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Executives

Katherine Nash - AVP IR & Corporate Communications

Charles Koppelman - Executive Chairman

Robin Marino - President & CEO, Merchandising

Kelli Turner - EVP & CFO

Analysts

Michael Kupinski - Noble Financial

David Bank - RBC Capital Markets

David Kestenbaum - Morgan Joseph

Michael Meltz - JPMorgan

Michael Kupinski - Noble Financial

Martha Stewart Living Omnimedia Inc. (MSO) Q3 2010 Earnings Call October 27, 2010 11:00 AM ET

Operator

Good morning and welcome to the Martha Stewart Living Omnimedia third quarter 2010 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.

It is now my pleasure to introduce Katherine Nash, AVP Investor Relations and Corporate Communications of 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 2010 third quarter earnings conference call.

Before we begin, let me remind you that our discussions 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 risks and uncertainties that 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 Charles.

Charles Koppelman

Thank you and good morning. In the second half of 2010, we are seeing some terrific results in merchandizing with the expansion of our offerings at the Home Depot and our new initiative at PetSmart. On the media front, our internet business continues to register robust growth and we had a solid quarter in publishing compared to the prior year’s period. And as we announced just yesterday in an effort to drive stronger results, we are streamlining our sales and marketing teams.

Going forward, each member of the team will sell across all of our media platforms. This new organizational structure provides increased efficiency for our clients more at a single point of contact at MSLO. It also represents a considerable cost savings around $4 million for us. Broadcasting has been challenging as we continue to be effected by the remaining runoff results from the syndication in the quarter.

We launched our programming block on Hallmark in mid-September and are focused on building our audience. We continue to see the move from broadcast to Hallmark on cable as a great opportunity for our company.

It takes time to build an audience on cable, even for someone of Martha's stature. We are working closely with Hallmark to compensate that and to raise awareness about our move. We’ve also been adjusting the programming mix and schedule in fact, we already started to see some positive results with steady growth in women viewers age is 25 to 54, with an 81% increase in net demo since we have won.

We are also getting some nice feed back from viewers who have already made the move with us and we have had good response to our primetime specials on Hallmark including the latest special Tricking and Treating with Martha Stewart which attracted nearly 1 million viewers. We will be following up with another hour long holiday special with Martha Stewart’s Holiday Open House would premier in December.

We are seeing early interest in Lucinda Scala Quinn's Mad Hungry Show and Hallmark has ordered a Christmas special with Lucinda since late June. Hallmark Channel was the fifth most watched cable network during the holiday season in 2009 which bodes well for our content and already is in the coming months.

Additionally, in broadcasting, Emeril's new Fresh Food Fast Show debuted on July 10, to great reviews on the food networks Scotland Channel. We continue to see a lot of opportunity for Emeril in broadcasting and merchandising and look forward to updating you in the months ahead.

Now, onto the publishing, we’ve showed continued stabilization recorded in fact when increasing the rate base for magazines affected to the January 2011 issues. Martha Stewart Living will increase 2.025 million from 2 million readers. Everyday Food will increase 1 million from 900,000 readers. And Whole Living will increase 650,000 from 600,000 readers.

This will be Whole Living sixth consecutive year of rate base growth. The rate base increase speak to the enduring appeal of our content and consumers notwithstanding a challenging environment footprints, in mid-November we will launch our first ever special digital issue of Martha Stewart Living Magazine for the iPad.

As an Omnimedia company our strategy has always to be wherever consumers are in Print, on TV and on the web. And now we are mobile too, we're happy to be working with Adobe to bring our magazines to the iPad. It's fitting that the launch of our first digital magazine will coincide with a 20 anniversary of Martha Stewart Living Magazine.

Martha changed the magazine industry with Living. And now, as we enter a new media era, our company is continuing a tradition of inspiration, innovation and excellence.

We think our readers will love it and we hope it expands our audience by attracting new readers to our creative concept. That’s a good transition into our internet business we tried a terrific order with total advertising revenue of 56% over last year. According to comScore panel data unique visitors across MSLO's websites grew 31% with page views up 37% over the prior year's period.

