In one of the least surprising executive moves of the year, Martha Stewart Living Omnimedia on Wednesday announced the resignation of its CEO, Susan Lyne. Lyne, a respected media veteran who launched Premiere magazine and had a successful career at ABC television, took over the company in 2005 after Martha had a few little legal problems. The company has hardly impressed Wall Street since. The stock traded at more than $30 a share in 2005 and today is below $8, losing about 7 percent of its value in midday trading. Last year, the magazine portion of the company laid off dozens of employees and shut down Blueprint after a year and a half of publishing. Someone had to go.
But while Lyne's fall was as predictable as a soufflé's in an earthquake, the fundamental problems at the company were almost certainly beyond her control—or any CEO's. Martha Stewart Living Omnimedia (we'll call it MSLO, though the stock ticker is MSO) is a textbook intersection of two media business lessons that should have been learned in the '90s. One is that just because a content company makes a splash online does not mean that it needs to go public. (Departed TheGlobe.com and limping Salon.com are two other examples of content companies that held IPOs.) The second is that it is extremely difficult to build a lasting media company around a single personality, no matter how talented or compelling that personality is.
Indeed, Martha's personal aura is so powerful that it's easy for the casual observer to misunderstand exactly where the company makes its money. While Martha Stewart is probably best known as a magazine publisher, broadcaster, and ex-con, the true profit center for the company is in merchandising. In the first quarter of 2008, for example, MSLO made $6.6 million in profits from merchandising, far more than the $1.6 million in profits that came from publishing, according to the most recent filing with the Securities and Exchange Commission.
There's nothing intrinsically wrong, of course, with running a merchandising company. The problem in MSLO's case is that too many of its free-range, organic eggs are in the same down-market merchandising basket. In 2007, 76 percent of MSLO merchandising revenues came through Kmart, which sells everything from bedsheets to artificial Christmas trees under the brand Martha Stewart Everyday.
The arrangement between Kmart and MSLO—which goes back to 1997—has largely been a one-way street. * Kmart signed the contract when it was in bankruptcy and, to put it charitably, the retailer was not in a strong position to dictate terms to Martha. So Kmart agreed to pay a minimum amount in royalties to MSLO: $40.4 million in the year ending Jan. 31, 2003, and a whopping $65 million in the year that ended this January.
During that time, Kmart's situation has not improved: It merged in 2005 with Sears after closing stores and watching sales decline. For every year between 2003 and 2007, Kmart didn't sell enough Martha Stewart Everyday products to meet the minimum royalty promised to MSLO. And so those payments are about to plummet: Unless Kmart has the turnaround year of the century and Martha's products fly off the shelf, it won't be required to pay MSLO more than $20 million in 2009. That's $45 million less than this year, a drop that will all but eviscerate profits in the company's merchandising division.
Yes, MSLO says it will make up this revenue through merchandising deals with Macy's, Costco, KB Home, etc., and to some extent it will. But it's not 2003 anymore. Given the disappointing sales of Martha merchandise in Kmart, no other chain is going to provide the ludicrously generous guarantees that Kmart did. Moreover, the housing slump means that fewer people are spending on home improvement the way they have in recent years. Witness the recent bankruptcy and partial liquidation of Linens 'n Things.
The hard truth is that demand for Martha Stewart in all forms—magazines, books, TV shows, Web sites, and stuff—has passed its peak. You can feel it in the culture, where Rachel Ray is today's go-to domestic goddess. And you can see it in the numbers: In the first quarter of this year, the minuscule rise in MSLO advertising revenue was more than eaten up by a loss in circulation revenue, meaning that people don't want to pay for Martha material as they used to. And even the stagnant publishing arm did better than the Internet arm, which lost $2.2 million in the most recent quarter and has lost millions more over the last several years. The company as a whole lost money for four consecutive years before turning a profit in 2007.
Can anyone save this sad mess? Given the company's singular focus, only Martha could. And, theoretically, the conditions of her 2006 conviction for obstruction of an investigation and making false statements allow her to take over as CEO in 2011. That year she will turn 70: How much longer does she want to grace the covers of magazines, whip up meringues on TV, and hawk mediocre soup in Costco? The most likely scenario—and the one that still keeps the stock slightly above water—is that some outside investor would swoop in, sift through to find where its value is, and sell or shut down the rest. For many of the company's employees, that would probably mean looking for a new job. But for those who'd like to see Martha retire with dignity, it would be a good thing.
Correction, June 11, 2008: The article originally stated that Martha Stewart products have been selling in Kmart since 2003. In fact, they have been selling since 1997. The royalty arrangement was renegotiated in 2004. (Return to the corrected sentence.)