Martha Stewart's company is doomed

The arrangement between Kmart and MSLO -- which goes back to 1997 -- has largely been a one-way street. Kmart signed the contract when it was in bankruptcy and, to put it charitably, the retailer was not in a strong position to dictate terms.

So Kmart agreed to pay a minimum amount in royalties to MSLO: $40.4 million in the year ending Jan. 31, 2003, and a whopping $65 million in the year that ended this January.

During that time, Kmart's situation has not improved: It merged in 2005 with Sears Holdings (SHLD, news, msgs) after closing stores and watching sales decline.

For every year between 2003 and 2007, Kmart didn't sell enough Martha Stewart Everyday products to meet the minimum royalty promised to MSLO. And so those payments are about to plummet: Unless Kmart has the turnaround year of the century and Martha's products fly off the shelf, it won't be required to pay MSLO more than $20 million in 2009. That's $45 million less than this year, a drop that will all but eviscerate profits in the company's merchandising division.

Yes, MSLO says it will make up this revenue through merchandising deals with Macy's (M, news, msgs), Costco Wholesale (COST, news, msgs), KB Home (KBH, news, msgs) and others, and to some extent it will. But it's not 2003 anymore. Given the disappointing sales of Martha merchandise in Kmart, no other chain is going to provide the ludicrously generous guarantees that Kmart did.

Moreover, the housing slump means that fewer people are spending on home improvement than in recent years. Witness the recent bankruptcy and partial liquidation of Linens 'n Things.

The hard truth is that demand for Martha Stewart in all forms -- magazines, books, TV shows, Web sites and other stuff -- has passed its peak. You can feel it in the culture, where Rachael Ray is today's go-to domestic goddess.

And you can see it in the numbers: In the first quarter of this year, the minuscule rise in MSLO advertising revenue was more than eaten up by a loss in circulation revenue, meaning that people don't want to pay for Martha material like they used to.

And even the stagnant publishing arm did better than the Internet arm, which lost $2.2 million in the most recent quarter and has lost millions more over the last several years. The company as a whole lost money for four consecutive years before turning a profit in 2007.

Can anyone save this sad mess?

Given the company's singular focus, only Martha could. And, theoretically, the conditions of her 2006 conviction for obstruction of an investigation and making false statements allow her to take over as CEO in 2011.

That year she will turn 70: How much longer does she want to grace the covers of magazines, whip up meringues on TV and hawk soup in Costco?

The most likely scenario, and the one that still keeps the stock slightly above water, is that some outside investor would swoop in, sift through to find where its value is, and sell or shut down the rest.

For many of the company's employees, that would probably mean looking for a new job. But for those who'd like to see Martha retire with dignity, it would be a good thing.

This article was reported and written by James Ledbetter for Slate.com.

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