback with Time Warner, the retailer brought in Floyd Hall as chairman and CEO. Hall met with Stewart days after coming on board to try to forge a new relationship. "The word for Martha is `coordinate,' and a lot of our shoppers are looking for assistance in that area," says Hall. Kmart wanted to flood key corners of its store with Martha Stewart magic, and it was willing to give her control over her product to do it. Instead of consulting on a few floral sheet patterns, Stewart's people could produce thousands of different products and get astounding play with Kmart shoppers. About 60% of the chain's bed and bath section, for example, is now devoted to the brand, with other parts of the store being converted as product comes out, according to Steve Ryman, vice-president for merchandise. He says Stewart's attention to details such as stitching and fabric weight have pushed up overall quality, but he notes that the chain still has final say over what hits its shelves. The store rejected sage green for the three-month-old Baby Baby line, preferring to stick with the standard pink, yellow, and blue. "The typical American doesn't go to Kmart to find avant-garde baby colors," says Ryman. Maybe not, but an awful lot of them go to find Martha Stewart-branded merchandise. On the strength of the Kmart deal, Stewart was able to buy control of her magazine--and to concentrate on expanding her empire's reach. To do so, she has had to give staff members, who number in excess of 400, more leeway to dream up and execute ideas on their own. After all, they quickly learn her color palette and style. The veterans know what Martha would say on most subjects, and how she would say it. Stewart splits her time between plotting strategy and keeping up her high-profile TV spots and guest appearances. She no longer reads every line of copy before it appears in the magazine, but she still keeps a close eye on her empire's operations through weekly staff meetings and doesn't hesitate to parachute in if necessary. "If there's something really bad, I'll step in to fix it," says Stewart. Recently, she nixed a "Peter Rabbit" cake that was set to appear in the magazine as "way too fancy" and asked staffers to come up with something simpler. Think picky rather than perfectionist. While Stewart may revel in her image as the ultimate homemaker, she doesn't always look like a finishing-school ideal. Standing on the set of The Early Show on CBS, she'll take a spoonful of pumpkin bread pudding, pour on some rum sauce, and pop it straight into her mouth. If her assistant drops a fork while serving up barbecued turkey, she'll hand a guest the serving utensil to use instead of demanding new cutlery. She worries about her waistline and frets to her mother about eating several pierogi one night after work. She doesn't even have a place to stay in Manhattan because daughter Alexis Stewart and son-in-law John Cuti have crashed at her one-bedroom Fifth Avenue apartment for the past year while they renovate their own place--although Stewart could certainly afford a hotel room. In many ways, the country-club image is undeserved. Stewart grew up one of six children in a Catholic family in New Jersey, modeling to pay her way through Barnard College before marrying, becoming a stockbroker at Monness, Williams & Sidel, and then a caterer. "What bothered Martha about the stock market was that there was an aspect she couldn't control, and that was stock prices," says former boss Andrew Monness. "She was a terrific businesswoman." But the business of being Martha really began when Alan Mirken, former president of Crown Publishing Group, was so impressed by one of Stewart's catered parties in 1979 that he persuaded her to let his company publish her landmark Entertaining book three years later. The elaborate guide to good hostessing has since sold more than 500,000 copies and is now in its 30th printing. After attending her parties, Mirken is not surprised. "She created the most amazing ambience and food I'd ever seen," he says. In 1989, he helped Stewart arrange a meeting with magazine titan S.I. Newhouse Jr., who helped her develop the prototype for an upscale how-to magazine but later abandoned the project because it didn't fit his group. Time Warner bought into the idea--but not without resistance. During one meeting, an executive leaned across the table to ask: "What if I find out on Page Six that you've run away with a rock star with a bone through his nose?" The curt response from Stewart, then fresh from a bitter divorce from book publisher Andy Stewart: "I don't have time for such silliness." FAMILY AFFAIR. She has rarely had time or interest in anything but the company, and indeed it's hard to tell where the person ends and the brand begins. She stages photo shoots at her homes and claims actually to cut trees, repair deer fencing, and do the other heavy chores listed in her monthly calendar. Her idea of relaxing is to come home and tackle a project like taking the Chippendale legs off an antique stool to make a new base for her 18th century Japanese lacquer trays. On vacation in Egypt, she took time out to visit factories that made fabric for her line. Her only child, Alexis, 34, who has started helping out informally on the product side of MarthaStewart.com, admits to having been "vaguely irritated" when her mother devoted a Martha Stewart Weddings magazine column to her 1997 nuptials. Having grown up steeped in silk flowers and three-tiered gateaux a l'orange, the younger Stewart