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October 10, 2007

Has the public soured on Martha Stewart?

Shares of her company's stock have dropped 40% since last December, while her TV ratings have plummeted and merchandise sales have faltered. But some say Stewart is going to come back.

By Michael Brush

Is Martha Stewart washed up? Wall Street says yes.

Investors have pummeled the shares of Martha Stewart Living Omnimedia (MSO, news, msgs), which are down 40% since the middle of last December, while the broader stock market, as measured by the S&P 500 Index ($INX), has gained 8%.

It's not just a question of shareholders being tired of stars-and-stripes cupcakes and perfectly coordinated window dressings. As they tend to, investors are merely reacting to bad numbers.

* Viewers are tuning out her TV show, "Martha," in a big way. By the end of the last television season in April and May, viewership had fallen 30% since the show relaunched in September 2005 after Martha's release from prison, according to Nielsen Media Research. This contributed to an 11% decline in broadcasting revenue in the second quarter.

* Sales of merchandise are weak. Martha Stewart Everyday product sales at Kmart were down 22% in the second quarter, contributing to a 5% decline in overall merchandising revenue. In the year before that, Kmart merchandise sales slipped 9% to 16% each quarter.

A recent survey showed that consumer awareness of the Martha brand has fallen significantly over the past two years. She ranks well below daytime talk show hosts Rachael Ray and Oprah Winfrey for qualities like appeal, influence, awareness and trust, says Chris Anderson of The Marketing Arm, a division of Omnicom (OMC, news, msgs).

In terms of "appeal," she ranks near the bottom of 1,000 rated celebrities, along with Donald Trump and bad-boy rocker Tommy Lee. Stewart gets ratings for "trust" similar to those scored by actress Lindsay Lohan, who has been in and out of rehab for alleged alcohol abuse, and Gene Simmons, who showed off his makeup skills as lead singer of the rock group KISS. These ratings come from surveys done by Omnicom's Davie Brown Entertainment division.

No more domestic 'porn'

What's going on here? One problem may be a big change in the way Stewart presents herself on TV since she came out of prison, says Renae Bredin, who analyzes Stewart's career as coordinator of the Women's Studies Program at Cal State Fullerton.

* Talk back: Is Martha Stewart washed up?

Before going to prison, her TV show offered what Bredin describes as a kind of "domestic pornography," replete with soothing images of an idealized home life. The imagery comforted women too stressed by job or family pressures to create the perfect home. Part of the bargain was that Stewart offered "how to" lessons teaching viewers the tricks to trading up to a lifestyle enjoyed by those above them the class structure, says Bredin.

"The new show is more about celebrities and chitchat. It is not the Martha people went to early on, to move up in class," says Bredin, who is working on a book about the domestic diva to be called "Martha Stewart Makes Me Shiver."

Bredin believes Stewart has the smarts to tweak the show and get it back on track. But other cultural trends may make it a challenge for her standards in home life to prevail once again.

David Urban, a marketing professor at Virginia Commonwealth University, points to the popularity of the home-improvement program "Design on a Dime" and Rachael Ray's quick-fix, 30-minute approach to cooking as signs that Stewart may have a problem. He says the success of these shows signals that time-starved Americans crave solutions that save time and money. "Both of these are a far cry from Martha's labor-intensive, expensive fix-ups and menus," he says.

Many homemakers find Stewart "scary" because they know they can never measure up to her standards, says Elaine Bloom of A Place For Everything, an organizing company that offers people advice on how to get more order in their home lives. Instead, homemakers are giving up the ideal of having "the perfectly decorated home and the most beautiful cupcakes" in exchange for more time to spend with families or on other pursuits that bring them satisfaction, Bloom says.

Don't write her off

Stewart's defenders, including the CEO of her company, say all is not lost. It would be a mistake, they say, to write off a person who rose from modest beginnings to create a top consumer brand and a media empire worth more than $700 million.

"Her appeal does not seem to be dropping," Martha Stewart Living Omnimedia Chief Executive Susan Lyne said in an interview last week. In fact, the company is so confident in her staying power, it recently reiterated projections that it will book a profit for the year -- despite nothing but losses so far -- because of impressive strength in merchandise sales through new channels in the coming months. "Everyone here is incredibly excited about the momentum the company has," says Lyne.

Indeed, her influence over consumers may not be as weak as it seems. Remarkably, Stewart has the power to sell homes in the depths of a severe housing recession. Martha Stewart-branded houses from the home builder KB Home (KBH, news, msgs) sell twice as well as other homes in the same communities. "Our partnership with Martha Stewart continues to generate tremendous excitement across the country," KB Home CEO Jeffrey Mezger said in his company's quarterly conference call in September. "We are driving to open as many Martha communities as we can."

Plus her flagship magazine, Martha Stewart Living, is still a big hit among advertisers. The number of ad pages jumped by over 30% in October, building on solid gains earlier this year. For most of 2007, the magazine has had more ad pages than it's had since 2002. The company's Everyday Food magazine has shown similar strength. The magazines are holding circulation levels or posting slight gains -- a positive in an industry beset by readership declines.

So the bad TV and merchandising numbers may not really be the ominous signs critics claim. TV ratings are down in part because daytime TV ratings are weak overall, says Sidoti analyst Rich Tullo who has a "buy" rating and a $19 price target on MSO stock. Ratings are also poor because NBC moved the show from a familiar time slot to a new position following a show with rock-bottom ratings, says Lyne.

Kmart sales are weak because the chain has been closing stores and reducing shelf space by eliminating product lines, says Bear Stearns (BSC, news, msgs) analyst Michael Meltz. The chain has been running down Martha Stewart inventory ahead of the launch of a new line of home goods in Kmart this fall.

A Martha makeover

Stewart has new merchandising deals with Macy's (M, news, msgs) and Costco Wholesale (COST, news, msgs), which will likely pick up where Kmart leaves off. She could use the help. Her guaranteed minimum royalty payments from Kmart drop sharply next year to $20 million from $65 million this year.

These kinds of deals demonstrate that big retailers still see a lot of power in the Martha brand. "Retailers still want the brand in their stores because it has an incredible ability to attract consumers and get them to buy not only Martha stuff, but whatever else they are selling," says Robert Routh, who used to cover Martha Stewart Living Omnimedia as an analyst at Jefferies and now owns shares of the company as a private investor.

Macy's declined to say how well home-furnishing goods in its Martha Stewart Collection are selling since the official Sept. 10 launch. But in Macy's quarterly conference call in August, Chief Financial Officer Karen Hoguet described early sales trends for the products already on the shelves as "very encouraging." She noted that 35% of bridal registries in July included Martha Stewart products, even before the full lineup had hit the floors.

The deal to sell Martha-branded food products through Costco takes the domestic diva back to her origins as a caterer who offered food tips in her first book, called "Entertaining." She will sell about 50 prepared and ready-to-eat food products through Costco. Products will roll out in January, but Costco-related sales won't boost Martha Stewart Living's bottom line in a meaningful way until later in 2008, the company says.

One reason Martha Stewart Living Omnimedia stock may be weak is that the company has no debt and about $80 million in cash. Investors may be penalizing the company for not buying back stock and not taking on debt to make growth-boosting investments, Routh says. But Martha Stewart Chief Financial Officer Howard Hochhauser says MSO is holding on to its cash for possible acquisitions and planned investments. He says if the stock price is still this low in eight to 12 months, the company would consider buying back stock.

At the time of publication, Michael Brush did not own or control shares of companies mentioned in this column.