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Martha Stewart is cooking again
Heres a pricey corporate icon worth every penny. Martha Stewart Living Omnimedia's advertisers are back, her shows are booming and new deals are rolling out like buns in a bakery.
By Michael Brush
Martha Stewart, it turns out, is worth it.
Yes, her company, Martha Stewart Living Omnimedia (MSO, news, msgs), paid her over $5 million last year, her first year back on the job, including an array of perks suitable for a domestic diva -- perks we will get to in a moment. Yes, she owns a half billion dollars worth of the company's stock, or 29 million shares.
But since her poncho-clad stroll from prison in March 2005, Martha Stewart has demonstrated just how valuable she is.
Just look at these numbers:
- This past quarter, overall sales jumped by 60% to $62 million. The company's quarterly loss narrowed to 13 cents a share from 38 cents a share a year before.
- Revenue in the company's core publishing business increased 43% to $36.2 million because advertisers are back -- thanks to the honcho's return -- boosting ad pages by 70% last quarter.
- The launch of Stewarts eponymous TV show and a new program on satellite radio helped push broadcasting revenues to $11.3 million from virtually nothing during the first quarter last year.
Skepticism on Wall Street
Now if the stock market would only notice. Martha Stewart Living shares are down 32% since the company's founder emerged from her stint in prison, and Wall Street remains unimpressed. Most analysts rate the stock a "sell," reasoning that the stock is still overvalued despite its sharp fall.
Related news and commentary on MSN Money
But Wall Street has it wrong -- because its underestimating Stewart. In particular, analysts are overlooking the incredible loyalty of her fans, and how that loyalty can be used to create profitable deals that stamp the Stewart brand on everything from hand towels to houses.
That's the take of Jefferies & Co. analyst Robert Routh, the only analyst with a "buy" rating on Martha Stewart shares. He believes the stock will trade for at least $23 inside a year, a 34% gain from the current price.
Heres a closer look at the bullish case for Martha Stewart:
Marthas mob
During all of Marthas legal issues, the only people that ran for the hills were advertisers, who are now coming back in droves, says Charles Koppelman, chairman of the board at the company.
After Stewart was sprung last spring, company-sponsored surveys found that 75% of women believe Stewart does influence their home-management decisions, and 43% said they were more likely to buy products endorsed by her. When Stewart left prison sporting a poncho, a half a million people downloaded the pattern for the garment.
Strike up the brand
In the past few months, Stewarts been leveraging that loyalty to slap her name on everything from houses sold by KB Home (KBH, news, msgs) to pillowcases and cookware to be sold by Federated Department Stores (FD, news, msgs) next year. Her fans are ready and willing to buy more, so lots more profit-boosting deals are sure to follow, says Routh.
The difference between 2004 and now is that we have the opportunity to partner with anyone we want, explains Koppelman. Everybody wants our brand, and it is up to us to pick and chose.
Heres a look at some of the main deals Stewart has struck lately, and what else might be coming.
Macys. In early April, Stewart announced a five-year co-branding deal with Macys, a division of Federated. Her stock jumped 14% to $20 in one day on the news, giving a taste of the potential moves that may be in store. Martha Stewart housewares will launch next year, and the deal will likely expand to include more home furnishings. Another possibility around the corner: a Martha Stewart food line, says Routh.
KB Home. Talk about a bold statement to wake up anyone who hasnt noticed that she is back. Thousands of people attended the first showing of Martha Stewart homes in Cary, N.C., in March. The houses moved quickly. She has deals on similar developments in Atlanta, Houston, Las Vegas and in Southern California. The company gets roughly $8,000 per home.
Next year, KB Home buyers will be able to customize their Stewart homes with her line of interior fixtures and exterior trimmings. Routh believes the concept could morph into lucrative co-branding deals with the likes of Lowe's Companies (LOW, news, msgs) or Home Depot (HD, news, msgs).
EK Success. In January, Stewart struck a co-branding deal with EK Success, a company that markets craft supplies and tools used to create scrapbooks, a market worth $3 billion a year in sales. Products should hit the market early next year.