kept the affair to a distinctly un-Martha-like five-person lunch. "I can't remember 10 seconds where Mom wasn't immersed in the business," says Alexis. Mom doesn't see the problem and has a look of wistful excitement when her daughter's name comes up. "I think she's getting warmer about coming to work with me full-time," says Stewart, who brushes off the notion that she's made any personal sacrifices for the sake of her business. Stewart has already brought in plenty of other family members. Her mother cooks for the show, nephew Christopher sings on holiday specials, and sister Laura writes radio scripts. But outsiders form the heart of her enterprise. She wooed Marc Morrone to be her expert on pet-keeping after seeing him work with animals on late-night cable TV. She worked long and hard to bring in the widely admired Helen Murphy, who had helped build the Polygram label and then take it public, as her new CFO. "I expected to walk in, roll up my sleeves, and dig for figures and facts," says Murphy. But, in true Martha Stewart style, even the balance sheet was crisp and clean. The next step is to give the company a life of its own. Stewart rarely appears on magazine covers anymore and is trying to groom some of her lieutenants as media personalities. She is even negotiating two TV shows this year that will not be hosted by her. But Stewart remains the lifeblood--the magic touch that forced Josefina Howard of New York's Rosa Mexicano restaurant to put marinated lamb shank in parchment paper on her menu because so many customers ordered it after seeing her prepare it on Stewart's show. Despite her close identity with the brand, Stewart argues that her business can live on without her. "I have imbued this company with a tremendous amount of my spirit and my artistic philosophy," she says. "So much that emerges here now is a combination of that and other people's creativity." Not everyone agrees. Clay S. Timon, chairman and CEO of brand consultancy Landor Associates, says that Martha Stewart Living has already become a truly mass-market brand. He describes it as "very middle-American, with a slight aspiration--not to reach Rodeo Drive, but to live life a little better." Can it survive without her? "Maybe," he says, "but not yet." In any case, Stewart certainly has the means to start living life a little better herself. She earned about $5 million in pay and bonuses from her company in 1998 and is guaranteed at least $1.2 million this year. With stock that's now worth almost $1 billion, she can also afford a place in Manhattan that's big enough to house her cherished cats and dogs--and even her daughter, if need be. She'll still have five other houses: two in Westport, two in East Hampton, N.Y., and her favorite retreat--in Seal Harbor, Me. With all this activity in the home office, though, the windswept icon of country chic is planning to move to New York City full-time. Despite her massive net worth and a booming business, she'll no doubt arrive with her garnishing kit and glue gun in tow. Return to top | |
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  Return to top  Return to top  Return to top TABLE Martha's World Martha's empire starts with its core subject areas... COOKING ENTERTAINING WEDDINGS CRAFTS GARDENING HOME HOLIDAYS BABY/CHILDREN KEEPING ...which develop content for different media... MAGAZINES: Martha Stewart... Living Weddings Entertaining Clotheskeeping BOOKS: Martha Stewart... Entertaining Cookbook Weddings Christmas NETWORK TV: Martha Stewart Living CABLE TV: From Martha's Kitchen MARTHA STEWART.COM: askMartha, chat groups, recipes, and other information NEWSPAPERS/RADIO: askMartha ...and merchandise for a variety of outlets KMART/ZELLERS: Martha Stewart Everyday (Includes sheets, towels, table linens, garden equipment, and baby bedding) CATALOG/ONLINE: Martha By Mail MarthasFlowers.com SEARS/CANADIAN TIRE: Paints SPECIALTY RETAILERS: Fine paints, fabrics, crafts Return to top TABLE Mini Marthas A handful of experts keeps the empire humming GAEL TOWEY, creative director, 47: This former publishing executive joined Stewart when the magazine was launched in 1990. She oversees creative content in all its forms. STEPHEN DRUCKER, editor-in-chief, 46: A veteran of Travel & Leisure and The New York Times, Drucker oversees editorial content and has edited Martha Stewart Living magazine since 1997. SUSAN SPUNGEN, food editor, 40: A former restaurant and food industry exec, this nine-year company veteran oversees all food and entertaining content. MARGARET ROACH, garden editor, 45: Roach has been writing books and articles about gardening since 1985 and has worked full-time with Stewart since 1995. HANNAH MILMAN, crafts and holidays editor, 40: Before joining Stewart in 1991, Milman did style and product design for clients such as Donna Karan and Calvin Klein. STEPHEN EARLE, style editor, 39: A former creative director at Polo Ralph Lauren, Earle oversees information on decorating and the care of everything from clothes to pets. DARCY MILLER, weddings editor, 31: From her start as a Martha Stewart editorial assistant in 1992, Miller helped develop a Web site and new products, and she edits a quarterly magazine. Return to top A Picture-Perfect Target Building an empire on gilded acorns and perfect pasta is bound to generate smirks. But few have smiled through as much sarcasm and sniping as Martha Stewart. She has been roasted as much as a field of free-range chickens. When not being skewered as a humorless, hard-driving