Martha Stewart Living Omnimedia (MSO.DL) has had a tough last few years despite continued popularity for the Martha Stewart brand. The company has spent time restructuring its operations, due to changing media-consumption patterns, including cancelling its live-audience show and eliminating some of its niche publications. 

In addition, Martha Stewart Living Omnimedia has made some mistakes, like the signing of a product-licensing arrangement with J.C. Penney (JCPN.Q) that didn't sit too well with existing licensee Macy's (M -2.35%), culminating in a high-profile court battle. However, with a recent mending of fences between the company and Macy's, is there potential upside for investors?

What's the value?
Martha Stewart Living Omnimedia's business has been on a downward slide over the past five years due to contraction in its publishing and broadcasting segments, the source of most of its revenue. While the company's premier publication, Martha Stewart Living, has maintained a subscriber base of more than 1 million, waning interest in its other niche publications led to their eventual demise, sharply curtailing the company's overall advertising and circulation revenue. On the bright side, though, Martha Stewart Living Omnimedia has souped up the content and capabilities of its online properties, which has led to greater traffic flow and growth in digital advertising revenue.

In fiscal year 2013, Martha Stewart Living Omnimedia's results have continued to be weak, evidenced by a 19.8% top-line decline that was primarily caused by double-digit drops in its publishing and broadcasting segments. While the company reported another operating loss during the period, its performance improved versus the prior-year period, thanks to a reduction in the size of its sales and marketing organization. More important, its net cash position has given it time to implement the changes that should hopefully lead to a profitable enterprise.

Of course, a major part of Martha Stewart Living Omnimedia's future profit story and corresponding value proposition is its merchandising operations, currently accounting for roughly 37% of total sales. While the company has leveraged its brand with a number of licensed product partnerships, from paint sold at Home Depot to pet products sold at PetSmart, the housewares category is the company's forte, hence the rationale behind its gamble to expand market share in this area through its 2011 deal with J.C. Penney.

A bad idea in hindsight
In retrospect, the deal with J.C. Penney probably made little sense for Martha Stewart Living Omnimedia, given the diverging fortunes of J.C. Penney and its larger competitor. Macy's, for its part, has been a forward-thinking enterprise trying to capture incremental market share through initiatives like its localization and omnichannel strategies while maintaining financial flexibility with a solid balance sheet.

Macy's efforts have continued to produce financial dividends in FY 2013, including rising comparable-store sales and a 2.1% top-line increase. Despite a lack of opportunities to grow its overall store base, Macy's has used its various initiatives to create more productive stores, leading to an uptick in its operating profitability. While the positive results could have led to complacency, Macy's seems to recognize the need to maintain a favorable cost structure in light of competitive pressures, recently announcing restructuring actions including the closure of a select group of underperforming stores.

In contrast, J.C. Penney has spent most of FY 2013 in crisis mode after a disastrous and expensive makeover in 2012 that led to sharp sales declines and almost proved to be the company's undoing. J.C. Penney's reversion to its traditional promotional strategy and a focus on in-house private-label brands, orchestrated in early 2013, seems to be gathering strength, with the company reporting a 3.1% comparable-store sales gain for the recently completed holiday season. However, the company's continued operating losses and weak financial position, courtesy of large debt issuance in 2013, make its future anything but certain.

The bottom line
Martha Stewart Living Omnimedia has made some smart moves lately, including shrinking its publishing operations and limiting its relationship with J.C. Penney to certain nonoffending categories, a move that likely appeased key licensee Macy's. With little debt and a strong roster of major licensee partners, it is an intriguing bet for investors.