Our Martha Stewart Everyday Food app for the iPhone and iPod touch continues to resonate with consumers. It has been downloaded nearly 200,000 times such as mid-February launch and remains one of the most popular paid apps in the Lifestyle category on the App Store. And now we are in the process of getting more original editorial content, beautiful food photography and functionalities. We are expecting upgrade to be available early 2011; I should also mention that in September Martha Stewart’s everyday food was one of the handful of media brands selected to help launch HP's new line of Photosmart and wi-fi printers which allow consumers to print content from us without using a computer. And next week, we’ll launch our new Martha Stewart Makes Cookies app for the iPad.

The app will provide home benefits with recipe’s shopping list, how-to-videos, timers and techniques for making great cookies. From Halloween to Christmas, consumers know where to come for inspiration, recipes and how-to-ideas. Halloween seems a stock earlier each year and this one was no exception. Our website experienced considerable activity around Halloween content beginning at September and that is continuing into the fourth quarter, which we expect will be our most-trafficked quarter yet.

And some, we head towards the end of year; we are focused on building our audience on Hallmark channel which is also significant growth opportunity in broadcasting. We have a lot of momentum in our internet business and we are excited about the imminent launch of our new cookies app and our first digital magazine. We are still facing a tough and inconsistent advertising environment is expanding its audience from our brands remain strong.

And our merchandizing business is beginning to deliver exactly the kind of results we envisioned when we initiated our strategy of diversification and expansion. And now I will turn it over Robin who will take you to our merchandizing issues and results.

Robin Marino

Thank you Charles and good morning everyone, our Merchandizing business delivered a very strong performance in the third quarter with a continued expansion of our product line at the Home Depot and solid results for our Martha Stewart collection at Macy’s and our Martha Stewart Crafts line. We also had a very positive response to our new Martha Stewart Pets line at PetSmart stores and on petsmart.com.

Merchandizing revenue was up 7% over the prior year’s quarter with key partnerships across our Martha Stewart and Emeril brands demonstrating year-over-year sales increases in the quarter.

Now for some color on our partnerships, we are feeling great about where we are with our Martha Stewart Living line of home improvement products at The Home Depot. Since the launch of our partnership we have introduced products in 14 categories at more than 2000 Home Depot stores in the United States and Canada. Our special order carpet program which launched in the quarter supported by television and print media has been very well received by consumers. The program features 36 easy-to-clean durable nylon styles in a range of colors that co-ordinate with our paint palette.

We are also seeing lot of interest in our new cabinetry, countertop and hardware program which we showcased last month at a terrific event for designers, contractors and media. The program includes 11 different door styles, 32 hardware designs and a variety of finishes, and a range of countertop styles to complement our cabinetry finishes.

Additionally, we are exited about our holiday seasonal assortment, which began rolling out this month and should now be set in off stores and we have one store for 2011. Our Martha Stewart Pets line at PetSmart officially launched in the quarter and the results are very positive. We currently have our presence in multiple categories in all of PetSmart nearly 1200 stores in the US and Canada.

Top performing categories in the quarter include toys, feeding bowls and grooming tools. Our themed Halloween assortment also had great sell through. The launch was well supported with a successful commercial in which Martha put our products to the test. The commercial was so well received the PetSmart has put it back on the air. We are pleased with the early results and expect to expand our offerings in spring 2011 including the launch of an assortment of products for cash.

Last month marked the third anniversary of our Martha Stewart collection at Macy's, and we think there is a lot to celebrate. In a short period of time, we’ve emerged as the number one brand in Macy's home store. We had another solid performance in the third quarter driven by sales of soft home textiles.

On previous calls, we'd mentioned our lower-price-point Martha Stewart Essentials assortment. I am pleased to say that the line successfully launches in the quarter and we will expanding in Spring 2011 to include food prep items and bakeware.

For this holiday season, we are participating in Macy's gift initiative with some packaged Martha Stewart gift ideas. Macy's continues to put marketing muscle behind our brand, with print ads and a new commercial featuring Martha as I had mentioned on our last call.

Martha Stewart Crafts remains a solid contributor to our merchandising business driven by increased distribution and strong sales of our core offerings such as tools, punches, glitter and embellishments. We recently expanded into JoAnn Fabric and Crafts with our Halloweens assortment and will further extend our offerings into core categories at JoAnn Fabrics in the fourth quarter.

