Last Friday, shares of Martha Stewart Living Omnimedia (UNKNOWN:MSO.DL) shot up 18.35% to close at $3.87. This was followed by a 1.29% increase on Monday. The share price appreciation came about after the company's new CEO, Daniel Dienst, announced that he was laying off about 75 employees. The bold move, which illustrates the company's dedication to reducing expenses, will help lower next year's costs by an estimated $10 million. Does this news present the Foolish investor with an amazing opportunity to buy into a turnaround, or would you be better off taking the profits you have?
Martha Stewart's results have been anything but beautiful
To put this move into perspective, we should look at the recent performance of the company. Looking back five years, we can see that revenue has suffered significantly. Between 2008 and 2012, revenue at the media conglomerate fell 30.5% from $284.3 million to $197.6 million. This trend has extended into the company's 2013 fiscal year, with revenue falling 22.3% in its third quarter compared to the same quarter a year ago.
The primary drivers behind Martha Stewart's revenue decline over this timeframe have been two-fold. First, sales in its broadcasting segment fell 63% from $47.3 million to $17.5 million. From 2011 to 2012, the 45% drop in revenue for this segment came from lower advertising and licensing revenue, mostly associated with fewer television integrations and the conclusion of The Martha Stewart Show.
Second, revenue from the company's far-larger publishing segment dropped 25.1% from $163.5 million to $122.5 million. Like the broadcasting segment, the publishing segment saw its greatest decline (13%) from 2011 to 2012. The sharp decline stemmed from a combination of fewer advertising dollars and lower rates on subscriptions.
The revenue decline over the past few years has brought with it a similarly large decline in profitability. Between 2008 and 2012, net income for the conglomerate fell from -$15.7 million to -$56.1 million. In addition to lower revenue, higher costs as a percentage of sales have significantly impaired the company's fundamentals.
Putting aside profitability for a moment, we stumble upon another piece of bad news for shareholders; lawsuits. Recently, the company went through a legal dispute involving its alleged breach of contract with Macy's (NYSE:M). In 2011, Martha Stewart and J.C. Penney Company (NYSE:JCP) agreed to sell certain products (both name-brand and under the Everyday name by J.C. Penney) through the retailer's store-within-a-store setup.
The deal between J.C. Penney and Martha Stewart was expected to last 10 years and projected to bring in at least $200 million in revenue for Martha Stewart in exchange for a stake in the company. In response to the deal, Macy's, which has the rights to the Martha Stewart Collection, filed a suit alleging that the company breached its exclusivity rights and that J.C. Penney encouraged the breach.
After a lengthy trial, J.C. Penney agreed to sell back its stake in Martha Stewart and significantly reduced its involvement with the company. Though this seems to indicate that troubles involving Martha Stewart are over, it's possible that Macy's, which is the conglomerate's largest customer, could eventually cease its relationship, a move that could spell the end for Martha Stewart. With the company generating around $250 million in revenue for Macy's in 2012 alone, it's doubtful that their relationship will end anytime soon, but the risk is there in the long run.
As you can see, the situation at Martha Stewart is poor and getting worse. In addition to seeing revenue fall drastically over the past five years, the company has continuously been hit with net losses. Add to this the risk of a major deal going south, like the one it has with Macy's, and the risks are omnipresent.
To address these concerns, management is probably right in finding ways to cut costs, but it's unlikely that a $10 million reduction in employee expenses will have a large enough impact to justify such a tremendous jump in market cap. Instead of spelling the beginning of more prosperous times as the corporation trims away at what it considers unneeded resources, the move might be a sign of management's last desperate attempt to plug a hole on a quickly sinking ship.
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.