The past several years have not been particularly kind to Martha Stewart, as her namesake company Martha Stewart Living Omnimedia (UNKNOWN:MSO.DL) has been on what appears to be a terminal decline. For instance, in nine of the past 10 years, the company has experienced a net loss. Every year since 2007 sales have declined, falling from a high of $327.89 million to $197.63 million (or 39.7%) by the end of 2012. On the bottom line, this decline has been particularly apparent during the company's 2012 fiscal year as it booked a net loss of $56.1 million (though in all fairness, about $44.3 million of the loss can be chalked up to a one-time impairment charge).
Sirius XM Radio becomes disenfranchised
The simple explanation behind the home keeper's fall from grace can be summed up in two words: declining popularity. In essence, as consumers become less and less enchanted by Martha Stewart's products and brand image, companies have significantly decreased their reliance on what she has to offer. A prime example of this is the decision of Sirius XM Radio (NASDAQ:SIRI) to renew their content deals with her, but to do so under more unfavorable terms each year.
The relationship between Martha Stewart and Sirius XM began back in 2005 when the two entities agreed on terms that would consist of Martha Stewart having a channel that would run twenty-four/seven, and would require the company to provide 65 hours of original programming every week. However, all of this changed in November of 2011 when Sirius XM demanded that Martha Stewart's original programming would only be 40 hours per week, beginning in 2012.
In addition to this decrease, Sirius XM decided that Martha Stewart would take a fee cut and that all advertising space on the channel would be sold and that it, instead of Martha Stewart, would receive all compensation for the sale of the space with the exception of some advertising in the fourth quarter that would be remitted to Martha Stewart. Beginning in 2013, the terms of the agreement were revised again. Sirius XM lowered the fee again and the amount of original programming provided by Martha Stewart was reduced to 10 hours per week.
Although this is one sign of the decline of Martha Stewart, it would be difficult to say that it is material in nature. In fact, the lowered fee for the company only decreased its revenue directly by $0.9 million for 2012. With such a small impact on the company's financials, it would be foolish to say that this one sample is a valid indicator of the company's declining prospects. But, when you add in the fact that other companies are dumping Martha Stewart's products and services, you arrive at a more complete picture of what looks to be its impending doom.
Bigger trouble on TV!
Take, for example, Hallmark Channel, a television network owned by Hallmark Cards through one of its subsidiaries. In September of 2012, an agreement between Hallmark Channel and Martha Stewart came to its end, which contributed to a 45% decrease in Martha Stewart's broadcasting segment. The fact that the agreement was not renewed should be another sign that the company is suffering from a lack of customer and strategic partner appeal.
Macy's and J.C. Penney get involved
In truth, both of these examples are signs that Martha Stewart is struggling, but they pale in comparison to the massive lawsuit that the company is currently embroiled in. The suit, which is between Martha Stewart, J.C. Penney Company (NYSE:JCP), and Macy's (NYSE:M), involves an alleged breach of contract whereby Martha Stewart had previously agreed to sell all of its exclusive brands under the name of the Martha Stewart Collection to Macy's.
In 2012 alone this deal resulted in sales of around $250 million for the retailer. The contract between these two companies is supposed to last through 2027. However, its future is in doubt after Macy's sued the company, as well as J.C. Penney, over a $200 million, 10-year deal that Martha Stewart struck with J.C. Penney to create a store-within-a-store setup at the troubled retailer in which Martha Stewart products would be sold.
As the remainder of the case is being weighed and Judge Oing has yet to make a verdict, an order was issued that permitted J.C. Penney to continue to sell its roughly $100 million in non-branded (but still designed by) Martha Stewart merchandise within its stores. This move has proven to be beneficial for J.C. Penney as the company has struggled in recent years, but an unfavorable verdict could harm both it and Martha Stewart, while preserving the deal with Macy's.
On the other hand, there is always the possibility that a finding of a material breach of contract may allow Macy's to back out of its deal completely (though I think this to be unlikely due to how much it benefits from Martha Stewart's product line), which may be the final nail in the company's coffin.
In all that I've talked about above, I'm not trying to incite fear that Martha Stewart is going bankrupt tomorrow. However, I am trying to illustrate that the company has been declining for quite some time. If this trend continues and its strategic partners eventually back out entirely, then the company may have to be put out to pasture or be taken private by Martha Stewart herself.
In truth, the problems the company has are many. There is a good possibility that it may not be able to survive the fallout of a customer and strategic partner exodus. This is particularly relevant in the cases of J.C. Penney and Macy's, two major retailers that have the potential to add a lot of value to the company. If things do ultimately go south from here with the court ruling, then it wouldn't be out of the question to see the company's fundamentals deteriorate even quicker than they have lately.
Daniel Jones has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.