Martha Stewart (MSO) Q4 Earnings Preview

Secondary plays: MDP, TWX, MAHI, MHP...

MSO is expected to report Q4 earnings 2/19 before the market opens followed by conference call at 10:00am ET...

MSO Consensus:
Q4 EPS of $0.65 on revs of $122.12 mln;
Q1 EPS of ($0.15) on revs of $71.89 mln;
FY07 EPS of $0.25 on revs of $331.56 mln;
FY08 EPS of $0.35 on revs of $340.09 mln...

Guidance: After reported Q3 on 11/2, co issued Q4 revs guidance of ~$120 mln vs $125.5 mln First Call consensus. The stock gapped up ~3% but closed down ~6% (currently trading down a huge 52% since reporting Q3)...

Expectations: Since 1999, co has reported earnings in-line or beat estimates 26 times (missed only 5 times). The co has beat earnings estimates the past 5 qtrs by an average of $0.04. Specifically for Q4, co has reported in-line or beat estimates every time except once sine 1999. Revs growth YoY has been positive since mid-2005...

Macy's (M) same store sales have recently been weak, which brings to question how many people are buying MSO products at the increasingly struggling retail outlet. Gross margin will be key issue with increased holiday promotions to increase store traffic and sales. It is important to note the somewhat limited downside risk in the fact that the co has $2.50/share cash on hand...

Briefing note: Short interest is 29%, mkt cap is $322.61 mln, float is 22.78 mln and avg volume is 500k. Due to the high short interest, any upside guidance could fuel a move higher... Areas of

Focus on the Call:
1) FY08 outlook (if co projects profitability for the year it would be first time in 3 years)
2) Gross margin (gross margin estimates for Q4 is 68.4%, FY07 is 74.2% and FY08 is 89.2%)
4) Commentary on economic sensitivity of customers
5) Update on Kmart royalties (expected to drop significantly by the end of the year)...

Recent price movement: After reporting last qtr, co gapped up ~3% but closed down ~6%. Since reporting last qtr, stock is trading down ~52%, but trading up 4% over past month. Note the stock made a new 52-week low (~$5.22) on 1/22, but has since rebounded trading ~15% higher off this 52-week low...