Martha Stewart Living Omnimedia's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Oct.29.13 | About: Martha Stewart (MSO)

Martha Stewart Living Omnimedia, Inc. (NYSE:MSO)

Q3 2013 Earnings Conference Call

October 29, 2013 08:30 a.m. ET

Executives

Daniel W. Dienst – CEO and Director

Ken West – CFO

Katherine Nash – VP Communications and Investor Relations

Analysts

Michael Kupinski – Noble Financial Group

Operator

Good morning and welcome to the Martha Stewart Living Omnimedia Third Quarter 2013 Earnings Conference Call and webcast.

All participants will be in a listen-only mode until the question-and-answer session of the call. At the request of Martha Stewart Living Omnimedia, this call is being recorded. Anyone with objections should disconnect at this time.

At this time it is my pleasure to introduce Katherine Nash, Investor Relations, Martha Stewart Living Omnimedia. Katherine, you may begin when ready.

Katherine Nash

Thank you and good morning everyone. Welcome to Martha Stewart Living Omnimedia’s third quarter 2013 earnings conference call.

Before we begin, let me remind you that our discussion will contain forward-looking statements, which are made pursuant to the Private Securities Litigation Reform Act of 1995 as amended.

These statements are not guarantees of future performance and involve certain risk and uncertainties, which are difficult to predict. Actual future results and trends may differ materially from what is forecast in forward-looking statements due to a variety of factors, many of which are described in our SEC filings.

Also non-GAAP numbers are reconciled to GAAP in an attachment to our press release, which appears on our website at marthastewart.com.

Thank you, and now I’ll turn the call over to Ken.

Ken West

Good morning and thanks for joining us. Before getting started I want to welcome our new CEO, Daniel Dienst, to today’s call. Today is day two for Dan, but he’s going to share a few initial thoughts about his view of MSLO after I have completed my review of the third quarter. We are glad to have Dan on board and I’m very much looking forward to working with him.

In addition to Dan’s appointment, I will first address the recently announced amendment of our merchandising partnership with J.C. Penney. This is a very good outcome for MSLO in a few levels, and I like to just recap it briefly here. We announced the revised agreement last week, and under the amended terms we will move forward with a focus on the following Martha branded category, window treatments and hardware, lighting, holiday and celebrations. The guaranteed minimum royalties and design fees have been revised to approximately 50 million over a term of 4.5 years, reflecting the narrowed category focus.

We have also received 11 million shares of our common stock that J.C. Penney owned and their single share payments of preferred stock. The appraised value of these unregistered shares will be accounted for in the fourth quarter. Additionally, J.C. Penney will no longer have representation on our Board of Directors.

We are glad to have revised this agreement, or have this revised agreement in place and to be moving forward with J.C. Penney. We feel this is likely to lead to a resolution of the outstanding litigation.

I will move on now to the results. Overall our results for the third quarter show continued positive indicators with respect to the improvement initiatives we have implemented, but they also underscore that we have ways to go to achieve our goal of delivering performance that is sustainable and representative of engagement we see between our brands and consumers.

Total revenues were $34 million in the third quarter of 2013, compared with $44 million in the same quarter of 2012. Our 2013 revenues were paced by 7% growth in Merchandising revenues, offset by a decrease in Publishing revenue to 19 million, reflecting the impact of the restructuring of our Publishing business operations in late 2012.

Broadcasting contributions were negligible in the third quarter as anticipated due to the fact that we did not deliver any new programming in the period, so my commentary on this segment today is limited. Our operating loss in the quarter totaled 4.1 million and as compared to a loss of 6.5 million in the prior year, after excluding the year ago impairment charges. But overall our results were worse than we expected due largely to lower Publishing revenue.

The good news in Publishing is that we continue to see increased ad sales at Martha Stewart Living year-to-date, and weddings also continued to perform well. Restoring solid advertising performance to MSL is a key element of our Publishing turnaround strategy. Year-to-date through September, total ad pages in MSL increased nearly 12% over the same period in 2012 versus modest declines for its competitor groups and the broader print industry.

This gain is more noteworthy when considering we published one fewer issue in the 2013 period. Revenues per issue are up accordingly, and CPMs are holding relatively firm. While these trends are encouraging and positive, our Publishing results for the third quarter were disappointing and significantly below our expectations. As we indicated previously, our forecast reflected the publication of only two issues of Martha Stewart Living in the quarter due to our decision to reduce the frequency of the print title to 10 issues annually. However, other factors emerged that were unexpected. The largest of these was the absence of anticipated advertising spending from J.C. Penney in our media as they re-evaluate their marketing strategy under their new management team. This impacted Q3 print and digital advertising revenues and will have a similar impact in Q4.

