By Brian Lund (TMF Tardior)
March 14, 2000

Martha Stewart took time out from gardening and planning other peoples' weddings to announce fourth-quarter and full-year earnings for her eponymous company, Martha Stewart Living Omnimedia (NYSE: MSO) today. Revenues at the "quality living" content and merchandising company shot up like snap beans in full sun, growing 39% for the quarter and 29% for the year on total revenues of $70 and $232 million, respectively. Unfortunately, the kudzu took over this year, as operating costs rose 41% quarterly and 38% annually, stunting short-term income. Profits for the year fell 10% to $11.7 million, or $0.28 per weighted average share, compared to $0.33 last year. Analysts had accounted for this, but results still beat expectations by $0.04.

To be fair, the stunted growth is mostly attributable to the company's Internet/Direct Commerce initiative. Online sales in 1999 increased 145% to top $36 million by selling things like garden clogs and pressed glass jars. Expenses in the division, however, totaled $50.8 million. That represents an investment in the future, of course. Internet revenues are expected to top $50 million in 2000, and management projects the unit will break even in 2002 with a cumulative investment loss of less than $70 million. These days, those are pretty acceptable numbers.

They are made more palatable by the fine performance of the other three divisions at Martha Stewart Living Omnimedia (MSLO). Publishing, which includes books, a syndicated newspaper column and the results of Martha Stewart Living and specialty magazines, rose 15% and accounted for 63% of total revenue in 1999. Operating margins in the segment came in at a healthy 33.4%. Revenue in the television division (I know you've seen Martha on the idiot box, at least on CBS This Morning -- you see why they call the company omnimedia?) gained 31% on 21% margins.

The three media units, however, have got nothing on the merchandising division, which accounts for the marketing deals MSLO has with Kmart (NYSE: KM), Sears (NYSE: S), and other retailers. Revenues in merchandising grew 35% last year and 116% the year before. While it only accounts for 9% of annual revenues ($20 million in 1999), the marketing division has almost no costs, maintaining operating margins around 99%. This division basically hauls in scads of cash solely from the use of the owner's name. That's Martha-Stewart clean.

Speaking of scads of cash, take a look at the balance sheet: $155 million sitting in the bank, fresh off the IPO. That's balanced against $67.8 million in current liabilities and zero long-term debt. There was no cash flow statement in the press release, but the third-quarter filing shows $14.8 million in operating cash flow and $13.1 million in free cash flow. MSLO's Cash King margin is 8% and climbing. Not bad for a company that has only been public about five months. I think MSLO can afford to fling $70 million at the website to try to build sales, especially since the brand name is so well-established that the site might actually succeed.

There's a lot to like about MSLO: its cash, its clean business model, its rapidly growing sales. I really just have one problem with the stock, and it's the same problem I have with most of MSLO's products: it's too expensive. The stock closed yesterday at 261 times estimates for 2000 and 81 times projected 2001 earnings. Sure, it's growing and probably will continue to kick off free cash, but I can buy 30% income growth, no debt, and better operating margins at, for example, Abercrombie & Fitch (NYSE: ANF), for 8 times estimated 2000 earnings. Why should I pay so much more for MSLO shares? And can't you just teach me how to make my own stock certificates at home, Martha?

Bet she never heard THAT one before.

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