Martha Stewart Living Omnimedia Q1 2008 Earnings Call Transcript

Apr.30.08 | About: Martha Stewart (MSO)

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

Q1 2008 Earnings Call

April 29, 2008 9:00 am ET

Executives

Howard Hochhauser - Chief Financial Officer

Susan Lyne - President and Chief Executive Officer

Wenda H. Millard - President - Media

Robin Marino - President - Merchandising

Analysts

Richard Ingrassia - Roth Capital Partners

Richard R. Tullo - Sidoti & Company

Michael Kupinski - Noble Financial

David Bank - RBC Capital Markets

David Kestenbaum - Morgan Joseph

Operator

Good morning and welcome to the Martha Stewart Living Omnimedia first quarter 2008 earnings conference call and webcast. (Operator Instructions) At this time, it is my pleasure to introduce Howard Hochhauser, Chief Financial Officer of Martha Stewart Living Omnimedia. Sir, you may begin when ready.

Howard Hochhauser

Thank you and good morning, everyone. Welcome to our conference call to review first quarter 2008 results. Susan Lyne, our President and CEO, will bring you up to speed on strategic developments and then I will talk about our recent performance and our outlook for the second quarter and the full year. Robin Marino, our President of Merchandising, and Wenda Harris Millard, our President of Media, will join us for the Q&A session following our prepared remarks.

Before turning the call over to Susan, 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 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.

Now let me turn things over to Susan.

Susan Lyne

Thank you, Howard and thanks to everyone for joining us today. Our first quarter marked a good start to the year with solid performance across all of our segments. Total revenues were approximately 2%, driven by advertising revenue growth in broadcasting, publishing, and Internet. In fact, total ad revenue excluding Blueprint grew 9%. Given the current economic environment, growing ad revenue on each of our media platforms is a remarkable achievement, especially as the first quarter is seasonally a weaker quarter in our publishing and Internet divisions.

Our performance is at the high end of the market and clearly demonstrates the value of quality content and integrated media offerings.

Strength in the quarter was broad-based. Publishing was boosted by book revenue from our agreement with Clarkson-Potter and higher ad revenue at all of our magazine titles. We continue to make great strides in our Internet business, as evidenced by increasing user traffic and higher ad revenues. As we discussed last quarter, our product integration strategy in broadcasting continues to drive better segment results and is proving to be a key factor in our cross-platform sales momentum.

In addition, the leveraging of our content library and to cable programming and into international markets has helped us expand our audience reach. And despite a challenging retail environment, the merchandising segment also contributed positively this quarter.

Importantly, we posted year-over-year improvement in operating income, adjusted EBITDA and EPS. These improvements validate both the growth and diversification of our revenue streams, as well as our operating discipline.

The first quarter of the year is typically the lightest for publishing in particular thought it is noteworthy that we reduced our net loss from $12 million a year ago to $4 million in the first quarter of 2008. This progress keeps us on track with our outlook for the year and with our objective for sustained profitability longer term.

Earlier this month, we completed the Emeril acquisitions and we are in the midst of integrating those assets. We will begin reporting Emeril results as part of our consolidated financial statements and providing full year guidance on our second quarter call.

We see so many exciting opportunities ahead to grow this brand and business.

Now for some segment details -- starting with publishing, we saw a good performance driven by revenues from advertising and from our books line. Excluding Blueprint, which ended publication in Q4 2007, we posted ad revenue growth of 6%. Living, Everyday Food, and Body and Soul posted solid ad revenue gains due to a further diversification of our advertiser base into new categories like beauty, travel and financial services, all categories that command higher ad rates.

The result is better revenues on fewer pages which, given the price of paper, has a positive end impact for MSO. This improvement in an otherwise down environment for many publishers speaks to the vibrancy of our brand as well as the skilled efforts of the sales force we’ve built.

As we move into second quarter, we continue to see positive revenue trends in our magazines, though I will note that our visibility remains limited through the second half of the year.

Our books deal with Clarkson-Potter continues to be a great success. Within a week of publication, Martha Stewart's Cookies became a bestseller, debuting at number three on the New York Times paperback advice and how-to list. This was no accident. In addition to taking an omnimedia approach to our advertiser programs, we also use an omni strategy to introduce new products. At launch, cookies was promoted on the Martha Stewart Show, Martha Stewart Living radio, and on marthastewart.com, as well as through a special we produced for the Style Network. Next up is Martha Stewart's Cooking School, which is due out in October.