In digital, ad revenue growth was modest, restrained by the absence of the previously anticipated J.C. Penney revenue, and what we believed was some general industry softness in display advertising in the period.

Operating loss in Publishing totaled $6.4 million. The sequential increase from a loss of $5.7 million in the second quarter is a function of the lower than anticipated revenue. We did see improvements on the expense side in the third quarter and in fact total publishing expenses were down about $4.3 million from Q2. This amount is net of investments in our digital group, particularly video. While we have made significant strategic reductions to our publishing cost structure our results today indicate that it remains too high relative to the advertising revenues we are currently generating from our print and digital activity.

We continued to evaluate options for lowering our cost while also working to gain additional traction in print and digital sales. As we work to improve performance, there continues to be a great deal of activity across our publishing group and building audience and are enforcing the strength of our brands, particularly in digital media, where we continue to see strong performance of use of our video content, and we’re also seeing increased visits to Martha Stewart sites from mobile devices.

We estimate that our digital audience, as measured by unique visitors including mobile, was up 25% over last year’s third quarter. In addition to our digital properties, Martha also continues to expand her vibrant social media audience. We also published her 80th and 81st books in the quarter, Martha Stewart’s Favorite Crafts for Kids and Martha Stewart's Cakes. And in October, we celebrated our second annual American Made celebration in New York honoring creative entrepreneurs across the country.

Moving to Merchandising, the addition of J.C. Penney helped drive 7% revenue growth in the quarter to $14.1 million, in line with our expectation. Our pets business at PetSmart also contributed to the growth in the quarter. Year-over-year sales comparisons for The Home Depot were down somewhat as anticipated, but the improving trend in select categories including kitchens and paint, are encouraging. Our quarter also included the launch of the Martha Stewart Essentials line of supplements developed with our new partner, Inergetics. Martha Stewart Essentials began selling on Walgreens store shelves in September.

Merchandising operating income grew 11% in the quarter, exceeding the 7% growth in revenue. Starting in Q2, we anticipated the possibility of changes in our JCP partnership, and began managing our business accordingly, including a resizing of our design team around the categories we are pursuing going forward. Even with the amended terms and smaller scope, the revised partnership drives attractive revenue growth and further diversifies our portfolio of large retail partners.

Wrapping up the segment discussion, corporate expenses of $7 million, were approximately $1 million lower in the third quarter compared with the year ago due largely to lower executive compensation and reduced legal expenses in the 2013 period.

Looking at the balance sheet, we have a total of $41 million in cash, cash equivalents, short-term investments, and restricted cash and investments at September 30. We remain in a solid working capital position and have no long-term debt outstanding.

I will now review our outlook for the fourth quarter. In Publishing, we expect to see significantly improved revenues compared with the third quarter just reported, but they will be down approximately 20% from a year ago, partially offset with higher digital revenue. Expenses for this segment are expected to decline in the low double digits on a percentage basis with savings related to the restructuring offset somewhat by higher marketing and technology cost in digital. This leads us to expect an operating loss for the quarter in the $3 million range.

In thinking about the year in Publishing, we realized most of the anticipated cost benefits from our restructuring activity undertaken a year ago, net of reinvestments we made in our digital operations. However, our revenue clearly did not keep pace as planned, despite the encouraging signs we have seen in MSL and weddings during the year, as well as higher digital revenues. We had previously indicated that our restructuring would generate $5 million to $7 million in improved adjusted EBITDA. Unfortunately we were unable to deliver on that expectation, and we will report an operating loss similar to last year’s level. We will be intensifying our focus around driving improved economic performance in 2014.

Merchandising revenue is anticipated to approximate the prior year fourth-quarter performance, and operating income should increase modestly. This will translate to full-year performance at approximately last year’s level. This anticipated result is due to the trajectory of the JCP relationship early during the year, which included higher expenses associated with the full design team staff up. This segment had to absorb these expenses through more than half of the year as the relationship evolved to its current revised status.

In Broadcasting, we anticipate revenue to come in below $1 million and for the segment to be modestly profitable. Additionally, we anticipate no significant programming deliveries in the 2013 fourth quarter. Our fourth-quarter corporate expenses should be approximately $6 million, substantially below the prior year, due mostly to lower litigation expenses.

As I mentioned earlier in my remarks, we will account for the return of our stock from J.C. Penney in the fourth quarter, which will be reported as a gain and will likely lead us to report a profit for the quarter, and positive earnings per share for the year.