Home shopping continues to be a terrific sales form for our craft line. Late last month, our products were once again featured on HSN with positive results and we have planned for additional appearances on HSN and QVC UK in 2010 and 11.

HSN is also a wonderful forum for Emeril's product line and its appearances in the quarter was very successful. In addition, wholesale shipment of Emeril's All-Clad cookware line to Macy's, Bed Bath and Beyond, and other retailers registered double-digit growth. We saw similarly strong results with his coffee line with Timothy's and its appliances with T-Fal.

In early October, Emeril's red marble steaks line with Allen Brothers expanded to a full catalog and now includes seafood, sides, sausage and desserts. To sum it up, our Merchandising business had an excellent quarter. Our new partnerships are off to a terrific start more while our more established product lines continue to deliver results. As we look to the year’s end and beyond, we see a lot of opportunity to continue to grow our Merchandising business. And now Kelli will take you through our financials.

Kelli Turner

Thank you, Robin. Total revenue for the company was essentially flat at $49.7 million in the third quarter of 2010. Adjusted EBITDA was flat at a loss of $5.6 million; net loss per share was a loss of $0.16 versus a loss of $0.22 a year ago. Before moving to our segment results, I'd like to address two key points that help explain the year-over-year performance.

First, last year's third quarter included a catch-up accrual for bonuses, both cash and non-cash, while this year's bonus accrual has been consistent cash-only and is smaller than last year. Second, TurboChef impacted both Broadcasting and Merchandising in the third quarter of 2009, contributing almost $3 million of EBITDA.

Now for our year-over-year performance by segment, overall publishing revenue was $30 million compared to $27.1 million in the prior year. Keep in mind that the fall issue of Martha Stewart Weddings was recognized in this year's third quarter and then last year's fourth quarter.

Excluding the wedding's issue advertising and circulation revenue were both up 1% compared to the prior year. Martha Steward Living ad revenue was up 9% in the quarter. This was mostly offset by advertising performance at everyday food and whole living. Publishing adjusted EBITDA was a loss of $0.3 million in the third quarter of 2010 compared to a loss of $1.5 million in the prior year's quarter.

In the third quarter of this year, we made a significant direct mail investment which was not made in the prior year and should benefit our subscription business going forward. Broadcasting revenue was $5.8 million compared to $11 million in the third quarter of 2009. This decrease was due to the absence of TurboChef in this year’s third quarter.

Lower revenue from the Martha Stewart show in syndication, lower revenue associated with Whatever, Martha! which was delivered in the third quarter of last year and will be delivered in the fourth quarter of this year and lower guaranteed radio revenue.

Broadcasting came in lower than we expected at the time of last quarter’s call due to a slower than expected start of Hallmark Channel as well as timing of revenue recognition of some of our new programming. Broadcasting adjusted EBITDA was a loss of $3.5 million in this year’s third quarter compared to a positive $1.9 million last year.

Total internet revenue was $4.3 million in the quarter up 55% from $2.3 million in the prior year. Internet adjusted EBITDA was a loss of $0.6 million compared to a loss of $1.4 million in the prior year. We are in the final phase of the necessary re-platform of our website.

We think you will see visible changes and increased flexibility evident only next year. Merchandizing revenue for the quarter totaled $9.6 million compared to $8.9 million in the prior year period. Keep in mind that Kmart, 1-800-Flowers and TurboChef were in last year’s third quarter and are not in this year’s quarter.

Merchandizing adjusted EBITDA was $5.5 million compared with $4.3 million in last year’s third quarter. Adjusted EBITDA for corporate was negative $6.7 million in the quarter improved from negative $8.9 million in the prior year due to lower compensation costs which includes a lower bonus accrual I mentioned earlier, lower facilities related expenses and overall cost discipline. Our balance sheet remained solid at September 30; we had $41.4 million in cash, cash equivalents and short-term investments and $10.5 million in debt.

We expect some EBITDA covenants issues with our current covenant structure in the fourth quarter. We are not concerned because our bank has already indicated that they are willing to waive these covenants.

