MSLO Posts Loss, But Hints at the Future

I've just finished a two hour look at the 2008 4th quarter and full year results shared by MSLO this morning. While the company posted a loss for the quarter and year, executives of the company hinted at the future.

In his opening remarks, Charles Koppelman, Executive Chairman of MSLO noted that the company sees 'digital' becoming a key component of their "omni" offering. In recent interviews, Martha Stewart has also commented that the company is looking at all the possibilities a stronger 'digital' presence can bring.

Executives of MSLO were very clear that 2008 was the 'beginning of the end' of the relationship with Kmart. This was evident with the lower contractual minimum royalty payments after those payments reached the peak in 2007. In his comments Koppelman said, "We have known for some time that 2009 will be a transitional year as we position ourselves for 2010 when Kmart is no longer part of our business. It's a transition we've already begun to execute, and one that offers great new opportunities in the future." It's easy to read between the lines: MSLO is looking and negotiating terms for another mass market merchant for the everyday line or it's equivalent.

Despite the downturn in the economy, merchandising revenue experienced a gain of 67% for the full year when they exclude the Kmart factor. A gain of that magnitude during these tough economic times definitely shows the strength in the brand.

Robin Marino, Co-CEO and President of Merchandising commented that the new agreement with Hain Celestial Group to offer a new branded line of Martha Stewart natural home cleaning solutions are targeted to be on store shelves later this year. Later within the earnings conference call, other comments led me to believe these products will be available by the end of Q2.

Marino also mentioned that MSLO is very focused on expanding its presence in key areas where they have strong brand equity. One such area is food. As MSLO is concluding a two year run with Costco and the development of the Kirkland Signature/Martha Stewart co-branded food products, Marino mentioned, "Now, we plan to take what we have learned [with the Kirkland development] and apply it to a broader Martha Stewart food line, distributed in a wide variety of outlets including Costco. Could this mean we'll see a Martha Stewart food line at the local grocery store? It sure sounds as if that's a possibility.

Wenda Harris Millard, Co-CEO and President of Merchandising gave an outlook that wasn't sugar coated with regard to publishing. She noted that advertising revenue is expected to continue to decrease with current trends showing a 30% decline from last year. MSLO is not immune from the struggle and fight for every advertising dollar as it relates to print. They were very clear however, that they are in a strong position to 'weather the downturn' which left me with a clear indication that Martha Stewart Living or Everyday Food will not disappear from the shelves unlike many of their competitors.

Harris Millard, during a conference call Q & A also mentioned that the selection process for a new mass market merchant is in the works. In response to an analyst question regarding 'who' the next mass market partner will be, Millard said, "I can tell you that we've made significant process with a very complex selection process and we're very excited about our prospects for 2010. ...Kmart is still exclusive until February of next year and that does have a lot - a great deal of bearing on the timing of meeting our new partner." As the analyst pushed further to gain some insight on the potential merchandising partner, Charles Koppelman mentioned that they are under no obligation to announce the new partner. "However, we could be preparing for 2010 as we speak."

While seeing MSLO post yet another year loss is difficult, it didn't come as any surprise. MSLO is not providing guidance for 2009. I believe we can all have faith that the strength of the brand will carry MSLO through the continued economic difficulties and rise above the rest.

You can listen to the earnings conference call by logging into marthastewart.com/investor relations