It's Not a Good Thing
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Martha Stewart, the food and decor icon, always ended her eponymous shows with the tagline, "It's a good thing" but her company, Martha Stewart Living Omnimedia Inc. (NYSE: MSO) is not the good thing it may have been in the past. From its highs in the mid-$30's to its recent 52 week low $2.74 the stock has been pulverized just like the spices Martha grinds with a mortar and pestle. The media/merchandising company founded by and named for Martha Stewart just reported Q3 earnings on November 1 of a loss of $50.9 million or a negative EPS of $0.76.
How To Dress Up A Turkey
The company blamed declining print revenues and announced it would put its Whole Living magazine on the chopping block, cease publication of Everyday Food, and gut the Publishing segment workforce by 70 jobs. Martha Stewart Living also said they would be focusing on online and video versions of its magazine content.
Martha Stewart herself will not be suffering from these moves. As Non Executive Chairman and Chief Editorial Media and Content Officer she will still receive her $5.24 million paycheck as well as perks including personal trainers, drivers, security, and charitable contributions. The company has not had a profitable year since 2005 despite making lucrative merchandising deals with Macy's (NYSE: M) and J.C Penney (NYSE: JCP)
Corporate governance risks are low on audit but medium on the Board, compensation, and shareholder rights. The Board has Ms. Stewart's hairdresser, Frederic Fekkai, as a member and there have been frequent shufflings as members deal with the demanding Ms. Stewart. The risk for compensation would be higher but most of Ms. Stewart's pay is based on licensing fees for her "name" and talent fees. CEO Lisa Gersh Hall makes a fraction of Ms. Stewart's pay at $600,000. As for shareholder rights, Ms. Stewart controls 90% of voting rights.
How To Create A Stunning Value Trap
With a profit margin of -26.11%, a return on equity of -48.73%, and operating cash flow of only $2.95 million it's surprising the company has lasted this long. There's also the risk of a brand name being a person, that is Martha herself, and what would happen if the so far indomitable Ms. Stewart were to flag.
Then there is the matter of the injunction Macy's brought against Martha Stewart Living for allegedly violating her contract with them for the branded Martha Stewart merchandise by inking a deal with their competitor, JC Penney. In an interesting twist that deal bought JC Penney two board seats and 17% of shares.
A headline on a Fellow Fool article reads Can Martha Stewart Help JC Penney's Turnaround? The question should be can JC Penney save Martha Stewart Living? Can anyone rein in Martha herself? Well known as a perfectionist she gets caught up on details with hour long debates over various shades of blue-green, reported an editor in a New York magazine profile about the company.
Martha Stewart is Martha Stewart Living and so charges of cronyism and nepotism are serious. There is the aforementioned hairdresser on the Board. Ms. Stewart's sister-in-law, Margaret Christiansen, is a senior VP at Martha Stewart Living. But the worst example was a TV show called "Whatever, Martha" featuring Ms. Stewart's daughter, Alexis, and the daughter of former executive chairman Charles Koppelman, Jennifer Koppelman, in which the two showed snippets of Martha Stewart's shows and then traded nasty comments about Martha Stewart. For this the two were paid by the company over $750,000. Alexis Stewart trashing her mother so publicly on her own network was sickeningly tasteless.
Competition in this lifestyle market is relentless, from Oprah Winfrey's privately owned Harpo Inc, to Meredith Corporation (NYSE: MDP) and Scripps Network Interactive, Inc (NYSE: SNI)both of the latter involved in magazines and lifestyle multimedia. Meredith publishes magazines such as Better Homes and Gardens, Ladies Home Journal and EveryDay With Rachael Ray -- over 120 in total. Scripps owns HGTV and Food Network among others and also publishes magazines tied to the networks.
Either one of these is so much better than Martha Stewart Living on fundamentals. Meredith, in particular, is interesting with a 5.20% yield and a 13.53 P/E. Scripps has an 18.31 P/E and a .80% yield. Scripps is a name I recently wrote about and its foray into more reality based shows.
Merchandising and digital are the only recipes for success for this brand looking forward. While the Martha Stewart Living products are well-crafted (but pricey) and the magazines are elegant and informative, there are much better media stocks.
It would be ironic if J.C. Penney were to be the savior of Martha Stewart Living. That would only be possible if they could stand up to the rest of the board, including Ms. Stewart. J.C. Penney has their own problems with the stock down over 10% on November 12 on news of downgrades.
If only Martha Stewart could bring her considerable talents to bear on running her company, (she did train on Wall Street), or alternatively let her executives actually run the company this stock might have a chance but as it is, it's NOT a good thing.
leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of Scripps Networks Interactive. Motley Fool newsletter services recommend Martha Stewart Living and Scripps Networks Interactive. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.