TV flop takes toll on Martha's stock

Who is more fed up with Martha Stewart, television viewers or investors? Her company has lost more than 40% of its value since 'The Apprentice: Martha Stewart' hit the air.

The return of Martha Stewart isn't close to what it was cracked up to be.

Martha Stewart was expected to engineer one of the most remarkable and high-profile comebacks in business history.

Investors put their money on Stewart emerging from prison, winning back fans, wooing lost advertisers and turning the fortunes of Martha Stewart Living Omnimedia (MSO, news, msgs) around.

But Stewart's reality show, "The Apprentice: Martha Stewart," has turned out to be a flop -- one of the lowest-rated shows on prime-time network TV -- and shares of Martha Stewart Living have been sinking over the last two months.

And as Stewart's fresh-from-prison luster fades, the company is facing increasing competition in home furnishings, fashion, cooking and lifestyle television.

Few watching, many selling

Even before Stewart started serving five months in prison for lying to federal investigators, Wall Street was betting on a turnaround. Stewart's company already had signed an agreement with reality-TV guru Mark Burnett to refashion her lifestyle television show and develop a new program.

That announcement alone sent her stock up 14% in a couple of days.

The company's shares doubled while Stewart was behind bars. By the time she left the federal women's prison in Alderson, W. Va. -- a.k.a. "Camp Cupcake" -- her comeback seemed all but assured, and her stock was up nearly 300% from its post-conviction low of $8.55 on May 19, 2004.

The stock struggled a bit following her release, but jumped 12% on Aug. 25 when Stewart appeared, electronic ankle bracelet and all, to tout her new "Apprentice" spin-off and her syndicated daytime show.

The show debuted on Sept. 21, with Martha Stewart Living trading at $28.88 per share.

And then the ratings bomb dropped.

"The Apprentice: Martha Stewart" attracted just 7.7 million viewers for its first episode.

To put that in context, the show would need about double that audience to crack the top 25 for prime-time shows, according to Nielsen Media.

Ratings fell the following week and NBC quickly showed it had lost faith in Martha.

By switching time slots and putting Stewart's show up against ABC's Wednesday night powerhouse "Lost," NBC was basically giving up.

The show drew 6.6 million views on Oct. 19, according to Nielsen Media Research, which seems to be its base number.

With the benefit of hindsight, observers now say the show was doomed from the start.

Mike Paul, who heads a crisis P.R. and reputation management firm in New York, was skeptical about Martha's reality TV plans when they were first announced -- and has seen nothing to change his initial impression.

"Have you seen the commercials for this week's show? They come out and say 'Lost' is a repeat, so watch Martha," he said in a phone interview.

"They're acknowledging that people would rather be watching 'Lost.'"

The "Apprentice" idea was misguided from the get-go because Stewart's company has no ownership of the show and no way to make money from it, says Gary McDaniel, equity analyst at Standard & Poor's.

Investors are aware of the problems.

Martha Stewart Living Omnimedia has lost a third of its market value since the show went on the air.

Including the 14% drubbing the shares were taking today, the stock is down more than 46% from a peak of $33.75 a little more than a week before the show began.

'Trying to be something she's not' The travails of Martha, the company, point out the dangers of building a corporation around a single personality.

Even when that personality is a prickly one.

Viewers, says Paul, aren't connecting with Martha's "Apprentice" because they sense she is holding back from being herself.

"She's trying to be something she's not," says Paul, with a nod to her reputation as a, shall we say, tough boss.

"I've been in an elevator when Martha is berating her employees, and let me tell you it's not pretty."

But it's not boring, either.

The investment community is betting things will be worse.

The short position in Martha Stewart Living Omnimedia, which indicates the degree to which investors think the stock will fall, is more than 70% of the available float, according to Short Squeeze.

McDaniel has a "strong sell" rating on the stock and a $17 price target, which he says assumes the company makes a fairly quick return to where it was before Stewart's legal trouble, when the company was eking out a profit.

On Thursday, the company reported a loss of 30 cents per share in the third quarter, excluding items.

It expects to break even in the fourth quarter, but its revenue projection of $80 million was below Wall Street expectations.

No longer the only game in town.

As Stewart tries to boost her image, the company still can't make a profit and new competitors are entering the lifestyle brand arena.

Chris Madden and B. Smith are both making strides in retailing and gaining popularity with television shows, says Burt Flickinger III, managing partner at Strategic Resource Group.

Those companies are also hiring the best and brightest employees, people who might find working with Stewart challenging, Flickinger added. Part of Martha Stewart Living's strategy to hold off its competition is to continue forming attention-getting partnerships.

The company recently announced it is teaming up with KB Home (KBH, news, msgs) to created a residential community called "KB Home Twin Lakes: Homes Created with Martha Stewart."

The houses will be inspired by Stewart's three homes.

But another recent deal, with Bassett Furniture, was also highly touted and hasn’t stemmed Martha Stewart Living's decline in advertising revenue, Flickinger said.

"If she's not connecting with the country now, things will get worse for Martha in the new year," he said.

-- Kim Khan

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