Before moving on to Internet, I want to point out that the American Society of Magazine Editors has nominated Living for two national magazine awards for general excellence and for photography. The winners will be announced on May 1st. We are so gratified that Living’s talented staff continues to be recognized by the industry. Their commitment to excellence gives us an important edge in this challenging economic environment.

Living was also named to Ad Week’s 2007 hot list of top 10 magazines, as was Everyday Food for magazines in its category, their third consecutive year claiming this honor.

And now to Internet -- advertising revenue grew 31% in the first quarter, due to higher traffic to our sites, custom marketing programs, and higher CPMs. This impressive growth in our core Internet business was offset by the wind-down of our direct flowers program as we transitioned to the new Martha Stewart for 1-800-FLOWERS.com. That new program will be part of our merchandising segment going forward.

The transition had an impact on Internet in Q1 but the good news is that the trends in our core business are very strong. Page views increased in each month during the quarter, just as they did in Q4 of last year, up 33% in January, 49% in February, and 47% in March. Unique visitors were also up significantly -- 40% in January, 57% in February, and 53% in March. This upwards trajectory is a direct result of improved operating strategies, including greater daily programming, new features and functionality, and coordinated cross-platform promotions.

A few weeks ago we launched WeddingWire’s vendor search tool on our site, allowing users to find local vendors. I am pleased to report that the integration went seamlessly. We expect to add WeddingWire’s planning toolset to the site this quarter. This is an important step in our plans to expand our weddings franchise and to further build our interactive community by adapting WeddingWire’s technology for other digital content areas.

On to broadcasting -- revenue showed positive gains of approximately 18%. The spot market was strong this quarter, boosting advertising revenues. Just as important was our successful product integration strategy which creates unique value for advertisers and very importantly is aligned with the content our audience wants.

Our content library also contributed positively this quarter by leveraging existing content for domestic cable broadcast and to 60 countries internationally, we’ve added a growing revenue stream and amplified the voice and reach of our brand.

While household ratings for the Martha Stewart show declined year over year, the demographic profile of our viewers markedly improved, largely closing the gap on the numbers of 25 to 54 and 18 to 49 impressions we sell to advertisers. This increasingly younger audience profile has coincided with a return to our roots, with a stepped up focus on how to programming that our core audience had been requesting.

In merchandising, our results came in on target with expectations and we are pleased with that performance, particularly in the context of the current economic environment. The breadth of our merchandising business, as well as positive momentum in several areas, including Macy’s and our crafts line, give us encouragement for the near-term and real optimism for the longer term.

A few weeks ago we celebrated the launch of Martha Stewart for 1-800-FLOWERS.com just in time for the spring holidays and Mother’s Day. This partnership, which allows us to offer consumers same-day delivery, is a terrific match in that it brings together two parties doing what each does best to deliver a great product.

Our Macy’s line continues to perform well across all product categories and our rollout of new SKUs at Costco is ongoing. We anticipate a very broad rollout of new Martha Stewart crafts product in the second half of the year to several thousand retail outlets nationwide. This is a great opportunity for us to consolidate the leading physician in the $30 billion crafts market with a unique assortment that will be accessible to consumers everywhere.

With a year’s worth of learning in this category, we are ready for broad distribution and look forward to keeping you updated on our progress.

Looking ahead, the key challenge facing all media and merchandising companies is an uncertain and volatile macro environment. At MSO, however, despite the lack of visibility this environment creates, we are seeing good momentum in our businesses and a validation of our strategic path. Our omni advantage has only become more evident in the current climate, as has the wisdom of diversifying our merchandising portfolio.

Our first quarter revenue growth and narrow net loss shows that our strategy is generating tangible results and that our operating discipline is paying off. We are committed to delivering on our near-term promises but we also remain focused on the long-term health of this company and we have the financial flexibility in place to support our objectives. New businesses like Emeril create immediate growth avenues for the company and we are confident that when economic trends turn positive again, we have the assets and operations in place to generate even stronger growth.

Thanks again for joining us today and now I will turn the call over to Howard.

