Martha records huge loss

Don Hogsett, May 10, 2004

Hammered by deep cuts in advertising, and grappling with the legal woes of its founder, Martha Stewart Living Omnimedia Inc. recorded a worse-than-expected first-quarter loss of $20.3 million, more than four times as great as a year-before loss of $4.5 million.

The loss was twice as great as Wall Street expected — 41 cents a share — compared with a consensus Wall Street forecast of 21 cents a share, compiled by Thomson First Call.

Putting earnings under crushing pressure was a deep 29.8 percent slide in ad revenues, which accounted for more than half of the company's total sales. Adding another layer of pain, the company was forced to create a $9.3 million income-tax reserve against a deferred tax asset, "since the amount and extent of the company's future earnings are not determinable with a sufficient degree of probability" in the wake of Stewart's continuing legal woes, stated the company.

With results declining in all but one of the company's business units, overall sales tumbled 23.2 percent, to $44.6 million from $58 million last year. In addition to the 29.8 percent slide in ad sales, television revenues fell 36.9 percent, to $4.2 million from $6.6 million. Internet and direct commerce sales skidded 20 percent, to $5.6 million from $7 million.

In the one bright spot in the outlook, shoppers are clearly standing by the design impresario despite her legal problems, and royalties from her various merchandising programs, most notably at Kmart, rose by 4.5 percent, to $10.8 million from $10.3 million last year.

Taking a big bite out of the bottom line, costs remain a major problem at the company. Measured as a percentage of rapidly falling sales, costs shot up to 70 percent from 47.9 percent a year ago. And measured in absolute dollars, costs kept rising even as sales were sliding, jumping 12.1 percent, to $31.2 million from $27.8 million.

Average gross margin constricted by 370 basis points, or 3.7 percentage points, to 34.9 percent, to 38.6 percent.

Consumers are also standing by the magazines even if advertisers aren't, said Sharon Patrick, chairman and CEO. "Our consumers remain stalwart," she said.

Patrick added that surveys conducted after Stewart's trial and conviction show that "magazine subscribers, in particular, were unfazed by the verdict immediately afterwards and remain so roughly six weeks later."

Martha Stewart Living Omnimedia

Qtr. 3/31 (x000) 2004 2003 % chg
Sales $44,489 $58,022 -23.3
Oper. income (EBIT) (15,641) (5,398) --
Net income (20,257)a (4,509)a --
Per share (0.41) (0.09) --
Average gross margin 34.9% 38.6% --
SG&A expenses 70.0% 47.9% --
(...) - denotes decline
a-First-quarter results include $3.1 million in income-tax expense, compared with a prior-year tax benefit of $2.8 million; and a $161,000 loss from a discontinued operation, compared with a year-before loss of $221,000.

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