[Beginning of Cramer's verbatim comments for this segment...]

Jim:          Martha Stewart Living Omnimedia… shut up an amazing 19% today… and it made sense, why… because the company has a new agreement with Home Depot to develop an exclusive line of home improvement products… it is everything from closets to patio to dining… its gonna be sold starting in January of next year… I think the stock has a lot more room to run… and I do not recommend a stock that goes up this much in a day… there is plenty of time… the news just came up… let’s use cooler heads… but understand where I think that it is going ultimately… for Martha Stewart Living Omnimedia, it is all about life without Sears, K-Mart… the company has been locked into a very negative deal for Martha Stewart and the company with K-Mart… it is actually more of a suicide pact lately… and has been since 2003... it expires at the beginning of next year… and the loss of K-Mart exclusivity is what makes this Home Depot deal possible.

Now, there is no doubt in my mind that the merchandising side of the business will benefit massively from swapping K-Mart to Home Depot… and remember they are also in Macy’s… both far better retailers than K-Mart or Sears… I do not think there is anyone in the country who would disagree with that… from 2003 to 2008, the minimum guaranteed royalty that MSO got from K-Mart exceeded the actual royalties that it earned from retail sales… pretty awful… 2008 the earned royalty that MSO got from K-Mart was just $18.8m… the new agreement with Home Depot will give MSO a much broader reach… selling its products thru a superior retailer… with 2,241 stores… and you know that we have been recommending Home Depot on the show for a long time, I own it for my charitable trust.

In 2008, MSO merchandising segment made up almost 20% of its sales… K-Mart accounting for 43% of the merchandising revenues… look I think this deal is blow away… I think the Home Depot deal has the potential to make this a much bigger part of the company… we know Martha Stewart is a fabulous brand…
remember we have Martha, Emeril… I mean there are only a couple of first name people, you know what I mean… Jim, no… but so far it has had awful distribution.. .but that is going to change… as K-Mart is phased out in favor of Home Depot… now the company has got much more than just Martha going for it… Charles Kobbleman, MSO’s principle executive officer and executive chairman is a proven time tested winner… the man who practically built EMI back when the music business was … well it is still a great business, what can I say… Kobbleman has got a great eye for what people want… he discovered Bobby Darren, Billie Joel, Tracy Chapman, and turned them all into successes.

At Martha Stewart Living Omnimedia, Kobbleman is already working with someone who is a household name… with the Home Depot deal we are seeing exactly the kind of fabulous results that he can bring… Charles Kobbleman is so good… and this deal with Home Deathspot (i.e., Home Depot), as I like to joke about it, is so promising that I just had to bring him on the show in person to talk about MSO’s future…

Jim:           Mr. Kobbleman, welcome back to Mad Money...

Charles:   It is great to see you. It is a pleasure to be here.

Jim:    I am thrilled that you are here, and I know that the stock is up big… and you and I have been talking, that there is a major change in the company… it is not just the distribution… I look at your company, tell me if I am right… a lot of the analysts, and I have got all of their reports, they view it as a publishing company with this small merchandising business… can’t the whole model flip now that you are in stores that people thrive?

Charles:  You know the whole model really flipped many years ago when Martha came up with this great idea to go to K-Mart and build an offering of products for women that want to follow Martha. Well that worked incredibly well until K-Mart had all of their troubles. What the analysts do not get right is, that most of the analysts are either media analysts who do not understand the retail business. Retail analysts who do not understand the media business. Or digital players that do not understand either one of them. You get it. And the consumer gets it, and to your point attention K-Mart shoppers, if you want sheets, and pillowcases and stuff for you kitchen, etc. you know to go to Macy’s. And now come January, you know to come to Home Depot. And we are going to service them with all of our incredible products.

Jim:    My sources at Macy’s indicate, and these are good sources, I have to admit… that the Martha Stewart business that you have already bought, has been a major spark to Macy’s sales… do you think that I am on base with that?

Charles:  Oh you are completely on base. This month, for example, up to date we are up dramatically. And one of the reasons that I think is that the K-Mart shopper is finally connecting the dots. Because K-Mart has very little of our products in stores. They are now coming to Macy’s. And, of course, Macy’s is going to get this big lift as we will when we are totally out of K-Mart, and our shoppers will be happy to go to Macy’s.