That concludes my comments and now I would like to introduce Dan Dienst.

Operator

Good morning and welcome to the Martha Stewart Living Omnimedia third quarter 2013…

Daniel W. Dienst

All right. Thank you operator for that and thanks [Indiscernible], well done as always. Good to be sitting next to you.

Good morning everyone. I would like to make some brief comments after about 20 hours in the CEO seat and then we will turn it over to Q&A. As I said in my statement when we announced that the board had asked me to step into this role, it is truly an honor and a privilege to be here at MSLO. It is rare in my humble experience to see an opportunity with so much unrealized potential backed up by an organization with so much talent and so much creativity.

So to a certain extent it begs the question, why has this potential not yet been tapped and realized. We can sit and whine about how rough the past few years have been, they are sorted trials and tribulations, some significant distractions ranging from a rapidly shifting media and publishing landscape to unnecessary litigation with some of our [storied] and valued retail partners. But whining will not make wine as the saying goes.

What I am here to do is provide some basic leadership, take some of the heavy weight off our founder’s shoulders and make some of the tough but obvious decisions that should have been made long ago, all the while nurturing and ferociously protecting the Martha Stewart brand, which despite all the recent history remains as strong as ever and without peer.

As I roll my sleeves and begin work in earnest reviewing all of our businesses, we’re going to continue to move quickly, pull some of the noisy litigation balls out of the air, and reaffirm our commitment to delivering beautifully designed high quality products to our retail partners. We should be growing with our partners, not litigating with them. With those balls out of the air, we will then quickly begin to lay the foundations of exactly what our shareholders expect from us over the longer term, delivering sustainable earnings from each of our businesses, and being good custodians of our shareholders’ precious capital, because at the end of the day no matter how many press releases we put out, no matter how many media conferences we attend, no matter what the press rates, it is all about earnings and the quality of those earnings.

I had accepted this job because we earnestly believe that with some hard work and an organization that rallies around our founder’s initial vision about how to live well, we will create shareholder value that is at least equal to the value of our powerful brand. There was an opportunity here to help write the second chapter of one of the greatest American business stories ever told, the Martha Stewart story.

So thank you for the opportunity to briefly address you this morning, and we look forward to updating you on our progress in future calls, and I will be remiss if I didn’t also thank all of our talented employees, who have given me such a warm welcome upon my arrival to the office yesterday.

Well, now I will turn the call back to the operator for any questions you may have. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator instructions) You do have a question from Michael Kupinski from Noble Financial Group.

Michael Kupinski -- Noble Financial Group

Thank you and welcome Dan. I just had a couple of operational questions I want to ask first, what were the comparable revenues in the Publishing division year-over-year if you factor out the noise of, you know, for the shift into digital publications and the extra publications, what were the revenues down?

Ken West

Mike you will see in our press release the financial results for the quarter by segment. So we have not specifically broken out the revenues associated with the two titles that are no longer in print, specifically Whole Living and Everyday Food. So, as you know, we referenced that in prior quarters that we had the expectation that we would have a driving force through improved economic performance in that 5 to 7 range, $5 million to $7 million range in EBITDA, but we have had some disappointing ad sales results, which I referred to in my prepared remarks.

Michael Kupinski -- Noble Financial Group

Can you just give me what the same comps would have been year-over-year?

Ken West

Well, as I included in my prepared remarks, we talked about the improvement in ad revenue pages for MSL, I think that exceeded 12% year-to-date through September, and that is the positive news, as well as the increase in our digital ad revenue, which we expect to have the biggest growth in revenue for us in operations.

Michael Kupinski -- Noble Financial Group

Okay. If -- you know, I think you were trying to sublet the extra space in the corporate headquarters, earlier in the year that kind of fell through, what -- any updates on that at this point?

Ken West

It is still on the table for consideration, and we will update you once a final conclusion is rendered.

Michael Kupinski -- Noble Financial Group

And in terms of the lease on the corporate headquarters, how long does that run for at this point?

Ken West

We have approximately 4 years remaining on our lease here in New York City.

Michael Kupinski -- Noble Financial Group

Okay, and in terms of the cost cutting obviously was very evident in the quarter, and particularly in publishing, and you were indicating that you know, if you didn’t see the revenue traction that you expected and obviously you are showing some traction in terms of ad pages and so forth, but what are your thoughts about the sales force, the size of the sales force going forward, any thoughts in terms of where you might see some extra cuts if you need to continue to see cost-cutting going forward in the Publishing division?

