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Stewart deflects focus to product

Cecile Corral, Don Hogsett -- Home Textiles Today, July 29, 2002

After Martha Stewart Living Omnimedia (MSLO) chairman of the board and ceo Martha Stewart commenced last week's second quarter conference call by requesting that all media and investor questions focus on the earnings report and not on her ongoing federal investigation, updates on the company's merchandising and retail segments became a major focus of the meeting.

Overall for this year's second quarter, revenues increased 16 percent to $78.6 million, compared to $67.8 million in the prior year's quarter; EBITDA increased 38 percent to $16.2 million, compared to $11.8 million in the same period one year ago; and earnings per share from continuing operations increased 40 percent to $0.16 compared to $0.12 in the same quarter of 2001. Earnings per share for the second quarter of 2002, including discontinued operations, were $0.14.

For the merchandising segment, the company reported second-quarter revenues increased 82 percent to $16.0 million, due in part to higher royalty rates under MSLO's revised contract with Kmart; the introduction in the new Martha Stewart Signature specialty line of new products — essentially, a new paint line available exclusively at more than 1,500 Sherwin-Williams stores nationwide; and certain timing issues related to royalties earned from the sale of garden products at Kmart resulting from the revised contract.

Suffering most within the merchandising segment during this past quarter was the company's Internet/Direct Commerce division — currently operated by a new management staff that is preparing to overhaul it for a relaunch slated for October — which saw revenues decrease to $8.1 million from $11.1 million in the prior year's quarter, reflecting lower catalog circulation.

"Overall retail sales at Kmart increased by 7 percent in the second quarter, attributable in part to strong retail sales in garden products and housewares partially offset by lower sales for bed and bath products," said James Follo, executive vp and cfo.

He added that results "also benefited from sales of products in the Japan store and paint sales in Sherwin-Williams," the latter of which is in the process of rolling out to several hundred more stores nationwide.

"We don't think necessarily [Stewart's federal investigation] has really impacted sales of our products. We still don't see any evidence of that — too early to tell," Follo said. "The area where we've taken our numbers down really has to do more with same-store sales at Kmart — and then we are also taking down our numbers slightly on the Signature line's floor covering rollout, as well."

Early on in the conference, Stewart admitted that, while her new Signature specialty brand label consumer launch — which includes the Sherwin-Williams paint line; a furniture collection launching in October at High Point by Lenoir, NC-based Bernhardt Furniture Company; and hard floor, carpet and area rugs by Dalton, GA-based Shaw Rugs — is on schedule, "the program will open with fewer doors that originally planned."

In a separate interview conducted soon after the conference call, Jeff Meadows, Shaw Rugs division vp, told Home Textiles Today that Shaw had originally projected supplying its Martha Stewart line to up to 700 independent floor covering retailers nationwide. But to date only 450 retailers have committed to carrying the line. Shipping began last week to the first 250 stores, and all 450 stores are expected to be stocked with the merchandise by the end of August, Meadows said.

"We were expecting at the time between 600 and 700 retailers to carry the line by Labor Day, but what we got was some dealers taking that wait-and-see attitude because they are concerned about consumers' reaction to Martha's investigation and the impact it will have on sales," Meadows said. "But we are optimistic that everything will work out, and even before [Stewart's investigation] is resolved we think the program will move forward with more and more dealers adopting the program. They'll realize that it's an easy sell, and it will gain recognition very quickly."

MSLO made note during the conference of upcoming merchandising-related highlights on schedule for the third and fourth quarters, including: the addition of Sears Canada — effective in 2003 once the current contract with Zellers expires — as the newest exclusive Canadian retail partner for the Martha Stewart Everyday line; the October launch of a revised catalog under a new brand name through the company's Internet/Direct Commerce division; the fall launch of a new Martha Stewart Everyday holiday line; and also in the fall the expected rollout of more Martha Stewart retail stores in Japan based on the positive results of the current single unit in Tokyo.

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