Martha Stewart Narrows Loss

James Mammarella, November 12, 2007

New York —Pointing to strong activity in merchandising sales at both Kmart and Macy's, Martha Stewart Living Omnimedia (MSLO) painted a picture of turnaround, as it reported overall third-quarter revenue up 13% to $69.3 million, and an adjusted EBITDA loss of $0.7 million, compared to the $2.6 million loss for the same period one year ago.

The key factor in the turnaround is the resurgence of MSLO publishing. Still, merchandising received a shot in the arm by virtue of the Sept. 10 national launch of the Martha Stewart Collection at Macy's and a trend reversal up at Kmart.

President and ceo Susan Lyne pointed to the convincing rebound in Kmart soft home sales since the major refresh of the Martha Stewart Everyday program. Lyne said, “Fashion bedding is up 42% since relaunch — a strong indication that consumer interest is as high as ever.”

Total soft home at Kmart was down 21% pre-re-launch, she said, but has been tracking up about 3% since. In other words, the fashion bedding initiatives have contributed to a 24-point swing.

The company did not quantify the results at Macy's, which only contributed for three weeks of the quarter.

Merchandising revenues of $34.9 million for the first three quarters of 2007 dropped 1.7% from $34.3 million. And profits have slid: nine months year-to-date adjusted EBITDA of $15.2 million for the merchandising division was down 17.4% from $18.4 million for the same period last year. Merchandising operating income of $13.8 million for the period fell 18.7% from approximately $17.0 million a year ago.

Publishing was by far the leading unit for the company, generating $7.7 in adjusted EBITDA. Internet losses of $1.7 million were nearly triple the year-prior loss, while the broadcasting loss doubled to $1.0 million. The company's foray into licensed housing developments collided with a gloomy market. Corporate staffing-up costs have increased.

However, the third quarter still made the case that MSLO can turn a profit this year.

“For the full year 2007, we are now expecting revenue of approximately $330.0 million, operating profit in the range of $7.5 - $9.5 million, and adjusted EBITDA in the range of $33.0 - $35.0 million,” said Howard Hochhauser, cfo.

Merchandising is making money for Omnimedia, albeit less than it did a year ago. The fourth quarter will show how much momentum is embodied in the new program at Macy's and the new designs at Kmart.

Martha Stewart Living Omnimedia, Inc.

Qtr. 9/30 (x000) 2007 2006 %change
a. Results for 3Q-2006 include a one-time revenue item of $3.0 million related to the favorable resolution of a dispute with a former merchandising licensee.
b. Results for 3Q-2006 included a $2.5 million benefit from the resolution of a dispute with a former merchandising licensee; excluding the resolution, operating loss would have been $(10.4) million.
c. Excluding a litigation reserve of $18.2 million and the licensing resolution, loss per share from continuing operations would have been $(0.18) in 3Q-2006.
d. Not meaningful. Merchandising division revenues are licensing royalties; other units incorporate specialized cost and profit structures.
e. Includes selling, promotion, general and administrative expenses.
Sales $69,256 $61,050a 13.4%
Oper. Income (EBIT) (4,911) (7,927)b
Net income (4,414) (25,213)
Per share (diluted) (0.08) (0.49)c
Average gross margin NMd NMd
SG&A expenses 54.1%e 56.3%e
Sales $209,406 $191,303 9.5%
Oper. Income (EBIT) (25,252) (17,407)
Net income (23,019) (33,209)
Per share (diluted) (0.44) (0.63)
Average gross margin NMd NMd
SG&A expenses 55.0%e 53.0%e

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