Can Martha turn her
businesses around?

The main house and snow-covered grounds of her 153-acre estate in Bedford, N.Y., have been carefully groomed for her homecoming. The news media are poised for the fox hunt to capture pictures of her first hours of freedom. And after five months in a federal prison in West Virginia, Martha Stewart is ready to get back to work in her Manhattan office, where her employees are eagerly awaiting her return. 

As could be expected, much of Martha’s time in prison apparently was spent playing Scrabble, teaching yoga and making things in pottery class. But she hasn’t exactly ignored her business. In November, she hired Susan Lyne, former head of ABC Entertainment, as CEO, a position Stewart is currently barred from returning to. But Stewart's lawyers are reportedly trying to work out a settlement with the SEC in a pending civil action that would allow her to regain the CEO title.

Over the past few weeks, Lyne and company executives have been busy doing interviews — on television, radio and in print — announcing the “rebirth” of Martha Stewart’s various business enterprises. Shares of Martha Stewart Omnimedia have tripled since July.

But amid all of this enthusiasm Wall Street analysts, who are paid to take a more independent view of the company’s prospects, have been collectively scratching their heads.

Amid all of this joyful enthusiasm, Wall Street analysts, who are paid to take a more independent view of the company’s prospects, have been collectively scratching their heads.

Many have been advising their clients that the company’s stock — which accounts for the bulk of Ms. Stewart’s estimated $1 billion net worth — is headed for a fall.  Though her fans may be greeting her triumphant return with yellow ribbons, those ribbons may look to some investors more like the kind used to mark the boundary of a large, dangerous hole in the ground.

The latest window on the financial health of Stewart’s media empire came last week, when the company announced a $59.4 million loss for last year on revenues of $187.4 million. Those revenues were down 24 percent from $245.8 million a year ago, when the company lost $1.9 million. Company executives warned in a conference call that they expect to post another first-quarter loss of 35 cents a share —even worse than analysts have been expecting.

Revenues fell across all business lines except merchandising, which was essentially flat because of minimum royalties guaranteed in its contract with Kmart. Actual sales of Martha Stewart’s Kmart merchandise fell nearly 6 percent for the year. (In a quarterly financial statement last fall, the company said it does not expect actual sales of Martha Stewart goods on Kmart shelves to exceed the minimum guaranteed royalties until at least 2008.)

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