Martha Stewart Living Omnimedia Inc. (MSO) is beginning to execute on its original strategy of leveraging its brand across all business segments, signing a slew of high-margin merchandising deals and repositioning its website away from on-line commerce to becoming an interactive, ad-generating aggregator of content from its publishing and broadcasting business.
As a result, Internet revenue is more than doubling, and we expect the segment's operating margins to expand exponentially throughout 2008. Meanwhile, sales and operating earnings in the flagship publishing division have also been growing.
Revenue from retailer Kmart, which accounted for 76 percent of the Merchandising segment's revenue and 21 percent of total company revenue, is set to decline sharply in 2008. Although we expect the decline to be somewhat offset by a slew of new merchandising initiatives, the loss of Kmart royalites will clearly depress revenue growth in 2008.
In our view, the current real estate downturn will dampen some of Martha Stewart's large merchandising deals, most notably that with
KB Homes (KBH). We have trimmed our revenue and earnings estimates to reflect what we think will be a prolonged housing downturn after the lengthy inflated valuations. Moreover, if the housing slump and high gas prices prompt a recession, we don't think MSO would achieve our estimates or those of the Street.
