Martha Stewart Living Omnimedia

NYSE listed Martha Stewart Living Omnimedia (US: MSO) was created as a vehicle for the namesake founder's lifestyle products. The company has however been in a state of turmoil for much of the last 2 years following the indictment and subsequent conviction of Martha Stewart in relation to an insider trading investigation. However the shares have staged a robust recovery in recent months on the back of a series of positive developments.

In September Martha Stewart confirmed that she wished to begin her 22 week prison sentence early rather than wait for the outcome of an appeal. The decision meant that Martha Stewart could be back as early as next March to drive her company's revival. More recently the shares have been boosted by a major retail merger in the US, the development of a new television programme and an anticipated return of advertisers.

Martha Stewart's merchandising division has been only one of four units to be profitable this year, however, sales had been lower than last year. Therefore news of the US$11 billion deal between Kmart and another major US retailer Sears, Roebuck & Co, raised expectations that turnover at the division would receive a big boost. The new company, Sears Holdings, is expected to greatly expand the distribution of Martha Stewart's signature products. Significantly the new company will give shoppers a low cost, mall based alternative to rival retail heavyweights Wal-Mart and Target.

We believe that the market has reacted astutely, and that overall sales will be boosted substantially as a result of the merger. Previously we were optimistic regarding merchandising turnover in 2005, and the merger has added significant weight to this view.

The second major development has been the announcement made this month by MSO and NBC Universal, a major US television network. The two companies have agreed a multi-year deal for a new daily programme starring Martha Stewart beginning in the fall of 2005. Mark Burnett, the reality TV guru brought in earlier this year to revive the company's Television division, will be the executive producer of the nationally syndicated programme. We expect that the new programme will have positive effects on MSO that extend beyond the Television unit, as Martha is reintroduced to her loyal core of customers as well as new viewers.

Another encouraging development at MSO was the result of a September survey by WPP that 70 percent of Martha Stewart Living subscribers plan to renew their magazine subscriptions. This renewal rate is 19 percent better than the industry norm. We believe the renewal findings mark a significant turnaround from when the scandal surrounding Stewart was at its highest and magazine renewals fell 10 percent below the industry average. With strong subscription renewals returning to the magazine, we are optimistic that advertisers will return as the company has suggested in the second quarter of 2005 when Stewart is also released from prison.

We believed it was foolish of the market to assume that Martha Stewart's brand would be irrevocably tarnished by her conviction in March. We still expect the brand to go from strength to strength. However given the extent of the rally in MSO over the past three months, the prospect of some near term consolidation has increased. Nevertheless we believe that the company's longer term earnings recovery will gain further momentum upon the namesake's return, and in the interim, under the stewardship of new CEO Susan Lyne. Until earnings growth is re-established we are comforted by the strength of the company's balance sheet with US$158 million in cash and short term securities and no debt.

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