Can Martha Tidy Up This Mess?


By Pallavi Gogoi As fast as you can whip an egg, Martha Stewart's homemaking empire has cracked into what looks like a complete mess. Her two new TV shows -- the much-anticipated daytime syndicated show Martha and her own version of The Apprentice -- have underwhelmed audiences, posting dismal viewer ratings. The upfront $22 million payment to Mark Burnett, creator of the two shows, is looking more and more like a bad bet.

The latest bad news arrived on Oct. 27, when Martha Stewart Living Omnimedia (MSO) reported a net loss of $26 million in its latest quarter, ended Sept. 30. That's almost twice as much as the loss of $15 million MSO posted in the same quarter a year ago -- way back in the darkest days of her brush with the law. Convicted on conspiracy and obstruction of justice charges in March, 2004, she began her term at Alderson prison on Oct. 8, 2004.

As her release approached on Aug. 31, MSO stock soared to almost $35 a share -- close to its 52-week high of $37.45, set in February. But since then, it's been all downhill. And with the Oct. 27 results, investors really voted with their feet, driving MSO stock down 15% to close at $18.02, near a 52-week low of $16.82.

CROWDED MAGAZINE RACK. Was all that getting-out-of-jail euphoria nothing but hype? Is Martha a relic of a bygone era? It's too soon to say with much certainty. The truth is, there are some promising numbers buried in the latest earnings report. Advertising pages in Martha Stewart Living soared 48% in the quarter, ahead of a previous guidance of 35%. Everyday Food, the other magazine in its portfolio, also saw ad pages grow 21% (see BW Online, 8/31/05, "Martha Bets the Farm on...Martha").

What's more, both titles produced higher revenue per page. In a conference call, MSO CEO Susan Lyne said subscriber response rates were at record highs. "We're increasing the rate base of Martha Stewart Living effective the January, 2006, issue," Lyne declared, which should further increase revenue per page going forward. The icing on the cake: Fourth-quarter ad pages are expected to double, and ad commitments for 2006 look strong, Lyne assured investors.

Still, raising the rate base might prove risky. The women's magazine space is getting crowded fast, as Martha wannabes try to share the spotlight. "Even Rachel Ray is planning to come out with her own magazine," noted Dennis McAlpine, managing director of research firm McAlpine & Associates, of the latest TV culinary sensation. And Martha still has to compete with Oprah, who just came out in October with another offshoot of her O magazine: O at Home.

TOO BUSY? Even one of Martha Stewart's biggest boosters, Donald Trump, is panning her -- and that's not a good thing. In a recent radio interview, Trump blamed Stewart for a 40% slide in viewership for his own Apprentice show. "I think there was confusion between Martha's Apprentice and mine," he said. To investors' relief, it now looks like The Apprentice: Martha Stewart will be on air for only a few more weeks (see BW Online, 9/22/05, "Martha's Apprentice Needs an Edge").

There's also concern about the daytime Martha show, which continues to appear daily on NBC affiliates. The show is averaging about 2 million overall viewers, with a 1.7 rating for all households. That's not much compared to Oprah's 7.6 rating and 9.7 million viewers (see BW Online, 9/12/05, "Martha Gets Her Act Together").

In focus groups, viewers have told show researches that there are too many things going on during the broadcast and that Martha appears too busy. In response, the show has streamlined its format -- and so far the results have been positive. "The past two weeks saw increases in both households and demo ratings," Lyne said.

RADIO MARTHA. Web traffic to the Martha Stewart Web site increased 50% over the same period a year ago, MSO said. But that jump didn't translate to sales: Internet revenues in the third quarter were a mere $1.6 million, compared to $6.2 million the same period a year ago. One more positive note: Sales of products from her Everyday line at K-Mart improved after the Martha show started to air.

The Martha saga still has plenty left to play out for investors. After all, the domestic doyenne has only been back on TV for a month, and ad sales for her magazine are dramatically higher. More good news could be in the offing. Stewart's 24-hour satellite radio channel is coming in December. Sirius has promised to pay MSO $7.5 million per year for the next four years, while sharing ad revenue from the channel with the company.

And none of this counts the MSO team-up with KB Homes to offer designer homes, the plans to develop a new home-improvement reality TV show, and the launch of books and how-to DVDs before the end of this year. All could boost revenues going into 2006 (see BW Online, 8/9/05, "All Martha, All the Time").

It's not like Martha isn't trying. Investors may just need to show a little patience for results -- the kind that Martha demonstrates when she bakes that perfect soufflé. Savvy market players may want to keep an eye on revenues. If they start to rise, profits may not be far behind.

Gogoi is a reporter for BusinessWeek Online


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