I’ve had a lovely morning thus far, started with coffee with my husband, followed by a 3.6 mile run along Bellingham’s waterfront and I’ve settled into my office routine by reading the 2006 Stockholders Report for Martha Stewart Living Omnimedia. It’s not secret that I’m a huge fan of Ms. Martha. She’s definitely one of my top five favorite CEOs.
In reading the shareholder’s report, I was surprised to see that 82% of their merchandising revenue, 25% of their total revenues for the entire corporation, came from K-Mart. That is a lot of money to have riding on one company!
When I read further into the report, it looks like K-Mart paid the minimum retail guarantee; meaning Martha Stewart branded products did not sell enough so K-Mart essentially topped-off the payments to MSLO, to hit a pre-agreed upon minimum royalty rate.
This is troubling for many reasons but the biggest downfall to this arrangement that I see is that the minimum retail guarantee starts to drop off in 2008. This means that K-Mart will not have to guarantee as much royalty payments, starting next year.
Given that the royalties from K-Mart are 25% of MSLO’stotal income for the 2006 fiscal year, this doesn’t bode well for for future earnings past 2007.