Howard Hochhauser

Thank you, Susan. As Susan mentioned, our first quarter results meeting expectations is no modest achievement given the current state of the economy. This demonstrates the fundamental health of our business and makes us cautiously optimistic for the year ahead.

Now looking at the first quarter results, total revenue was up 2% year over year to $67.8 million and our adjusted EBITDA loss improved from negative $2.4 million to a negative $1.2 million. Our net loss in the first quarter also improved significantly to a loss of $4.2 million, or $0.08 per diluted share versus a net loss of $11.9 million, or $0.23 per diluted share in the year-ago quarter.

A few items that affect comparisons for the quarter include the closure of Blueprint, the revenue recognized in the prior year quarter associated with the relationship with Singer, and revenue related to our flowers business that has transitioned to the merchandising segment following -- excuse me, reflecting our new program with 1-800-FLOWERS.

Publishing revenue improved slightly over the prior year’s first quarter and was up approximately 4% when excluding Blueprint from the prior year. Adjusted EBITDA was roughly flat in the quarter, reflecting increased paper and distribution costs, as well as a direct mail campaign that was not done in the prior year quarter, partially offset by the savings from Blueprint.

Our Internet business again substantially improved in adjusted EBITDA, reporting a loss of $1.8 million compared with a loss of $2.3 million in the prior year quarter. Revenue was slightly down year over year due to the transition of flowers revenue as discussed. Advertising revenue grew an impressive 31% in the quarter as we benefited from an increase in both rate and volume.

Broadcasting revenue increased approximately 18% in the quarter as a result of advertising revenue and revenue related to the domestic and international distribution of our television programming. Adjusted EBITDA by $0.5 million was in line with expectations and reflects the benefits of a reduction in segment reduction costs.

The slight decline in merchandising revenue and adjusted EBITDA was primarily due to the Singer revenue recognized in the prior year quarter. The decrease was partially offset by initiatives launched in the second half of 2007.

Turning to the balance sheet, we finished the period ended March 31, 2008 with $90 million in cash, cash equivalents, and short-term investments, or roughly $1.70 per share. This does not include the impact of the Emeril acquisition, which was completed at the beginning of the second quarter.

After taking the Emeril acquisition into account and the proceeds from a $30 million loan, we expect to finish the second quarter with $70 million to $75 million in cash, cash equivalents, and short-term investments.

While we do not have a specific intent for the added capital, it provides us with additional financial flexibility, giving us added capability to pursue short-term growth opportunities in the months ahead.

In short, our balance sheet remains very healthy with a solid cash position and manageable debt.

Now I’ll talk about our guidance for the second quarter and full year 2008. Importantly, this outlook does not include anticipated contributions from the Emeril acquisition, which is expected to be additive to second quarter and 2008 performance. We will begin including Emeril in our financial outlook beginning next quarter once we complete the process of converting Emeril’s accounting from cash basis to GAAP basis.

For the second quarter, on a consolidated basis we expect revenue to be in the range of $71.5 million to $74.5 million. We anticipate operating income in the range of $0.5 million to $1 million, and adjusted EBITDA in the range of $4.5 million to $5 million.

On a segment basis for the second quarter, publishing is expected to show continued momentum with revenue in the range of $47 million to $48 million and adjusted EBITDA of approximately $8.5 million.

Advertising revenue is currently trending up in the mid-single digits when splitting Blueprint but visibility remains limited.

Broadcasting revenue is expected to be in the range of $10 million to $10.5 million, with adjusted EBITDA of approximately $0.5 million.

Internet continues to gain traction with advertising revenue on pace to end the second quarter up approximately 30% year over year.

Total revenue is expected to be in the range of $3 million to $3.5 million, with adjusted EBITDA loss of approximately $1 million.

Merchandising revenues are expected to be approximately $11.5 million to $12.5 million, driven primarily by revenue related to Macy’s and the benefit of new partnerships, including 1-800-FLOWERS.

Adjusted EBITDA is expected to be $5.5 million to $6 million. Corporate expenses are expected to be approximately $9 million.

We are reiterating our full year 2008 guidance, again exclusive of Emeril. On a consolidated basis, we are expecting revenue of approximately $300 million. We anticipate operating income in the range of $9.5 million to $14.5 million, and adjusted EBITDA in the range of $23 million to $28 million.