Ken West

That is an excellent question. I think we have the grounds covered in regard to our ad sales force. We’re just not making the effectiveness that we were seeking, but we do have the grounds covered, and we are looking for other areas, but we won’t go into any specific detail for other cost reductions. So please stay tuned, and we will see what we can disclose in the future.

Michael Kupinski -- Noble Financial Group

Aside from the contributions from J.C. Penney, can you just kind of give us the general feeling how the other partners, the weaker partners, kind of performed in the quarter?

Ken West

I would say all the partners performed as expected. We gave specific note to The Home Depot’s performance, which is starting to have an up-tick, which is what we’re anticipating and what we had planned. We have a great partnership rolling forward with them, and as I stated, all the other partners performing and we are happy with their performance to date.

Michael Kupinski -- Noble Financial Group

And then regarding The Home Depot, in terms of just kind of looking at, you mentioned that you are starting to see some traction, is the traction related to just signing deals, or is it related to additional SKUs, can you give us an idea of where the revenue improvement is starting to come from from Home Depot?

Ken West

There are continually new SKUs introduced every season. However, the volume -- it is really the question of volume that was sold through at the Home Depot for the quarter, and we would like to see a combination of both additional SKUs, potential new categories and just more volume.

Michael Kupinski -- Noble Financial Group

Okay. Thanks, and Dan I just have a couple of questions, can you -- you know, obviously you gave a terrific introduction, and I greatly appreciate that, what do you believe that you uniquely bring to the table at MSO and what was your interest specifically in coming to the company, I know that you gave -- you talked about, you know, the brands and so forth, but what do you uniquely bring that you feel to Martha Stewart?

Daniel W. Dienst

Well, thanks Michael. I think what I bring is a couple of things. One is I’m not burdened by history. I come in here fresh as I have done in many other corporate situations. I was speaking to some people last night and talking about the obvious question is here is a guy coming in without merchandising and media background, and I sort of looked at them and said, well, to business all right, and I have done things in basic industry, I have done things in retail, I think back to even things I did when I was a much younger man in sort of oil and gas, you know, exploration and production.

You know, we have got a tremendous, pardon the analogy to stray into exploration and production and oil and gas, we have got a tremendous reserve base, and the analogy is, you know, with our brand, which is the reserve base, how do we begin to really accelerate the monetization of that brand and deliver, you know, again the high-quality reserves to the market, and the means of doing that in our pipelines are obviously digital and the magazines, [is retail], and we need to do so in a cost effective and efficient manner, because that is what people expect. The reality is this company with its remarkable brand hasn’t being able to match up its earnings potential with that brand.

And we are going to tighten up the delta, and we’re not going to tighten up by denigrating the brand, we are going to tighten it up by driving the earnings forward and run this thing like a business. We have terrific, terrific people. You know, I have been around this company for a while tangentially. I have sat on the board now for a couple of months, the talent is unmatched and we need the talent to be more business like in our approach everyday, and that is what our shareholders expect.

We are a public company and we are beholden and obligated to deliver as I said in my prepared remarks a stream of earnings that are sustainable and high quality, and that is what we are after. And so you asked also a lot of questions about, you know, additional cost outs, or restructurings, and repositioning, we are going to get to that hopefully in a hurry, and you know, it is incumbent upon us to do so, and we ask you to stay tuned till we [appreciate this forward].

Michael Kupinski -- Noble Financial Group

Thanks Dan with that, and what in terms of -- is driving your compensation, I mean what like for instance, what is it driven by earnings, is it driven by stock price, I mean, what are the elements that kind of, you know, kind of help your compensation going forward, and if you can just talk -- I would imagine it is performance-based options and so forth as well?

Daniel W. Dienst

I mean actually for me it has always been, I have always tried to being myself in the many companies I have worked for, and work with as an owner, and -- so I want to sit pari passu with all of our investors out there, our large shareholder, you know, our moms and dads if you will who own this -- may own a few shares around the country or around the world, and I have always viewed myself as an owner. So I am highly incented by our Board of Directors to drive some value into our share price. But as I have said many times, you know, it is going to be the earnings, you know, we don’t control the stock price. You have some influence in it as you write and speak to investors and the like. At the end of the day the only thing that drives the P is the E and that is something we do control, and everything else should take care of itself.

Michael Kupinski -- Noble Financial Group

Thanks Dan and welcome aboard, congratulations.

Daniel W. Dienst

I appreciate that. Thank you.

Operator

(Operator instructions) There are no further questions. This concludes today’s conference call. Thank you for participating. You may now disconnect.

Ken West

Thank you.

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