Media and merchandising company Martha Stewart Living Omnimedia Inc. (MSO) Tuesday reported a 53 percent drop in first-quarter earnings still hurt by the industrywide advertising slump and a revised deal with struggling retailer Kmart Corp. (KMT).

But the company, led by lifestyle guru Martha Stewart, said it expects results to improve during the rest of the year, and it backed Wall Street earnings forecasts.

Martha Stewart, which derives most of its revenues from its media operations, said earnings fell to $2.9 million, or 6 cents per share, from $6.2 million, or 13 cents per share, a year earlier. The latest results beat the Wall Street consensus estimate by 1 cent a share.

Revenues slipped 2.3 percent to $68.7 million from $70.3 million a year earlier. While the publishing and Internet divisions remained under pressure, revenue increased at the television and merchandising operations.

"I was pleased with the strength of TV revenues given the condition of the market," said Adams, Harkness & Hill Inc. analyst Laura Richardson. "This shows some impact from their new programming on Home and Garden television, among other things."

Earnings before interest, tax, depreciation and amortization fell to $7.5 million from $12.1 million a year earlier.

But the company said it expects revenues and EBITDA to increase for the rest of the year.

The analysts' average earnings estimates compiled by research firm Thomson Financial/First Call are 14 cents a share for the second quarter, compared with 11 cents a year earlier, and 53 cents for the year, up from 45 cents in 2001.


Last August Martha Stewart revised its deal with Kmart after the retailer, which has since filed for bankruptcy protection, said it was closing a number of stores that distributed the company's products.

As a result, Martha Stewart now receives royalties based on retail sales rather than inventory purchases and will record some seasonal products, like Martha Stewart Everyday Garden, in the second quarter instead of the first.

"Kmart remains a risk factor," Richardson said.

Martha Stewart said it plans to launch its Everyday Holiday products in Kmart stores in the fourth quarter.

The company's stock, which has risen about 9.9 percent this year, was up 3 cents at $18.68 in morning New York Stock Exchange trade.

Publishing, which accounted for about 63 percent of total revenues and includes wedding and baby-themed magazines, dropped 7.5 percent to $43.1 million, hurt by one less special issue in the quarter.

But because Martha Stewart Living magazine raised advertising rates by 5.6 percent starting with the January issue, some analysts said publishing may show growth in coming months.

The industry has suffered in the last year from thin advertising spending exacerbated by the Sept. 11 attacks.

Internet and direct commerce revenues dropped nearly 18 percent to $7.8 million due to weak advertising and lower catalog circulation. The money-losing online unit cut jobs and named new management during the first quarter to try to avoid the fate of many now defunct e-tailers.

But television revenues rose 4.2 percent to $6.7 million, benefiting from two new cable programs on E.W. Scripps' Home & Garden Television network.

Merchandising revenue, which accounted for 16 percent of the company's total, rose 41.5 percent to $11.1 million, boosted by the launching of two new product lines through Kmart and the introduction of an existing one in Japan.