CapEx excluding any facility charges should be approximately $5 million and we do not expect any material tax charges for the year.

In comparing our 2008 revenue outlook with 2007 results, a few points to keep in mind -- 2008 will not have the benefit of the significant 2007 K-Mart true-up, a difference of approximately $41 million; 2008 will not have any Blueprint revenue, which amounted to $7 million in 2007; the change in our flowers program, which will deliver higher EBITDA and much higher adjusted EBITDA margins will result in 2008 revenue being lower by approximately $3 million.

In closing, building sustainable growth and free cash flow remains our top priority. We believe we have the resources, both human and capital, to deliver on our objectives for the near and long-term.

Thank you and we will now turn the call back to the Operator for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Richard Ingrassia of Roth Capital Partners.

Richard Ingrassia - Roth Capital Partners

Susan, would you say that your primary strategy for the balance of the year is execution on the Internet ad platform and other legacy businesses, as well as exploitation of Emeril versus finding additional acquisitions or short-term growth opportunities, as Howard put it?

Susan Lyne

I think that we’ve done a lot of work these past couple of years to put in place programs that can deliver short-term growth and more importantly significant long-term growth, so yes, we are very focused on executing on those programs, no question about that.

We do believe that there is a big upside to our Emeril business. It will be an immediate contributor but we have a lot of good ideas already about how we are going to grow that business.

And obviously the fact that we still have a strong balance sheet means that we are constantly looking for appropriate acquisitions. We started talking about acquisitions about 18 months ago. It took us more than a year to find the right acquisition. We are very disciplined investors, so I don’t think you should be looking for us to necessarily make any quick new investments but it’s an important part of our strategy long-term to continue diversifying our portfolio of brands, so yes, that is absolutely on the agenda.

Richard Ingrassia - Roth Capital Partners

Thanks. And would you say in the magazine segment, are we in middle innings of a rebound of CPMs and pages there? Or would you say we are now starting to approach the norms prior to Martha’s legal issues?

Susan Lyne

I am going to toss that to Wenda since she’s on the call with us. I think she is probably the right person to answer that question.

Wenda H. Millard

I think this sales team does an outstanding job of conveying the quality of our brands to the advertising community and I think the CPMs that they are garnering in the marketplace really speak to that. They do very, very well on an historical basis as well as a competitive basis now. So I think -- and particularly in this marketplace, so I think that right now you are seeing about as solid CPMs as you are going to see from anybody in the marketplace, so I’d say we are very much back and doing a great job vis-à-vis our competitors. But we are definitely -- those CPMs are definitely reflecting the quality of this brand.

Richard Ingrassia - Roth Capital Partners

Okay, and then just two quick questions for Howard; Howard, I think I heard that the reason why we don’t have guidance on Emeril yet is because of a change in reporting basis from cash to GAAP.

Howard Hochhauser

Right.

Richard Ingrassia - Roth Capital Partners

Is there also -- I mean, do you have visibility yet on the non-cash charges that might be in store, intangibles, for example?

Howard Hochhauser

Let me just break it into two pieces. We did the deal based upon a cash flow projection or his actual tax returns, so now you go through the process of converting that to GAAP. The other process as you hit on is doing the evaluation work to allocate the purchase price. We will have that all completed by the second quarter call and release that in about 90 days.

It may be worth just talking about visibility -- you know, one of the great attributes of this deal is a piece of it, an important piece of it are sort of contractual guarantees, if you will Susan, I don’t know if you want to talk about that a bit.

Susan Lyne

Emeril has two major arenas to his business right now. One is the television and he has a different model than we do, where he is paid essentially a talent fee. He is an executive produce on those shows but he has no liability for production costs, so it is a very clear revenue stream and a very high margin revenue stream.

On the merchandising side, he operates as we do on a licensing basis with certain guarantees, so both of these areas are pretty straightforward and we don’t anticipate any surprises.

Howard Hochhauser

Right.

Richard Ingrassia - Roth Capital Partners

Okay, and then just last, Howard, can you say something about the sale of all of your short-term investments in the quarter?

Howard Hochhauser

Prior to closing, we went very liquid so we could close Emeril and have cash available for working capital. Now the quarter is closed and we closed the loan, we are going back and extending the term of some of our investments.