Looking ahead to the fourth quarter, we expect print advertising revenue to be down on an apples-to-apples basis versus last year’s fourth quarter. We are very focused on this development and are watching it closely, and we believe the restructuring of our sales team mentioned earlier will lead to greater efficiency going forward.

Additionally, the fall issue of Weddings was recognized in this year’s third quarter were recognized in last year’s fourth quarter. This will obviously impact our year-over-year comparisons for our circulation and ad revenue in the fourth quarter, as last year’s fourth quarter had three weddings issues, including one SIP and this year’s will only have two including one SIP.

For internet, we expected the continued growth in advertising revenue and have leased the low-double digits. Given the realities of how we operate our business, beginning in Q4 we intend to report internet and print under one reporting segment called publishing. We will of course continue to breakout any meaningful digital item, especially online ad revenue.

For broadcasting, even with last year’s TurboChef comparison we expect revenues to be up in the fourth quarter compared to last year due to revenue from the new programming block. For merchandizing, Q4 will be the last tough Kmart comparison for us, although keep in mind there was a small portion of Kmart revenue included in this year's first quarter result.

Kmart’s contribution in Q4 ‘09 was 15.8 million, this included recognition of the 10 million in previously differed Kmart royalties as non-cash revenue as well as the minimum guarantee true-up and earned royalties from Kmart. Excluding the Kmart revenues from last year, we expect merchandising revenue to be up double-digits in the quarter even with revenue from 1-800-FLOWERS and TurboChef in last years fourth quarter. As a reminder, last years fourth quarter included a $3 million make whole payment associated with an equity investment which will affect the merchandising EBITDA comparison in this years fourth quarter.

In corporate, we expect a Q4 severance charge associated with the changes we’ve mentioned in ad sales and marketing. In closing, we had some work to do in print and broadcasting but again the economic of the Hallmark relationship made this change a better opportunity for us, we remain positive about this partnerships potential and our focus on making that a success. Thank you for joining us on our call today, we will now turn it back to the operator for Q&A

Question-and-Answer Session

Operator

Thank you the floor is now open for questions. (Operators Instructions) Our first question will come from the line of Michael Kupinski with Noble Financial

Michael Kupinski - Noble Financial

Yes I’ve got a couple of questions here. Can you just expand a little bit more in terms of the savings that you are anticipating in the publishing division, it seems like Charles you mentioned 4 million was that for the fourth quarter, or is that on a yearly basis? If you could just give us some color there.

Charles Koppelman

That would be annualized.

Kelli Turner

That would be affected in 2011.

Michael Kupinski - Noble Financial

Okay, and so do you have a thought about how much the severance costs might be in terms of the fourth quarter?

Kelli Turner

Yes, it should be under $1 million.

Michael Kupinski - Noble Financial

Okay. And then the G&A expenses were a little lower than expected. Is that where most of the accruals kind of fell into, I'm just trying to get…

Kelli Turner

Correct.

Michael Kupinski - Noble Financial

Okay. And so the level that you're at right now, at around $11 million or so, or $12 million, that's probably a good run rate when we go forward into the fourth quarter?

Kelli Turner

The 11 million for what division are you talking about Mike?

Michael Kupinski - Noble Financial

The corporate G&A.

Kelli Turner

The corporate G&A. It's probably not a bad run rate, correct.

Michael Kupinski - Noble Financial

Okay. And in terms of the margins in the Merchandising business, it looks like 57% or so. Given that that's largely a royalty-based business, why wouldn't the margins be higher? I mean, what can we look forward to, like, looking out to 2011, maybe 2012, in terms of where the margins might be in the Merchandising business?

Kelli Turner

We anticipate the margin, Mike, I think that you see them at the levels that they are because we have had a lot of big startups in the past two years.

Michael Kupinski - Noble Financial

Okay. And in terms of publishing, it seemed like the ad pages were actually looking pretty strong going into the next quarter. I understand that you have some comp issues there. If we are looking at it from an apples-to-apples basis, what type of advertising revenue climate are we looking at?

Kelli Turner

So Mike it remains mixed, the third quarter we saw some very positive trends in Martha Stewart Living. We’ve noted that when there is sometimes a very strong issue there is sometimes not as much money for the next issue. So I think that it remains mixed in the third quarter Martha Stewart Living performed well, Everyday Food and whole living were a little more challenging.

