More than 200 stocks hit new 52-week highs on the New York Stock
Exchange on Tuesday as the market powers ever higher. Toiling on
the sidelines of this surge is former highflyer
Martha Stewart Living Omnimedia (
, which has the dubious distinction of being one of just a handful
of names hitting 52-week lows these days.
The question for investors: is the Queen of domestic design
becoming irrelevant, or simply the victim of bad-timing?
To be sure, it's no fun being a magazine publisher these days.
High-profile titles such as
are seemingly near death, while other esteemed titles such as
are forced to cut the number of issues they publish each year. Yet
Martha Stewart Living's publishing business looks quite healthy --
at least in terms of circulation. The company's flagship
Martha Stewart Living
actually recently increased the amount of circulating copies its
guarantees to advertisers to 2.025 million, while lesser titles
(1 million) and
(650,000) are also posting rate base increases.
Trouble is, the weak
has been pressuring ad rates. So these titles are doing just fine
in terms of consumer popularity, but are generating steadily lower
ad revenue. That should change when the economy finally starts to
turn and ad budgets expand again. To be sure, we live in a digital
world, and Martha Stewart Living's nascent digital publishing
initiatives, which are growing impressively, will never supplant
the revenue that print advertising can garner. But as the number of
magazine titles keeps shrinking, Martha Stewart's titles should
eventually stand out even more clearly to advertisers as platforms
with a compelling reach.
Yet shares have already been reflecting this weak publishing
environment for quite some time. Instead, they are slumping
recently as the company switches horses mid-stream in terms of both
merchandising and broadcasting partners. Those moves are hurting
results now, but should pay off later.
On the merchandising front, Martha Stewart Living is no longer
deriving any revenue from the longstanding relationship with the
Kmart division of
Sears Holding (Nasdaq: SHLD)
. That was always a contentious
, with Martha Stewart accusing Kmart of operating shabby stores and
poorly promoting her eponymously-branded merchandise.
The company has subsequently inked deals with
Home Depot (
PetSmart (Nasdaq: PETM)
, but those retailers have been slow to make up for the lost
revenue associated with the Kmart divorce. However, those retailers
are still in the process of expanding the number of Martha-branded
items in their stores, and by the middle of next year, quarterly
merchandise revenue (which carries very high margins) should start
to look more impressive. An upturn in the economy would surely
Just to keep it interesting, Martha Stewart Living threw another
wrench into the mix. Tiring of erratic broadcast times (sometimes
at 2AM) through its TV syndication deal, the company took all of
its content to the Hallmark Channel in September. Early results
were not promising, as viewers seemed to fail to follow Martha from
over-the-air broadcasts to basic cable. Ratings were initially
quite low in September, but started to rebound in October. Hallmark
and Martha Stewart Living intend to heavily promote the broadcasts
into the holiday season, which is often a time of peak viewership.
With the holiday viewing base intact, the company hopes that 2011
broadcast revenue will be back at previous levels -- if not higher
-- than in 2010.
The broader view is to have those magazine titles promoting both
the TV programs and the retail partners, and to have the TV
programs promoting the magazines and the retail merchandise. Right
now, that whole effort is stumbling like a colicky horse. And
shares move ever lower.
Action to Take -->
What was a $20 stock in 2006 now trades for less than $5. Pretty
much anything that could go wrong has gone wrong. Martha Stewart
Living's strategies are logical, yet the company's execution on
those strategies has not been impressive. But this is still a
franchise that has deep resonance with female consumers. Those
consumers are cash-strapped right now, and the advertisers that
want to reach them are hesitant to spend. But it still looks as if
time will heal these wounds, and shares will rebound as the
magazine/retail/broadcasting kinks get worked out.
Shares may not see $20 again anytime soon, but a double from
current levels in 2011 is certainly feasible if these synergies
start tobear fruit.
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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