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Martha Stewart Living Omnimedia Inc. Message Board

  • apostate_001 apostate_001 Jan 10, 2006 4:49 PM Flag

    Accounting for KMart Revenue

    For the previous 3 quarters of this year, MSO recognized the following 'Kmart Earned Royalty' for a total of 21.7Million dollars:

    Q1 $6.1M
    Q2 $9.0M
    Q3 $6.6M

    I think I recall that the minimum royalty for 2005, per the Kmart contract, is $51.0M. Would this not mean that the 4thQ earnings report will show revenue of around $29.3M (a radical improvement quarter-over-quarter of 22.7M, thanks to this accounting quirk)?

    CFO Follo (the guy who recently jumped ship) said in November's conf call: "Merchandising revenues in the quarter are expected to be approximately $28 million, while OIDA will be approximately $23.5 million. Revenues in the quarter will include a true-up payment related to our minimum royal guarantees with K-Mart of approximately $16 million."

    In my mind, this accounting quirk (a 1-time phenomena) is the only possible way MSO could improve its 3rdQ numbers enough to reflect the breakeven point or profit that CEO Lyne has been forcasting.

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    • More regarding forcasting MSO's 4th quarter results:

      Q3's Total Operating Loss was $26.8M

      MERCHANDISING: As outlined in my previous post on this thread, Merchadising OIDA is likely to jump from $4.3M to $23.5M (per Folla), being a net improvement of $19.2M quarter-over-quarter.

      PUBLISHING: CEO Lyne has been bragging that advertising pages are up 100% (year-over-year).
      Subscription rates have been increased. No doubt publication costs will also be up. If Lyne's forcast is true or partially true, this could mean a net improvement for Pub OIDA by, say, $3M to $5M, quarter-over-quarter.

      TELEVISION: 3Q only contained 2 weeks of Martha's new tv show's revenue. Thus Q4 will also reflect a substantial improvement in rev. Folla said in the Nov. conf call: "Television revenues are expected to be approximately $11 million, as we benefit from a full quarter with the new syndicated show and the launch of our DVDs. OIDA loss for the third quarter will approximate $1 million." If Folla is correct, the television OIDA loss of just $1.0M will reflect a $2.0M improvement quarter-over-quarter.

      INTERNET and DIRECT MARKETING: (Forget this, too small of a segment to be consequential.)

      CORPORATE EXPENSES: For Q3 this item was a devastating -$23.8M, partly because it included a $10.8M charge for the Apprentice warrants. For Q4 that charge will only be $5.5M, which means roughly $5.3M less will be deducted from OIDA.

      Summary: Merchandising ($19.2), Pub ($3M), TV ($2M), and CorpEx ($5.3) adds up to $29.5M of improvements quarter-over-quarter. Given Q3's loss was $26.8, you might prepare yourself for a lot of ballyhoo about how MSO is now in the black! --- temporarily.

      My Conclusion: These numbers are as good as it gets (especially for Merchandising). Strong Sell

    • Thank you!

      You have dug up the data which I have been alluding to all along; namely that the 4th quarter payment from K-Mart is much larger than the other three.

      Hit on "Analysts Estimates" on the MSO Yahoo page, and you will see that there is a big drop in the revenues from 4Q05 to 1Q06.

      Again, thank you!