tycoon, she's lampooned for her impossibly complex home crafts. Her penchant for perfectionism makes Stewart an irresistible target for parody. A boggling array of books, sketches, and products play off the uptight homemaker image. Nash Co. in St. Paul, Minn., for example, sells a line of aprons and other products that carry messages like "Martha Stewart doesn't knead my dough." The Net contains such catty gems as the holiday calendar that had her bear a son and lay him in a potpourri-scented manger. Even talk-show host and fan David Letterman has lists like "10 ways to tell if Martha Stewart is stalking your dog" (No. 1: The dog droppings in your backyard have been sculpted into swans). "SO SERIOUS." Many brands, of course, suffer backlashes, but most don't have as convenient a human target as Stewart. "She's so serious," says San Francisco branding consultant David Aaker, who thinks spoofs hurt the brand. Her name has become synonymous with a kind of unattainable--and slightly ridiculous--standard in the domestic arts, thanks to projects designed to take hours, if not days, to complete. Tyler Brule, founder of wallpaper, a London magazine, calls it "homemaker porn... projecting into a world you can't have." Stewart takes the joking in stride. "It probably just makes me more human," she says. Stewart has even been known to take part in parodies of herself, like an American Express Co. commercial a few years back in which she tiled a pool with old credit cards. But she insists that she's selling useful how-to information and not an escapist fantasy for harried housewives. Tom Connor, co-author of three parody books, including Is Martha Stuart Living?, says elevating mundane chores to high art is a joke in itself. "The first time I opened her magazine, I started laughing because it was so over-the-top," says Connor, who featured Stewart making condoms from fresh-killed sheep. Stewart's laughing, too: all the way to the bank. Return to top ONLINE ORIGINAL How Margaret Roach Makes Martha's Garden Grow The gardening guru is one of an army of experts expanding the Stewart universe The world of Martha Stewart is staffed with people like Margaret Roach. One minute, she's helping to shape pruning shears for Kmart. The next, she might be putting together a peonies package for the magazine or personally doling out mulching tips on TV. The veteran gardening editor describes herself as a focused self-starter with high standards and boundless passion for her subject. If Roach, 45, sounds a little too much like her boss, that's no mistake. Home is an antiques-stuffed cottage in the Bronx, infused with the colors of cranberry, khaki, and jade. And after a tough week of talking, dreaming, and doing gardening for various parts of the Martha Stewart empire, what does Roach go home to do? Garden. After all, Roach is less an editor than a resident expert charged with creating core content to be used across the company. Like many of her colleagues, she's also another face that's being put forward to balance the brand. "Margaret is just like me," says Stewart, who is trying to build an army of Mini-Me's who can sustain the growth of her company into a worldwide name. HER OWN TEAM. Roach is just one the whizzes Stewart is relying on. Marketers, designers, writers, and other professionals who can effortlessly apply their skills across the different media and merchandising outlets are crucial to the company's success. For example, Roach relies on partner Terry Sutton to turn her vision into actual products for retailers, online distribution, and the Martha By Mail catalog. Sutton will source material, work with manufacturers, and suggest what's hot in the world of retail. The eyes of Design Director Eric Pike could glide over everything from a seed book to the packaging of bulbs. The ad folks might sell space for the Web site or magazine. Then there's Roach's own team, which includes Stewart's head gardener and other experts. "We don't want anything to calcify into silos," Patrick explains. "Everything is organic." There's no danger of Roach calcifying. She has been stomping around flower patches for 25 years and maintains a separate garden in Upstate New York. After stints doing sports writing and covering fashion, she became a garden columnist for Newsday in the late 1980s. She began to contribute features to Martha Stewart Living magazine and joined the company full-time in 1995. During her interview with Stewart, they talked plants. "Martha and I could be on our last legs from a long day and, if you show us a new gardening catalog, we'll stay up an extra hour," she says. "We want to change the way that America gardens." SPOKESWOMAN. Big plans, but that's just the kind of talk you'd hear from Stewart herself. "The culture is pervasive," says Merrill Lynch media analyst Lauren Rich Fine, who sees Stewart's corps d'elite as a key to her long-term success. After all, says Chip Gibson, president and publisher of Crown Publishing Group, "there are only so many hands that Martha can sprout." And he knows the payoff better than most. In addition to publishing all of Stewart's titles, his imprint, Clarkson N. Potter Inc., recently published Roach's Way to Garden book as well. Meanwhile, Roach is busy cultivating her part of the fiefdom. There's a massive range of content to roll out at the Web site next year, as well as thousands of gardening products to hit store shelves, and a special show at New York's Botanical Garden. She would also like to write more -- not