Whole living, the reason for that was really a top comp versus a big program in last year. In terms of going forward, it just still remains volatile and the market is still challenging.

Michael Kupinski - Noble Financial

And in terms of just the Broadcasting business, my last question, the Broadcasting margins, you kind of gave us some of your expectations in terms of revenues, but what would you look for in terms of the margins now that you have this new relationship with Hallmark?

Kelli Turner

So Mike I think as we talked margins in the broadcasting business I saw the power to just talk about right now because of the revenue recognition in broadcasting and the timing of delivering different things. So it is hard to say you expect the overall broadcasting segment to have margins of X. What I can say is on the Martha Stewart show which is the lion’s share of broadcasting that was EBITDA negative business historically the goal with our new relationship is born to be EBITDA positive.

And therefore obviously the margins will be going in the right direction. But beyond that it is really hard to day.

Michael Kupinski - Noble Financial

Given the fact that you moved to Hallmark, will the show, then, be positive EBITDA?

Kelli Turner

I mean that is the goal, we can see how that is possible and obviously always depends on ratings.

Michael Kupinski - Noble Financial

Yes, but the ratings so far haven't been all that strong. I mean, you have a little bit of visibility on that front, right? I know they are improving, but they haven't been strong. So do you do you have any thoughts?

Charles Koppelman

Since its debut week, the Martha Stewart Show is up 63% in the 18 to 49 demographic, 78% in the 25-54 and 87% in the 18-49 and what’s also significant is the median age has gone from 64.6 to 59.4, last primetime was recent primetime special was viewed by almost a million people. So that’s all heading in the right direction of course, a month doesn’t make a trend but we are certainly hopeful that the audience is outlining the Martha show and our other shows and as I mentioned earlier we are coming into 2009 was Hallmark’s peak season of viewers in general

Michael Kupinski - Noble Financial

I guess the question would be, at that ratings level, would the show be profitable?

Charles Koppelman

No, at that ratings trend it will be positive. At the current ratings, we are still little bit challenged. But again remember, historically we used the Martha Stewart Show as the organ if you will for our media, for our products, for our magazines and the fact that we have a model now that can actually end up being profitable is a major plus for us.

Operator

Our next question will come from the line of David Bank with RBC Capital Markets.

David Bank - RBC Capital Markets

I've got a couple of questions. I guess the first one, starting on the rate base increase; can you talk a little bit about what went into the decision to sort of increase the rate base guarantee? And I'm assuming it's kind of a neutral to positive impact on circ revenue and then, I guess a little more color on the broadcast side as to what the swing was in Whatever, Martha! delivery.

And also, I guess kind of a tie-in to Broadcasting. What are your plans for the Lucinda brand? And how long do you think, with the new platform and the new exposure, when do you think we would actually hear Robin start highlighting Merchandising-related sales there?

And I have a lot of questions; I'm sorry. The last question is, again, almost more for a Robin on the Broadcasting side. When do you think you'll have a view on what the impact of the new platform is doing for your business, and how effective a megaphone and a promoting platform it is for your business? Like, what would you say so far, and how long will it take before you really know?

Kelli Turner

Which one do you want us to answer first? Let me start with the more financial ones, and then we will turn it to Charles on Lucinda and Martha and Robin on your Broadcasting question. So on a rate based increases I think these really show kind of the strength of our relationship with our readers and we felt very confident in increasing other rate bases. We believe that this increase should flow through to our advertising revenue and as you said should be marginal to strong or follow the circulation side.

So, again what went into our thinking is that we felt like we can justify these larger rate bases, we felt comfortable with the decisions and I think that they really do speak to our relationship with our readers. So that’s the rate base. On Whatever and I don't want get into too much here but there was a timing issue and then accounting issue and so overall I think if you would assume at somewhere between 500,000 and a million for the swing, I think that's fair.

Charles Koppelman

On the Lucinda of it all as you all know, developing a new television show and making it work is a difficult operation, this one looks like it's beginning to work as I mentioned earlier, Hallmark has ordered a Lucinda holiday special. Mad Hungry, her daily show, is building audience and doing quite well for her new show. And to answer the question you asked Robin about Lucinda it is like a year or year and half or better to transfer a successful new television brand to a merchandising brand.

