Trading at $21.31 as of May 7, 2001
Martha Stewart has uncovered an extraordinary world of cooking and entertainment for my mother. The journey began in the '80s with Stewart's books, progressed into the '90s with Martha Stewart Living magazine, and today includes television, radio, a mail-order catalog, and a website. As someone who's reaped the fruits of this special relationship, I assure you my mother's money has been well-spent.
Today marks perhaps the most important day of that union. Mom, after years of devotion to Martha Stewart, the time has come for you to consider Martha Stewart Living Omnimedia
Martha Stewart Living is made up of four business units: publishing, Internet/direct commerce, television, and merchandising. The publishing unit contributed roughly 67% of total revenue last quarter and is highly profitable, with an operating margin of 37%. It includes Martha's bestselling books, two regular magazines, special publications like Martha Stewart Holidays, a newspaper column, and a radio show.
In publishing, the biggest risk is advertising. Most consumer magazines have a 50-50 revenue split between circulation and advertising, but at Martha Stewart, advertising makes up more than 60% of revenue. That tilt -- albeit a small one -- leaves the publishing business more exposed to cyclical changes in ad spending.
Meanwhile, merchandising accounts for 11% of revenue, and is highly profitable, with an operating margin of 99%. That's because the company generates revenue from royalties on products sold in retail stores such as Kmart
Unlike publishing, I can't find a weakness in the merchandising unit. In fact, it looks as if the sky's the limit: The business model is highly profitable and there are plenty of opportunities for expansion. The food opportunities appear the most promising. I'd personally like to see -- and I'm sure you would as well, Mom -- a Martha Stewart line of gourmet food. Don't laugh -- I'd certainly buy Martha Stewart frozen lasagna over Lean Cuisine or Healthy Choice.
Television media adds lots of value to the Martha Stewart brand, but unfortunately, the unit is the slowest-growing, least-profitable, and smallest contributor to the company's top line, kicking in only 9% of revenues. Television sales dropped 12.3% year-over-year last quarter and posted an operating margin of 12%. Soft advertising and lower ratings adversely affected its results. Television includes "Martha Stewart Living" and a weekly appearance on the "CBS Morning Show."
I'd like to see the company abandon this business because of its low growth rates and margins, but that's unlikely. Instead, the company's growth strategy primarily repurposes existing content for other shows. For example, the company has taken old cooking footage from the "Martha Stewart Living" program and begun broadcasting "Martha's Kitchen" on the Food Network.
Lastly, Internet/direct commerce is Martha Stewart Living's fastest-growing segment as measured by sales growth. The business unit includes the Martha By Mail catalog and Internet site found at www.marthastewart.com. As the Internet moves deeper into households, Internet/direct commerce opportunities will continue to grow. Jupiter Communications, for example, estimates that 40% of households have access to the Internet. Forrester Research expects that to grow to 65% by 2003.
Internet/direct commerce, which accounts for 13% of revenues, is the only unprofitable Martha Stewart Living business. The company continues to invest heavily in this segment and calls for profitability in 2002. But revenues fell 11% year-over-year last quarter because of a tough Internet advertising environment and soft product responses. All Martha Stewart Living's businesses, and particularly Internet/direct commerce, are highly susceptible to economic change, which affects everything from advertising to consumer spending.
We've completed a top-down study of Martha's business, but no analysis would be complete without answering one question: What happens to the company when there's no Martha? This is a risk investors should weigh heavily, but I feel her spirit will live on years after her departure.
Don't get me wrong, I'm not talking about her haunting a New England mansion somewhere. The company has already started to plan for her eventual departure by making product and content decisions without her. As for television and radio productions, where her physical presence is a must, the company has begun using other contributors along with Martha, such as its magazine editors, who could ultimately replace her. The company also has access to Martha's "treasure chest," a library of 10,300 pages of magazine content and 4,800 pages of book content.
Martha Stewart Living has a rock-solid financial position with roughly $114 million in cash and no long-term debt. It produced $36 million in cash flow from operations last year, compared to $28 million in 1999 and $18 million in 1998. That growing cash balance should lead the way to further investment opportunities, particularly toward the company's Internet/direct commerce segment.
Overall, Martha Stewart Living shares and Martha's products have lots in common -- both are of the highest quality and expensive. Trading at 36 times 2001 earnings, Martha Stewart Living looks pricey, particularly considering that it's expected to grow earnings 20% to 25% this year. Still, it's a company with an impeccable brand, solid fundamentals, and expanding possibilities. Mom, buying the stock seems like the next logical step in what has been a very special relationship.
A Stock for Mom represents the opinion of one Fool and should in no way be taken as the opinion of either The Motley Fool, Inc. or the company in question, or as representative of anyone or anything other than that specific Fool's thoughts.
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