MSO Is Crap, New CEO Unlikely to Help

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If Daniel Dienst is the answer to Martha Stewart Living Omnimedia’s (MSO) problems, the domestic diva’s media empire may be in far worse shape than investors have feared.

Dienst, who joined the board of the New York-based company in August, was the head of Sims Metal Management (SMSMY), North America’s largest scrap metal recycler. His nine-year tenure was not without controversy.

Earlier this year, the company was forced to take a write down of $291.3 million in impairment charges after allegations of fraud surfaced in the company’s U.K. operations. The company restated its earnings for the past three years. At the time,  Dienst, who “retired” from Sims in June and wasn’t accused of wrongdoing, offered a profuse public apology, saying:

“Our announcement of employee misconduct and potential fraud is obviously something no CEO wants to make — it’s extremely disappointing, it’s embarrassing and it’s a situation that should have never occurred in the first place.”

Wall Street doesn’t know what to make of Dienst’s appointment. Give credit to Mike Kupinski, an analyst with Noble Financial Capital Markets, for a trying to put it in context: "It was at first a little shocking, but then completely made sense. He's a restructuring kind of guy. He has a history of coming into companies, fixing them up and selling them."

One problem with this theory is that the biggest impediment reducing costs at MSO might be Stewart herself. The Domestic Diva earned a staggering $5.46 million in compensation, about 260% higher than the $1.5 million Lisa Gersh (Dienst’s predecessor) earned. Stewart’s perks included $2 million in fees and expenses $168,871 for personal fitness, wellness, beauty and wardrobe and $127,955 for personal drivers.

Stewart, though, is doing some belt-tightening. As USA Today noted, she took a 10% cut to her 2013 salary, leaving her with $1.8 million. Her annual licensing fee was slashed to $1.7 million — a decline of  $300,000. No one needs to throw a benefit in Stewart’s honor, though: Forbes estimates her fortune at $970 million. Perhaps Stewart should follow the lead of the Wall Street masters of the universe, many of whom took $1 salaries when the financial crisis hit.

MSO also is a mess financially. The company’s only profitable business in the last quarter was merchandising, and it was hardly a cash generating machine. Revenue at the business jumped 7% to $14.2 million as it benefited from “royalty revenue recognition from the company’s relationship with JCPenney.” Operating income surged about 12% to $9.5 million.

Unfortunately, this bright spot might not last. JCPenney, which has plenty of other problems, recently announced that it was scaling back its relationship its MSO because of the legal challenge leveled by Macy’s (M) to MSO’s alliance with JCP. Silly Macy’s was under the impression that it had an “exclusive” agreement with MSO. Martha Stewart clearly thought otherwise, prompting a legal battle royale.

But MSO’s biggest problem is more fundamental. It is a gnat-sized company in a media industry populated by elephants such as Time Warner (TWX),  Viacom (VIA.B) and Walt Disney (DIS).    Martha Stewart should have sold her company years ago because her brand makes more sense being a part of a larger organization than as a stand-alone company.

That’s the strategy that Stewart’s rival Oprah Winfrey has undertaken. She partnered with Hearst to publish O, the Oprah Magazine and with Discovery Communications (DSCA) for her cable channel OWN, lessening her personal risk. Winfrey’s magazine and broadcast operations are far more successful than anything Stewart has done. Forbes pegs Winfrey’s net worth at $2.9 billion.

Getting back to Dienst, he’s certainly trying to get off on the right foot, saying, ” …I look forward to rolling up my sleeves, getting to work and helping write the next few chapters of this remarkable company’s story.”

Unfortunately, many of the CEOs who have worked with Stewart have also brimmed with optimism at the starts of their tenures, only to give up and quit. I will be shocked if Dienst lasts a year.

The bottom line is that now is not the time to buy MSO.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities. Follow him at Berr’s World.