Shares of Martha Stewart Living Omnimedia (UNKNOWN:MSO.DL) have run hot lately, up more than 75% over the past 12 months, thanks to generally better-than-expected results. Mr. Market is also likely happy that the company made up with department store giant Macy's (NYSE:M), ending protracted litigation over Martha Stewart Living Omnimedia's strikingly similar product licensing deal with J.C. Penney (NYSE:JCP).
That said, Martha Stewart Living Omnimedia's stock price may be getting a bit ahead of the fundamentals, given that the company continues to report sales declines and operating losses. So, after a big run, is it still a good bet?
What's the value?
Martha Stewart Living Omnimedia built a media empire around Martha Stewart's stylish ways and popularity. Her long-running syndicated TV program, The Martha Stewart Show, provided the foundation for ancillary revenue streams that included magazines and licensed merchandise sales. Unfortunately, declines in publishing advertising revenues, as well as reduced television and radio presences, have led to falling total sales over the past few years and this has led to a string of operating losses for the company.
In its latest fiscal year, it was more of the same for Martha Stewart Living Omnimedia. It suffered a double-digit revenue decline that stemmed from lower sales in its publishing and broadcasting segments. On the upside, though, ongoing restructuring activities significantly improved MSLO's profitability during the period, which resulted in its lowest operating loss of the past five years. More important, the corporate restructuring freed up resources for a focus on growth areas like its licensed merchandise segment. In this space it has a roster of big-name distribution partners that include Home Depot and PetSmart in the gardening and pet products categories, respectively.
Betting on a horse
Despite a growing roster of licensed product categories highlighted by a recent foray into vitamins, the home category is clearly Martha Stewart Living Omnimedia's focal point, as it allows the company to sell a range of unique textiles and housewares. While the company would undoubtedly have liked the dual distribution opportunities of two major retailers, it is pretty clear that Macy's and J.C. Penney couldn't play nice together, as seen by the ongoing litigation between the parties, and this ultimately forced MSLO to bet on a horse.
Of course, MSLO bet on Macy's. The companies came to an amicable resolution in January, an event that was no doubt helped along by a change to its J.C. Penney partnership agreement last fall, which eliminated the product categories at the source of the dispute. In hindsight, that was probably the wise move, given the divergent fortunes of the two iconic retailers.
Macy's, for its part, has been a well-oiled machine lately, reporting top-line and comparable-store sales gains in each of the past four fiscal years. More important, the company has reported improved operating profitability, on an adjusted basis, in each of those years; it has focused on cost efficiencies and maximized its personnel resources, which included the introduction of online fulfillment through its physical stores. The net result for Macy's has been strong operating cash flow that has fueled its investments in greater inventory selection and an expansion of its Bloomingdale's Outlet concept.
On the other side of the spectrum, J.C. Penney has struggled mightily of late. It has been hurt by a 2012 format makeover that didn't pan out, which is evidenced by comparable-store sales declines in each of the past two fiscal years. While the company's reversion to its traditional format and highly promotional marketing scheme seems to be bearing fruit, as evidenced by higher comp sales in its last two fiscal quarters, the heavy debt outlay required to get J.C. Penney back on track has put it in a relatively poor financial position. In addition, with operating profitability still anecdotally a ways off, what the company will look like going forward remains to be seen, although the odds are that it will need to be a smaller operation.
The bottom line
Shares of Martha Stewart Living Omnimedia have had some positive momentum lately, as Mr. Market seems to expect the company to return to profitability in short order. This will likely come through greater licensed merchandise sales, especially at key partner Macy's. However, prudent investors should probably wait for that outcome to materialize prior to betting on the story.