Robin Marino

However, we have quite a decking process on what that brand can look and feel like I assure you. So, we believe that it's a big opportunity as she gains traction on air. And I guess that's the best segue into your television commercial David, historically Martha teaches and inspires on that show.

Our viewers enjoying it and our partners love it and we are extremely optimistic that as we move forward with Hallmark we will be able to continue to do that and grow and build our businesses in tandem with it.

David Bank - RBC Capital Markets

So do you think, I mean, the ratings have been somewhat disappointing. I don't think any of us look to that business to be a massive contributor to the overall bottom line. But we look to it to be a big driver of your business. Do you think there's been any disruption in the merchandizing side, or is it just kind of a bump?

Robin Marino

I would say that there has been zero disruption on the merchandizing side based on the television show.

Charles Koppelman

And you also have to keep in mind that, that one of the reasons that we transitioned from first-run syndication was that, because the outlets in which Martha’s show was being shown across the country, it was so different. 2’O clock in the morning in one place, 10’O clock at another, 3’O clock in the afternoon at another and the ratings would kind of copy that. So we didn’t have great ratings.

At Hallmark, we have the opportunity to certainly match those ratings and hopefully have more viewers watch the show because they know where to find it. It’s on several times during the day and it really gives us a big opportunity. On the merchandizing side, television is just not limited nor has it ever been to the Martha daily show. If you are watching Jay Leno on Monday night, Martha was on Jay Leno and had a great time with Jay and he was talking about some of our products at Home Depot.

If you follow Martha’s Twitter or the other television that she does and our other personnel as to whether it’s on the Today Show or Emeril on Good Morning America, those are all drivers for our merchandizing business for our magazine business and even for our Hallmark Channel which Jay Leno was kind enough to alert everybody that the Martha Show is on Hallmark. So this is the beginning of a long time relationship with Hallmark, which we are confident, will certainly be a better platform for us going forward.

Operator

Our next question will come from the line of David Kestenbaum with Morgan Joseph.

David Kestenbaum - Morgan Joseph

Just one quick question on the bank covenants. Do the banks give you time to get in compliance with the covenants, or was there any extra interest extracted for it?

Kelli Turner

We were not out of compliance with the covenants; we were in compliance with everything in the third quarter. We are just proactively taking that waiver and no, there was not any additional color.

Operator

(Operator Instructions) Our next question will come from the line of Michael Meltz with JPMorgan

Michael Meltz - JPMorgan

Finally got around to seeing your son's movie. I thought it was great.

Charles Koppelman

I’ll be happy to tell me, just call me during this earnings call but I didn’t take it.

Michael Meltz - JPMorgan

Right. Hope Netflix pays him a royalty. Two questions for you. Kelli, there's a lot of moving pieces in the numbers, and I appreciate the quasi-guidance of sorts. Can you actually, though, quantify a bit more? If you want to give wide ranges, fine, but year-over-year in the fourth quarter, where should we expect revenues and EBITDA to shake out, please? And then I have a follow-up.

Kelli Turner

When you talk about revenue and EBITDA on the fourth quarter, you are talking about the overall company

Michael Meltz - JPMorgan

Total Martha Stewart, yes.

Kelli Turner

Yes so I mean I think as you know the fourth quarter is always the biggest quarter, right. So EBITDA should be positive in the fourth quarter. Revenue should be significantly higher than where it was in the third quarter. So beyond that I am not sure what I can say right now, other than you should assume those two things so it will obviously be bigger than the third quarter and the second quarter which also had positive EBITDA you should assume that its bigger than that also.

Michael Meltz - JPMorgan

So and in second quarter was literally, though, 2 million or so right? On your…

Kelli Turner

Correct.

Michael Meltz - JPMorgan

In Merchandising specifically, I think, Robin, there was a question about costs, or I think it was a question about costs. What is a good quarterly run rate of expenses for your segment?

Robin Marino

If you take that one up Kelli, its got numbers.

Kelli Turner

Sure so merchandising sort of clearly I would assume that merchandising in the fourth quarter should be about sort of flat sequentially with the third quarter.

