Martha Stewart Living's publishing, television, and Internet/direct commerce business units posted so-so results this quarter in part because of tough ad spending conditions. Meanwhile, merchandising continues to explode and is highly profitable. Like most consumer-oriented companies, the company's business is highly susceptible to the economy.
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Martha Stewart is helping the cooking and planning incompetent -- this Fool included -- get ready for Mother's Day this week and next, but stopped briefly today when her integrated content company, Martha Stewart Living Omnimedia (NYSE: MSO), posted better-than-expected first-quarter results, citing the continued introduction of new products and publications. The cheers and celebration ended there, however, as the company lowered second-quarter guidance. Earnings increased 11.2% year-over-year to $0.13 per share, compared to $0.11 per share in the year-ago period. That beat Wall Street's expectation by two cents. Earnings before interest, taxes, depreciation, and amortization (EBITDA) expanded 6% over the year-ago period to $12.1 million. Revenue gained 3% year-over-year to $71.2 million, but fell short of Wall Street's expectation of $75.3 million. In the press release, CEO Martha Stewart said development of the Internet/direct commerce unit would take longer than expected. Martha Stewart Living's business is divided into four units: publishing (67% of revenue), Internet/direct commerce (13%), television (9%), and merchandising (11%). While Internet/direct commerce is its fastest-growing unit, it's also the only unprofitable segment. Publishing remains the company's largest unit, but sales grew a mere 5.6% year-over-year because of a drop in Martha Stewart Living magazine advertising pages. Roughly 60% of magazine revenue comes from advertising -- circulation makes up the rest. That revenue mix tilts slightly more toward advertising than most consumer magazines, leaving it more exposed to cyclical changes in ad spending. Merchandising is highly profitable, with an operating margin of 99%. That's because the company generates revenue from royalties on sales of products sold in retail stores, such as Kmart (NYSE: KM) and Sears (NYSE: S), under different versions of the Martha Stewart name. Head to your local Kmart, for example, to find Martha Stewart products ranging from bedspreads to garden tools. Merchandising revenue grew a colossal 27% year-over-year this quarter. Television media adds lots of value to the Martha Stewart brand. Unfortunately, the unit is the slowest-growing, least-profitable, and smallest contributor to total revenue. Television sales dropped 12.3% year-over-year with an operating margin of 12%. Its results were adversely impacted by advertising and lower ratings. Television productions include "Martha Stewart Living" and a weekly appearance on the "CBS Morning Show." Internet/direct commerce revenue fell 11%, citing a tough Internet advertising environment and soft product responses. This segment includes the Martha By Mail catalog and online Internet site found at www.marthastewart.com. The company has made significant investments in the area, but the path to profitability remains lengthy. Still, it remains one of Martha Stewart Living's most promising growth opportunities, particularly as the Internet moves into more and more households. Martha Stewart Living lowered second-quarter earnings guidance from $0.12 per share to between $0.10 and $0.11 per share. Looking at the company's four business units, it's clear publishing, television, and Internet/direct commerce have all been hurt by soft advertising. Investors beware: the company's business -- like most other consumer companies' -- is highly susceptible to swings in the economy, which impact everything from advertising to consumer spending. Martha is helping Mike Trigg plan for Mother's Day. To see his holdings, view his profile. The Motley Fool is investors writing for investors.
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