Richard Ingrassia - Roth Capital Partners

Okay. Thanks, everybody.

Operator

Thank you. Your next question comes from Richard Tullo of Sidoti & Company.

Richard R. Tullo - Sidoti & Company

First question is to Howard -- did you say that you expect to have $70 million to $75 million in cash and short-term investments on the balance sheet in the second quarter?

Howard Hochhauser

That’s correct.

Richard R. Tullo - Sidoti & Company

Does that include the payments to the Emeril deal?

Howard Hochhauser

That’s after Emeril and includes the proceeds from the loan. I would just note that now we are free cash flow positive, so as the year progresses, we’ll be building cash.

Richard R. Tullo - Sidoti & Company

Right. Second question -- in terms of food advertisers, one of your competitors had said that they had a decline in food advertisers. What are you seeing there?

Susan Lyne

I’m going to let Wenda answer that.

Wenda H. Millard

I think the CPG, consumer packaged goods group, food manufacturers are definitely under pressure and there is no question at all that they are reducing their advertising spend. We did not experience that in the first quarter. As Susan outlined for you, we had a very strong first quarter, including with food. As she also said, our visibility is limited for the rest of the year, as I think any publisher will tell you. But that is a category that is cutting advertising. They are under a lot of pressure.

Richard R. Tullo - Sidoti & Company

And where are you seeing the strength in advertising?

Wenda H. Millard

Well, we are actually focusing a lot on diversifying the categories from which we are growing our advertising, so financial services has been very healthy for us. We are building out in beauty advertising. We’ve been picking up in pet supplies and we are also working on travel advertising and in the consumer electronics or technology sector. Those represent growth areas for us.

Richard R. Tullo - Sidoti & Company

Thank you.

Operator

Thank you. Your next question comes from Michael Kupinski of Noble Financial Group.

Michael Kupinski - Noble Financial

Thank you for taking the question. In terms of the broadcast division, it did a little bit better than I was looking for and your guidance is a little bit stronger than I was looking for in the second quarter. Were there any special issues in the quarter? Is this product placements, ratings improvements -- can you just give me a run-down on what is going on in the broadcast segment?

Susan Lyne

I think there are two issues here. We certainly have benefited from this younger demographic mix. We are seeing much stronger VPVH numbers, very interesting. I think probably stronger than at any time since Martha’s been on television. And whether that is a new younger viewer interested in all the how-to in crafting, which would not be surprising given what we see in the larger marketplace, but that has definitely helped us.

The second thing I would say is that in addition to the straight-on advertising, we’ve also benefited from product integrations, and this is really part of that omni strategy we’ve been talking about, where we are able to drive cross-platform programs and these integrations, television integrations have been a very important element of that.

So it’s a good thing for us and it’s actually turned out to be very seamless in our programming because it is easy for Martha to integrate these products into how-to programming. There is just a natural fit.

Michael Kupinski - Noble Financial

And in terms of the Internet side, it was a little softer in the first quarter. The guidance is pretty much on target for what I was looking for but was there any particular reason why the Internet was a little softer in the first quarter? Were you still ramping up trying to position your sites and that sort of thing? Can you just give me a little color on what was going on on the Internet side?

Susan Lyne

I’m just going to take the top piece of this and then I’m going to pass it on to Wenda; I think that what you have to recognize here is that our core business was actually very strong. We used to include flowers, our direct flowers business in that Internet segment and that added several million dollars of revenue. So we are transitioning away from that old flowers business to a new one which will be included in our merchandising segments and again, that core Internet business was very strong, both on a traffic basis and also on an ad revenue basis, up 31%.

Wenda, do you want to add to that?

Wenda H. Millard

All of the core metrics there were very strong, so when you look at page views, our monthly unique visitors, the average time spent on the site, the page views per unique visitors -- those were all tracking very, very strong. As Susan said, some of them were up -- some of those metrics were up over 50%, so the traffic gains were strong, the engagement level is very, very high with the user and so we had a very, very strong quarter from an advertising revenue standpoint.

So I think we are looking very, very good there and that momentum continues.

Susan Lyne

And I do want to reiterate one thing, which is that it’s no accident that these numbers are up. Our Internet team has been diligently working to make sure we are really delivering what our users want and maybe you want to talk a little bit about that, Wenda.