Michael Meltz - JPMorgan

Okay. All right. And then one follow-up. There's a lot of talk here about Hallmark and the ratings. And what have the ratings actually been, and what is a good rating, in your view or a target rating?

Kelli Turner

So one thing I want to say the ratings or so its going to add before I mean just a point to be clear on. If you look at the sort of the cumulative rating for the three airing of the Martha Stewart Show we have as many, if not more on certain day’s people watching the Martha Stewart show as there was before in syndication. So I think when the press or whatever are looking at ratings, they are looking at one airing as opposed to three airings.

In terms of what the ratings are and what's the successful rating I mean what was in the press early will certainly be early rating as Charles said they have gone up significantly since then was in the best case scenario we would like to be where we were on MBC, three times a day on Hallmark. So that would be sort of where we got to, that would be real success and real profit. That’s going to take time to get there, but that’s what we are working towards.

Michael Meltz - JPMorgan

And that would imply cumulatively, what, though, a 0.5, 0.8? What's the number we should try to get?

Kelli Turner

Again, at the end in syndication Martha was around a 0.4 or 0.5, if we were doing that three times a day on the Wal-Mart and again we think we can do that. We think being on one network where everyone knows where to find Martha being at consistent time. As Martha's audience finds her, we think that that's what we are working towards.

Charles Koppelman

You will also realize that we no longer have a distribution feed to a syndication company as well. So, the opportunity and the economics with a little good luck will improve the situation significantly.

Michael Meltz - JPMorgan

Okay, all right. And then I'm sorry, let me just ask one more. The comment earlier about consolidating or I guess reporting together Digital and Publishing, is there any change philosophically? Or let me ask what triggered it, and is it somewhat a reflection of digital initiatives and iPad and it just makes sense?

Kelli Turner

So it’s exactly what I mean there is a couple of things. One as you know, we just sort of restructure ourselves in marketing organizations that we have one team selling across all platform.

Charles Koppelman

Which we believe will be a better way to sell and therefore hopefully we'll garner better results as well as being more efficient from a cost perspective.

Kelli Turner

In addition to that, I think you are exactly right on sort of the digital magazines, the line between print and digital is becoming very blurred so we had made a decision that the app like Martha Makes Cookies would go in our internet division but the special issue of Martha Stewart Living would go in our print division and really the line is just becoming so blurred and I think we were probably the only ones to have them as separate units. So we still planned to breakout revenue and tell you how we are doing on digital revenue and if there is a sort of meaningful item, we will break them out. It is just the allocation of cost between the two, with becoming more and more confusing and we were running our businesses more on a combined basis than ever before.

Operator

And your next question will come from the line of Michael Kupinski - Noble Financial.

Michael Kupinski - Noble Financial

Great, I just had a couple of quick follow-up questions on the Merchandising side. Robin, I was just wondering, obviously 2010 was a year of substantial product ramp, particularly in Home Depot and now PetSmart. I was just wondering if you have any thoughts in terms of products kind of going into the fourth quarter, maybe heading into 2011, what we can look for since it seems like you've kind of established yourselves in Home Depot already with the large product groupings. I mean, how many new categories can we expect as we go into 2011?

Robin Marino

Michael, we haven’t only given guidance yet about how many new categories will be expanding into in our partnership with the Home Depot. But we are constantly as we said to you earlier; our plan is to populate many areas of the store where we believe we have the ability to add innovation and design. So you will see some new introductions in 2011 there.

We also are constantly exploring new opportunities outside of the existing partnerships that we have and I think we have probably one or two new partnerships to announce in the coming months, in areas where again we have that strong brand equity.

In fourth quarter it is always a call to action for people who are celebrating. So we see big escalations in our craft business at the point sale in Q4, we think that the pet product is a great holiday gift item. We’ve engaged in the gift program at Macy’s in a very meaningful way. So we are optimistic about having positioned ourselves well for Q4 sales.

Michael Kupinski - Noble Financial

And in terms of the Macy's particularly, I mean, you came out with the Essentials lines. Are there any other opportunities there to expand any product categories?

Robin Marino

We believe there are and I think I just have to tell you to stay tuned on that.

Operator

Ladies and gentlemen this does conclude today’s Martha Stewart Living Omnimedia third quarter 2010 earnings conference call and webcast. You may now disconnect.

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