Martha Stewart's company is doomed

By Slate.com

In one of the least surprising executive moves of the year, Martha Stewart Living Omnimedia on June 11 announced the resignation of its CEO, Susan Lyne. Lyne, a respected media veteran who launched Premiere magazine and had a successful career at ABC television, took over the company in 2005 after Martha had legal problems.

The company has hardly impressed Wall Street since. The stock, which traded at more than $30 a share in 2005, today is at about $8.

Last year, the magazine portion of the company laid off dozens of employees and shut down Blueprint after a year and a half of publishing. Someone had to go.

• Talk back: Do you think the party's over for Martha Stewart?

But while Lyne's fall was as predictable as a soufflé's in an earthquake, the fundamental problems at the company were almost certainly beyond her control -- or any CEO's.

Martha Stewart Living Omnimedia (MSO, news, msgs) (we'll call it MSLO, even though the stock ticker is MSO) is a textbook intersection of two media business lessons that should have been learned in the 1990s.

Indeed, Martha's personal aura is so powerful that it's easy for the casual observer to misunderstand exactly where the company makes its money. While Martha Stewart is probably best known as a magazine publisher, broadcaster and ex-con, the true profit center for the company is in merchandising.

In the first quarter of 2008, for example, MSLO made $6.6 million in profits from merchandising, far more than the $1.6 million in profits that came from publishing, according to the most recent filing with the Securities and Exchange Commission.

Of course, there's nothing intrinsically wrong with running a merchandising company. The problem in MSLO's case is that too many of its free-range, organic eggs are in the same down-market merchandising basket.

In 2007, 76% of MSLO merchandising revenues came through Kmart, which sells everything from bed sheets to artificial Christmas trees under the brand Martha Stewart Everyday.

Continued: Today's go-to domestic goddess

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