Wenda H. Millard

Sure. I mean, our editor -- we are very fortunate to have a very data driven editor and we look at our performance every single day and look to understand what our users are reacting to and we move very, very swiftly to add new content, take down new content, add more of something that is working. So I think that the metrics that we are seeing are a reflection of our looking every single day at what it is our users are responding to and giving them more of that.

So the metrics are really very, very strong as a result of that, so I think being very data driven, understanding exactly what the user is looking for from us is a way that we’ve really grown that business and will continue to grow that business.

Michael Kupinski - Noble Financial

I think you are doing a great job there, by the way. I did have one final question -- have you noticed in the past that a strong influx of political advertising in broadcast television displaced some advertisers to magazines? Any thoughts on the political environment and how that might affect you?

Wenda H. Millard

You know, we’re not really a -- I think because of the nature of our content, we are not the recipients of a lot of political advertising, so I --

Michael Kupinski - Noble Financial

I was just talking about more displacement, because we’re looking for a really heavy political cycle this year and --

Wenda H. Millard

I see what you are saying. You know, I actually have not seen that. I mean, Susan, you may have observed --

Susan Lyne

I think that’s a non-factor for us.

Wenda H. Millard

Yeah, I just don’t see it for us.

Michael Kupinski - Noble Financial

Okay, very good. Thank you.

Operator

Thank you. Your next question comes from David Bank of RBC Capital Markets.

David Bank - RBC Capital Markets

I have a couple of questions. The first one, if we could start with merchandising, I guess. And thanks for giving us the visibility that you did in what I think is a really difficult category to give visibility into. My sense is that it is going to take you between three and four quarters between announcing any sort of real material deal and actually seeing any real material revenue from those deals.

So you’ve given us a pretty good sense of 2Q. Can I ask -- is there -- what’s coming online there besides Macy’s and Costco and kind of the magnitude of ramp from 2Q versus 1Q? And I think given some of the statements you made, can you give us a little bit of color in terms of 3Q with respect to are there any new deals that are kind of in the pipeline where the spigot turns on in 3Q? I’m trying to get a sense of for us, the 2Q merchandising number was a little bit low and I want to know if there is kind of a ramp coming in 3Q.

And any commentary you have more broadly about the pipeline -- I’m just going to give you two other quick questions. The second one is can you talk a little bit about in terms of publishing, what is the last book that you have closed right now? Is it the July book or the June book? What are you seeing in terms of this summer, July and August?

And the last question is I think probably most Wenda-oriented, which is so we are seeing continued acceleration in page views. We are seeing continued acceleration in CPMs but we are actually seeing something of a deceleration in growth for advertising revenues in the next quarter. So is it sell-through or am I doing the math wrong?

Susan Lyne

Wow -- that’s a long list.

Howard Hochhauser

Let me take the number part of it and then I’ll hand it off. I’m going to take the third one first, with respect to deceleration. We did 31% ad revenue growth in Q1. We are forecasting as we sit here today to do 30%. I wouldn’t consider that a deceleration. In fact, the base gets bigger in Q2 so on an absolute basis, it’s actually a more aggressive or a bigger total dollars of ad revenue into Internet. I’ll hand it back to Wenda later to get into the details.

Let me now take your first question, which is just the seasonality or the modeling of the merchandising business. And you do -- I just want to remind you, you still have a K-Mart, a potential K-Mart true-up in the fourth quarter. We still have a minimum this year. To the extent they go below the minimum, we’ll book that in the fourth quarter.

So you do have a disproportion amount of your K-Mart revenue potentially coming in the fourth quarter.

David Bank - RBC Capital Markets

So there may have been like versus a year ago, a shortfall in 2Q but you get a true-up in the fourth quarter?

Howard Hochhauser

Let me just give you the seasonality or some near-term trends in the K-Mart business, which makes it difficult to model. So in Q1, and we give this out in every call, our sales were down about 21% at K-Mart. Then, let’s fast-forward to trends for the first three weeks of April, where that same number was down about 4%. So you have a lot of volatility in the sales performance and that change is really due to garden furniture, which this is the season and it is doing really well. So you just have a sort of a bumpy road as it relates to K-Mart sales in 2008, but you have the ultimate guarantee getting trued up at Q4.

