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Martha Stewart sticks by Kmart -- for now

Posted: Friday, February 01, 2002

NEW YORK -- The future of Kmart's crown jewel of brands, Martha Stewart, hinges on a decision by the bankruptcy judge overseeing the discount chain's reorganization.

The judge may be hard pressed to set Stewart's company free from its lucrative contract with Kmart, given the importance of her line of home and garden products to any eventual turnaround by the company.

If a release is granted -- something Stewart herself says she isn't seeking -- the question remains: Which merchant would offer the best home for the 4,000 products carrying the Martha Stewart Everyday label?

Martha Stewart Living Omnimedia, where Stewart serves as president and chief executive, said in a statement last week it will stick by its contract and continue to sell its products to Kmart for the ''foreseeable future.''

But the company left open the possibility that the label --the top sales generator at Kmart, posting $1.5 billion in sales for fiscal 2001-- might have to eventually find a new home at other mass retail outlets.

Plenty of stores such as J.C. Penney Co. Inc. and Sears, Roebuck and Co. would be interested, industry analysts believe. But the arrangement with Kmart cannot be easily ended, they said.

''The reality is they have a binding contract,'' said Douglas M. Arthur, an analyst at Morgan Stanley. ''They're locked in.''

Only if Kmart fails to make payments can Martha Stewart break its contract, something it might be tempted to envision.

''It's not a great thing when a big part of a company is dependent on a huge retailer which is downsizing,'' Arthur said.

A day after Kmart filed for bankruptcy protection Jan. 22, Arthur reduced Martha Stewart Omnimedia's earnings expectations for 2002 from 60 cents to 55 cents a share, based on anticipated closings of Kmart stores.

The restructuring is expected to include shutting down hundreds of stores and a radical change in the company's strategy, to distinguish Kmart from rivals Wal-Mart Stores Inc., the lowest-price operator, and chic purveyor Target. There is uncertainly about how Martha Stewart will fit in.

An emphasis last year on food sales had hurt not just Kmart, but put Martha Stewart ''in the back seat. Martha clearly now needs to be in the front seat,'' said Burt Flickinger, III, managing director of Reach Marketing, a Westport, Conn.-based retail consulting firm.

Some 80 percent to 90 percent of Martha Stewart Living's retail revenues come from Kmart sales. For 2001, retail merchandising is expected to bring in $33.8 million, or 11 percent of the company's total revenues, according to Arthur.

He estimated total sales at Martha Stewart Omnimedia were $301.3 million last year, up from the previous year's $285.8 million. The company is expected to report 2001 results in February.

While Kmarts problems mounted, merchandising revenues at Martha Stewart Living have increased 20 percent since 1998, fueled by a steady stream of new products to Kmart.

Last year, retail sales for the Martha Stewart Everyday line were up 25 percent from a year ago, according to the company.

Clearly, Stewart and Kmart's partnership, begun in 1997, has proven to be mutually beneficial. The brand has helped Kmart attract droves of customers that might otherwise not shop there, and it helped catapult Stewart's merchandising empire.

Last June, the contract was both extended through Jan. 31, 2008, and fortified. It calls for Stewart to roll out a new line of holiday products this year, and it gives Stewart higher royalty rates but requires her to cover product design costs that were previously paid for by Kmart. Martha Stewart officials declined to comment on the specifics of the royalty fees.

Kmart must fulfill all obligations under the agreement during bankruptcy, including the payment of minimum guarantees, according to Arthur. Martha Stewart Living said last week it is owed $13 million from Kmart, but said that it fully expects full payment, based on the importance of the brand to Kmart.

Still, while company spokeswoman Elizabeth Estroff declined to comment on whether Stewart was in talks with other retailers, analysts are ready to place their bets.

The most likely place, some analysts say, is Sears, which is aiming to further develop its home area. Sear's ex-chairman Arthur Martinez is also on the board of Martha Stewart. Another possibility is J.C. Penney, according to Walter Loeb, president of Loeb Associates, a retail consulting firm.

Wal-Mart might be too low priced for Stewart, though some believe it would be a good fit.

Signing on with Target would be tricky, since the merchant already has an exclusive arrangement with houseware designer Michael Graves. And Kohl's, which has a focus is on apparel, would have to redo its merchandising to make room for Martha Stewart.

Nevertheless, ''Martha is definitely reviewing her options,'' Leob said. ''The name is so well known and is transferable.''

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