Friday, January 28, 2005

Martha Stewart living folds some divisions. -Crook should fold all of the biz-

Martha Stewart Living folds catalog, online sales

MICHELLE TSAI
ASSOCIATED PRESS

NEW YORK — In the latest attempt to revive its troubled business, Martha Stewart Living Omnimedia Inc. is shedding nearly all its online and catalog operations, which have continued to lose money despite the boom in Internet retailing.

A note on marthastewart.com's shopping home page announced the company's final sale and directed customers to look for Martha Stewart products elsewhere.

The company will keep selling flowers through MarthasFlowers.com, a business it has outsourced to Provide Commerce Inc.'s ProFlowers unit for a revenue share.

Otherwise, Kmart Holding Corp. will be the only seller of Martha Stewart items online. Kmart has an exclusive agreement to sell Martha Stewart Everyday products, a separate line from the items on marthastewart.com.

Martha Stewart Living Omnimedia decided in August to wind down its direct businesses, saying its Catalog for Living couldn't meet profit plans for 2005. Marthastewart.com will center on how-to content and selling magazine subscriptions. Calls to the company weren't returned.

But the demise of the company's e-commerce arm comes as a surprise in a year of strong growth for online retailers. Online holiday sales hit $23.2 billion this year (all figures U.S.), up 25 per cent from last holiday, according to the eSpending survey by Nielsen/NetRatings, Goldman Sachs & Co. and Harris Interactive Inc.

"You'd think they'd be able to turn a profit there, given the growth in online retail," said Gary McDaniel, equity analyst at Standard & Poor's. "The only explanation is the execution hasn't been there."

The company's Web and catalog revenue were $6.2 million in the third quarter, down from $6.6 million the prior year. The company lost $2.7 million from its Web and catalog operations in the quarter, compared with a loss of $2 million in the third quarter of 2003. The company doesn't expect the fourth quarter to be any better, projecting revenue of about $6 million and operating losses of about $2 million.

The conviction of company founder Martha Stewart has hurt just about every part of its business. Sales of Martha Stewart Everyday products dropped 6.6 per cent at Kmart in the first half of 2004 compared with the previous year. Advertisers pulled out of its magazines, readership dropped and television networks stopped carrying the syndicated show Martha Stewart Living.

Martha Stewart Everyday products continue to sell well at Kmart, according to Caryn Klebba, a Kmart spokeswoman.

Without a catalog or Web business, Martha Stewart will rely even more heavily on Kmart for merchandise sales. "The only thing that (Martha Stewart Living Omnimedia) makes money on now is the agreement with Kmart," said McDaniel.

Martha Stewart Living Omnimedia reported $4.8 million in operating earnings from merchandising during the third quarter, but the company had a total operating loss of $16.2 million.

Kmart and Martha Stewart Living Omnimedia have extended their merchandising relationship through the beginning of 2010. Kmart will pay a minimum royalty of $49 million for the year ending Jan. 31.

Despite its current losses, the company's prospects are improving. Stewart's new prime-time show with NBC in the fall should restore her image and drive advertising in her magazines as well as sales through Kmart, according to McDaniel. The merger between Sears Roebuck and Co. and Kmart has also boosted shares of Martha Stewart Living Omnimedia from $12 to today's close of $30.93 on the New York Stock Exchange.

In the meantime, the company is planning to sit out on the growth in e-commerce. Some analysts say marthastewart.com may have been targeting the wrong audience altogether.

"The person who buys Martha Stewart is the Kmart shopper, not an online aficionado," said Dennis McAlpine, managing director of research company McAlpine Associates.

It looks like the company simply decided that the Internet retail space is too competitive, said McDaniel. "They've lost money on all those sales," he said. "I'm not sure how that's possible."

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