Media. Stewart recently started a new magazine, called Blueprint, which targets a younger demographic and features fashion, beauty, health and fitness tips. Last September, the Martha Stewart TV show launched, and the company signed a five-year radio deal with Sirius Satellite Radio (SIRI, news, msgs) in November.
The launch of her TV show rekindled interest in Stewarts Web site, where traffic jumped 80%. Routh believes a home-shopping program and some kind of Web site deal -- perhaps with Yahoo! (YHOO, news, msgs) -- may be in store.
Everything but CEO
One potential risk in owning this stock is Stewarts sheer supremacy over the company. This is something you would expect from such a domineering personality, but it also hints of poor corporate governance and a board that may be more focused on Stewarts well-being than producing better shareholder returns, say skeptics like David Phillips, who publishes the 10Q Detective.
Her dominance is evident in everything from her pay package to her grip on the lions share of the voting shares, says Phillips. As for her pay, profiting from an increase in the value of her giant share position because of her efforts might be enough of a financial reward, suggests Phillips. After all, with each $1 advance in the stock, she is up $29 million.
But Stewart gets plenty more than that. First, she gets $900,000 a year in base pay as the founder of the company, since her conviction bars her from taking on the duties of chief executive. Thats as much as CEO Susan Lyne earns. (Stewart actually received $750,000 in 2005 because she only worked part of the year.)
Beyond her base pay, last year Stewart snagged these juicy perks
- $2.8 million to cover her legal expenses
- $500,000 for her work on The Apprentice: Martha Stewart, which paid Stewarts company $750,000 for her appearance
- $500,000 for use of her homes for filming and photography and development of content and products
- $177,000 to help pay for computer and phone connections in her homes
- $100,000 for an expense account
- $99,000 for security gates at her main residence
- $70,000 for her work on the TV show "Martha"
- $17,777 for her personal transportation
Not only does she enjoy a lot of perks many CEOs dont get, there is another problem with this pay package, says Phillips. If she gets paid for so many of her specific duties, whats her founder pay for?
Company spokeswoman Elizabeth Estroff responds that as founder, Stewart is one of the companys most important assets and a "creative inspiration for the entire company." Estroff says that you could make the case that hosting the TV show alone was worth her salary.
The payments to use her home for production make sense because the company would likely spend more if it had to scout for or create comparable settings, says Estroff. They are living laboratories for the magazines, products and everything we do.
Compromised paymasters?
Dont look to the board to crack down on her pay any time soon. At least two board members have apparent conflicts of interest.
Board chairman Koppelman has a consulting firm called CAK Entertainment, which gets $725,000 a year from the company. He is also eligible for performance pay of up to $3 million and stock. Last year, he got $1.1 million, and 125,000 restricted shares.
Spokeswoman Estroff says the company doesn't believe this is a conflict. Koppelman responds that his interests are aligned with shareholders because he owns a significant amount of stock that dwarfs any compensation I might be getting. The rest of the money I can get paid is mostly tied to transactions that I help accomplish for the company. He says he played a key role in the deals with Sirius and KB Homes.
The company also made a $100,000 donation within the past year to the Virginia Commonwealth Universitys Adcenter, a graduate program in advertising that is run by a member of the companys pay committee, Rick Boyko. It only looks bad if you think bad, responds Koppelman. Rick is a brilliant advertising executive, and students from his school have spent time assisting our people looking at branding. The spokeswoman says the contribution complies with governance rules of the New York Stock Exchange.
As a shareholder, you wont have any say in these matters, since Stewart owns virtually all of the Class B shares with all the voting power.
Normally, these kinds of corporate governance red flags would be enough to make me steer clear of a stock. But Ill make an exception and add shares of Martha Stewart Living Omnimedia to my model portfolio.
After all, owning shares of this company already means you are putting all your faith in Stewart -- since her persona defines the business. Its her company, says Routh. Its her brand, and without it there would be nothing to the company.
At the time of publication, Michael Brush did not own or control shares of companies mentioned in this column.
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