|The insider trading scandal swirling around Martha Stewart has heavily impacted her company.
MARTHA STEWART INDICTED; RESIGNS CEO-CHAIRMAN POSTS
Charged with Securities Fraud and Obstruction of Justice; Broker Indicted Too
A DEFIANT MARTHA STEWART TO REMAIN AT HEAD OF OMNIMEDIA
Resignation Speculation Called 'Categorically Untrue'
MARTHA STEWART TO BE INDICTED
U.S. Attorney Requests Grand Jury Action
MARTHA STEWART PROBE DRAINS OMNIMEDIA
Ongoing Investigation Cited in 67% Earnings Drop
EARNINGS AT MARTHA STEWART'S OMNIMEDIA PLUMMET 42%
Impact of Stock Trading Scandal Cited
SEC TO FILE FRAUD CHARGES AGAINST MARTHA STEWART
Report Says Lawyers Notified of Pending Action Over Stock Sale
"It's been 14 months of unique and challenging developments for Martha Stewart Omnimedia," the company's president-CEO, Sharon Patrick, said at the start of the company's remarkably downbeat earnings call.
The company's icon and founder, Martha Stewart, on June 4 was indicted on criminal charges of securities fraud stemming from her sale of ImClone Systems stock in late 2001. Ms. Stewart pleaded not guilty. Later that day she stepped down from her position as chairman-CEO, although she retains her guiding-light role as chief creative officer. Ms. Stewart's case is slated to go to court in January.
No sign of abating
The negative impact of Ms. Stewart's case has been felt on the company for some time now and shows no signs of abating. The company reported net income for the second quarter ended June 30 fell 86.4%, to $931,000, from the same quarter last year. Total revenue declined 16.3% to $65.8 million, while operating income dropped 88.5% to $1.5 million.
Chief Financial Officer James Follo said the company now expects a net loss of between $7 million to $9 million, or 18 cents and 20 cents per share, for full-year 2003 -- a substantially steeper loss than analysts had expected.
At the publishing division, which accounts for more than half of the company's earnings, revenue fell 16.3% to $39.6 million, from $47.3 million in the year-earlier period -- but the quarter saw an additional issue of Martha Stewart Weddings magazine as well as two issues of the company's new title, Everyday Food, Mr. Follo said, though he would not disclose what the division's decline would have been without those three extra issues.
Ad revenues down 40%
Circulation revenues fell 20% for the flagship magazine Martha Stewart Living and ad revenues fell 40% as ad pages fell 34%, to 312. In the next quarter, Mr. Follo said, ad page declines are expected to increase, to "somewhere around 40%."
The company has cut subscription prices in an effort to stem circulation declines, and Mr. Follo said an announcement on the title's rate base, currently at 2.3 million, was expected within 30 days -- an announcement that, given current dynamics, looks very likely to be a rate-base reduction, although no guidance was given on what the announcement may hold.
Current projections for Everyday Food held for the fledgling title to incur almost $10 million in losses before turning profitable in 2006, Mr. Follo said. By industry standards, this is a relatively quick path to profitability.
TV show ratings down
Ratings of Ms. Stewart's daily TV show Martha Stewart Living are down as well this quarter, Ms. Patrick said. And sales of Martha-branded goods at Kmart registered declines even after factoring out discontinued products and Kmart store closings. Merchandising revenues for the quarter fell 26.4% to $11.8 million.
Increases in corporate overhead resulting from Ms. Stewart's woes were costing the company approximately an additional $2 million per quarter, Mr. Follo said.
"We believe if we safeguard principal assets during this period, our business will rebound significantly" should Ms. Stewart's situation end in a "positive resolution," Ms. Patrick said.
Upcoming pet show
She touted the upcoming launch of a pet show starring longtime Ms. Stewart associate Marc Morrone, and the launch of Everyday Food as exemplifying what she termed the company's strategy "since day one" to decouple the brand from Ms. Stewart. But few such moves were acted upon until Ms. Stewart's legal woes hit.
Should such woes end poorly for Ms. Stewart, Ms. Patrick said, a rebound will "be more difficult, take more time and require further investment."