Martha Stewart Living Omnimedia (MSO.DL) recently announced a 14% layoff of its staff, which should bring the staff total down to around 422 from 497. This news led to an 11% spike in the stock price. With new CEO Daniel Dienst, a successful turnaround artist, at the helm, some investors are excited. But they're not as excited about a potential turnaround as they are at the potential of Dienst gearing the company toward a sale.
The dilemma here is that analysts disagree greatly on what Martha Stewart Living could sell for. Therefore, putting a specific number on it would be a guess. In the meantime, let's assume there's no sale and take a look at the underlying business. Does it have potential on its own?
A necessary move
Cutting 14% of any staff is going to lead to significant cost reductions. Moralists will argue that this was an unfair move, as is often the case. Aside from investors, nobody likes layoffs. But if you look at the chart below, you will see that revenue has lagged SG&A expenses by a wide margin over the past year:
Martha Stewart revenue (trailing-12-month) data by YCharts.
If SG&A expenses are outpacing revenue, then you have an unsuccessful business on your hands. Something needed to be done, and layoffs are the most effective way to cut costs. After reading about the layoffs, I wanted to investigate morale at the company. Some investors overlook the fact that employees offer the best inside view of a business, and with Glassdoor.com, you can find out a lot of information about what's going on at almost any company.
A look at morale
On Glassdoor.com, employees leave anonymous reviews about their employer. They also rate their company on a scale of 0 to 5, with 5 being the highest. They have rated Martha Stewart Living a 2.8 of 5 -- not so hot. And only 28% of employees would recommend the company to a friend. Such a low score hints at low morale.
Some of these negative comments relate to poor upper-level management, internal strife among upper management, difficulty with the ad sales division, poor leadership, and consistent layoffs. The following comment was also telling: "Progress on building website and other digital product is absurdly slow due to overly bureaucratic working environment."
Some of the positive comments related to a good work-life balance, a creative spirit, and a great brand.
So far, we see that SG&A expenses are greatly outpacing revenue, and that company morale is low. These are concerning trends, and when discussing Martha Stewart Living, you can't leave out the J.C. Penney (JCPN.Q) and Macy's (M -2.03%) drama, either.
Made for a movie
This story is dramatic enough it could be found in a movie -- and it might be found in a documentary somewhere down the line, perhaps about Martha Stewart's successes and failures.
The basic premise of what took place here: Martha Stewart and Macy's had a deal whereby Martha Stewart-branded kitchen, dining, and bedding products would be sold exclusively at Macy's. However, apparently former J.C. Penney CEO Ron Johnson had other ideas. He attempted to lure Martha Stewart away from Macy's so he could sell Martha Stewart products at J.C. Penney, as part of an effort to make J.C. Penney "America's Favorite Store."
Clearly, that plan didn't work out well, as his attempt backfired. Macy's brought a lawsuit against both J.C. Penney and Martha Stewart Living in 2012, resulting in an agreement in which Penney's drastically scaled back its partnership with Martha Stewart Living. But actually, nobody wins. J.C. Penney and Martha Stewart ended up looking bad, and Macy's ended up paying unnecessary legal fees when it didn't do anything wrong.
The J.C. Penney/Macy's/Martha Stewart drama is more important than you might think. For instance, if a potential acquirer looks at Martha Stewart Living as a whole, while they will see that the products and brand have value, they might be a little hesitant to get involved due to all of the drama associated with the brand. The potential acquirer will notice that ad sales and show cancellations have led to a lack of revenue growth and expanding losses. However, if Martha Stewart Living becomes cheaper, a buyer might step in.
The bottom line
After the J.C. Penney/Macy's incident, Martha Stewart Living is dealing with negative publicity, on top of low company morale, declining revenue, and expanding losses. On the other hand, Daniel Dienst has proven to be a successful turnaround artist, and nobody should ever feel too comfortable betting against Martha Stewart.
Personally, I think this would be too risky of an investment right now given all of the aforementioned headwinds. However, make sure to do your own due diligence prior to making any investment decisions.