a tough task, perhaps, when one considers that she whipped off the text for Way to Garden in less than three weeks. Like her colleagues, she has taken to speaking before audiences, appearing on TV, hosting Web chats, and writing the greeting letter for her part of the site. "I'm encouraged to maximize my creativity, and I'm empowered by being paired up with people who are experts in their areas as well," she says. And where's Stewart? Never far away, but not always hovering, either. "She thought up the model," says Roach. "But we're encouraged to think big as well." The challenge may be less in growing the business than in sprinkling that Martha magic over the results. Return to top ONLINE ORIGINAL Investors Aren't So Sure about Stewart's Style Down from its hot IPO, the company hasn't really caught Wall Street's fancy yet As you'd expect from a company run by the queen of gracious living, Martha Stewart Living Omnimedia (MSO) made a stunning debut on the New York Stock Exchange on Oct. 19. The shares quickly soared to $50 from an initial public offering price of $18. But -- as hot IPOs and other debutantes often do -- it has since suffered a post-party letdown. Mostly trading in the mid-twenties for the past two months, the stock stumbled to a low of 20 1/16, on Dec. 29. MSO did get a lift the first week of the year when both Bear Stearns and Banc of America Securities raised their recommendation to a "buy." In a Jan. 5 report, Banc of America analyst Shelly J. Hale cited strong November Web traffic, a new partnership with Kmart's bluelight.com e-commerce venture, and recent stock-price weakness as reasons for the upgrade. The reports pushed the stock to the high-20s but didn't power huge gains, perhaps in part because both firms participated in the stock's underwriting and thus could be expected to come out with positive research. MSO shares closed Jan. 6 at 26 9/16. Part of the problem is that, as popular as Martha is with fans who are tuned into her style of decorating, cooking, and gardening, her company isn't really in sync with investors. At its core, MSO is in media and publishing rather than a fast-growth area like high-tech or the Internet. Clearly, the company has huge potential to bring Martha's brand to the Net -- and got a $25 million capital investment from Internet venture capital firm Kleiner, Perkins, Caufield & Byers in the third quarter of 1999 to help develop it. But the company's publishing, television, and merchandising generate the great bulk of revenues ($43 million out of a total $50 million in the last quarter). BAD TIMING. Investors recognize that MSO isn't an e-tailing pure-play, says Tom Taulli, senior analyst at Internet.com and author of Investing in IPOs. "It has a strong association with the brick-and-mortar world. That will keep a lid on a stock like this." Plus, the company was a little bit late to the Internet and is only beginning to build up a robust site now -- just when investors are far less enamored of e-commerce than they were a year ago. Amazon.com's Jan. 5 warning that even a 150% gain in fourth-quarter sales over the prior year won't bring it any closer to profitability doesn't spur enthusiasm for the Internet retailers. Martha Stewart Omnimedia is subject to the same negative financial dynamics. Although the company has been strongly profitable in the last three quarters, Hale expects it to only break even in the fourth quarter on $64 million in revenues, thanks to a $9 million operating loss in its Internet business. Hardly pounding the table on the stock, she set a 12-month price target of $32. Also holding back the stock: Investors are wary of the company's reliance on Martha Stewart herself. She could die, get caught in a scandal (which doesn't seem very likely), or her fans might simply get tired of her. "It's important to make Martha Stewart into a brand that has longevity," says Kevin R. Gruneich, an analyst at Bear Stearns & Co. Although Stewart is known to be an exacting manager, Gruneich is quick to point out that some of her top people have been with her for nearly 10 years. Depth of talent in the organization is key to her long-term success, notes Merrill Lynch analyst Lauren Rich Fine. "A REAL BUSINESS." While being so reliant on Stewart may add some risk to the stock, she is also the company's greatest asset. Ranked as one of the top 25 managers in American business in the Jan. 10 issue of Business Week, her vision for creating high-quality content, spreading it across different media, and ultimately to branded merchandise is driving the company's growth. "She knows how to run a business -- a real business," says Taulli. While it may not be an Internet play du jour, the stock may make sense for an investor who wants some exposure to dot.coms but doesn't want to risk getting caught in an Internet stock meltdown. "While I don't think we would see spectacular zoom on upside, there is a floor there too," points out Taulli. "As the market craters, you may not see the same kind of downside you might in other companies." Relative to other media names, Martha Stewart Living Omnimedia certainly has a lot of growth still ahead of it. Formed in 1997, it's still in an early stage of development. "What they've laid down in the last two years is phenomenal," says Gruneich. For investors who admire Stewart and her brand, picking up a few shares to hold long-term, might prove (to borrow her tag line), a very good thing. Return to top |
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