As it relates to Q2 and Q2 non-K-Mart revenue, you have Macy’s and 1-800-FLOWERS being the contributors in Q2. Costco seasonally I think is a low quarter in Q2.

Susan Lyne

And it’s also worth noting that we are going out much more broadly with our craft product at the very end of Q2, and so for the second half of the year, we will see some pretty significant growth there.

David Bank - RBC Capital Markets

Okay.

Susan Lyne

Let me move on to the publishing piece of it, just to -- Wenda, you can speak to this. I think that we are pretty -- we have a lot of visibility into our Q2 publishing numbers at this point. We have not closed June yet -- actually, we have closed June. We have not closed July yet, but the reason we were able to give you guidance on where we see ad revenues for the second quarter is because we are pretty clear through June. After that, I think it’s -- we are just going to have to wait and see.

Wenda, do you want to weigh in here?

Wenda H. Millard

No, I think we’ve said it and I think anybody out there on the street will tell you that the visibility is very, very limited. The marketing community in general is planning on a just-in-time basis and that makes it very difficult for all of us to forecast with a great degree of accuracy, so we are all cloudy on the visibility.

Howard Hochhauser

And David, just not directly on point but I want to add some color on the rate versus pages growth; to give you an example, MSL in the first quarter was up 5% in revenue but actually down in pages, and it gets back to Wenda’s point about the omni of it, by focusing on categories, focusing on rate. And in this environment where A, it’s a tough ad environment but it is also really tough on the raw materials side. You have an increase in paper and postage working against you all year, so it is important to focus on the rate component of all of this.

Wenda H. Millard

So it’s really a question of strategic management of that business.

David Bank - RBC Capital Markets

Okay.

Operator

Thank you. Your next question is a follow-up from Richard Tullo of Sidoti & Company.

Richard R. Tullo - Sidoti & Company

Can you break out what you did with Macy’s in the quarter?

Howard Hochhauser

Richard, I’m going to talk about the numbers -- or I’m actually not going to talk about the numbers but I’ll hand it over to Robin. You know, we break out K-Mart because it is such a material portion of our business. As part of the strategy to diversify, no one partner is a material component and for confidentiality reasons, for contractual reasons, we do not break it out but Robin is here and could put some color on the performance.

Robin Marino

I would say that generally we’ve been very pleased with our performance overall. We’ve seen strong performance -- I think we spoke about this on the last call. We are the number one registered brand on Macy’s bridal registration. Our Trousseau collection is expanding to just over 450 doors as we move into the fall selling period.

Our performance in housewares, both in cookware and dinnerware, has been very strong and in soft home as well, in both opening price points and the better portions of the collection. So I think that in totality, we are very, very pleased with our performance.

Richard R. Tullo - Sidoti & Company

Thank you.

Susan Lyne

I just want to go back to David’s question for a minute about ad revenue, because I’m not sure we were clear enough about it. You know, we don’t know what our ad revenues might have been if the economy hadn’t slowed, but we have done some pretty specific things to protect and actually grow our ad revenues. We have rebuilt the rate base on Living and in fact, all the rate bases are higher this year. We have invested in a strong sales team and we are focusing much more on omni sales. So I think that we have a lot of comfort right now that we will continue to see growth, even with that lack of visibility because this is one of those moments when quality and a really strong customer connection count.

Operator

Thank you. Your next question comes from David Kestenbaum of Morgan Joseph.

David Kestenbaum - Morgan Joseph

Susan, this is the most positive you’ve sounded in several quarters. I mean, are you surprised at just how strong the business has held up, or is it just you are more positive on the advertising or merchandising markets in general?

Susan Lyne

You know, I think that it’s a combination of things. We had a lot of rebuilding and we had a lot of new launches and so there’s been an enormous amount of execution that was critically important to get us to this point. And I think right now what is I think very positive is that the company is performing in what is a very tough environment and certainly performing as we said at the high end of our competitive market, so yeah, I am positive.

David Kestenbaum - Morgan Joseph

Thanks.

Operator

Thank you. There are no further questions. Ladies and gentlemen, this concludes today’s Martha Stewart Living Omnimedia conference call and webcast. You may disconnect your lines at this time and have a wonderful day.

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