Jim:    I also have to say that Terry Lundgren, the CEO of Macy’s, has made a turn that many of the suppliers that I am familiar with in Macy’s is saying that the business has really bubbled… the stock is not at $17 for nothing… now, one of the things I talk about business models… not everyone is as familiar with that… Martha Stewart TV show, Martha Stewart radio, Martha Stewart magazines… they have not driven the traffic to K-Mart… now I imagine that all of these very popular methods of distribution will be used to drive traffic to both Macy’s and Home Depot.

Charles:  Most definitely. But not that I want to disagree with you, but during the years of K-Mart and our partnership, our media and Martha have driven a lot of people to K-Mart. In fact, why would you want to go shop at K-Mart? With no disrespect, Mr. Lambert. For Martha Stewart. So as it is transitioning out, of course, you are not going to K-Mart.

Jim:    Well, let me just say… the reason that I say this is because I was going over the ten q… the recent ten q and I found this… there is a minimum guarantee from $131.10 has been reduced by $1m in exchange for leave from exclusivity… it seems to me that you are actually paying K-Mart not to sell Martha Stewart.

Charles:  Well, you know it is kind of like a get out of jail card. And we are going to be at Home Depot earlier than anticipated, and we are very excited about it.

Jim:    Now, when Martha Stewart does Twitter, when she goes online… will she be saying look this is my… at the end of her show, say listen this is available at Home Depot?

Charles:  As of today Martha had something like a 1,400,000 on Twitter and she is going to let them know what she is up to, what she is doing, what her life is going on. And, of course, we are going to drive those people into Home Depot. Just as we are driving them into Macy’s.

Jim:    Do you expect that the 20% that is merchandise vs. the 80% that is publishing could go more 50% 50%?

Charles:  Oh, there is no question about that. Absolutely.

Jim:    Okay, one of the things that I have been focused on is that when you look at the number of shop keeping units that K-Mart has of Martha, I would think that you could blow that out… let’s say that there are 10 things that she is selling at K-Mart… I think that you could do 20 at Home Depot and 50 at Macy’s… am I right about the idea that you do not use all of the different things that Martha puts out?

Charles:  Yeah, we have the opportunity now to develop bigger products. Greater products. Different products for both Home Depot and Macy’s. Both Terry and Frank Blake, and the team at Home Depot, that is what they are looking for. They are looking for our ideas. Our creative sense. Martha’s eye for the marketplace. So yes, we have great opportunity to do that.

Jim:    Michael’s, Costco… where are we now?

Charles:  Michael’s we have a wonderful craft business that is only going to grow and do even better. In fact, we are even testing some craft product at Target for this holiday season. Food, we did an experiment with Costco to learn about the food business. I think we now know what our consumer wants. Similar to what we did with Michael’s and crafts. And now we are going to unveil a strategy for food over the coming months.

Jim:    Okay, Charles, I cannot go without challenging the notion that publishing is such a bad business… how much of it, you were from the music business, how much of it is a secular decline? not going to come back? how much can we expect that earnings will continue to be hurt by a decline in plain old advertising?

Charles:  Well, I am even seeing some pick up there. Not a lot. I cannot tell you that I can predict next year. But publishing is vital to our brand. Don’t forget that we have four wonderful magazines. And our customer, our consumer, love those magazines. Highly targeted so that advertisers want to be in those magazines. So whatever recovery occurs, it will occur faster for us. And again, as you so aptly point out, we are building our businesses on all fronts. Digital is growing. Merchandising will grow in leaps and bounds. And publishing will with great magazine and a great customer, we will continue to manage and grow that business.

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Jim's comments AFTER the interview:     Okay, once again, I wish the stock had not run because you know I would drive it hard… I have to wait for it to come in… Charles Kobbleman, you are a delight… Charles Kobbleman is the executive chairman and principal executive officer Martha Stewart Living (MSO)… congratulations on the new deal.

 

[verbatim recap]

[end of segment]

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