Martha Stewart Audit Case
Martha Stewart Living Omnimedia is primarily comprised of a magazine publication and a television show created by home decor aficionado, Martha Stewart. Both sources of media primarily feature home renovating and decorating products. Also, having an emphasis on do it yourself (DIY) projects for a more stylish and satisfying home. Stewart herself, described Martha Stewart Living as, “the most trusted guide to stylish living. While MSLO brings in revenues from those looking to decorate their homes and a significant portion of revenues comes from air time and in-show brand/product mentions, the majority of revenues for Martha Stewart Living Omnimedia comes from their publishing branch. As a company named after the founder, a risk for Martha Stewart Living Omnimedia is the name. After all, Martha Stewart is a convicted felon who was put away by jury. In addition, with an ongoing insider trading investigation being conducted by the Securities and Exchange Commission, public relations and brand loyalty are likely to be negatively impacted.
As one of the major branches of the company, MSLO’s broadcasting revenues have been steadily decreasing. Her television program, Martha, is not producing the ratings that were expected with Martha’s comeback. Therefore, MSLO will have to give away advertising time away for free for compensation. If MSLO fails to draw an audience and better ratings, investors will react and the value of stock will decrease. Another potential risk is for Martha Stewart to split up her company or to establish a new entity.
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This would stem from the Securities and Exchange Commission’s rule that she will not be able to return as CEO for her insider trading case. If Martha becomes unsatisfied with the operations of her management team currently running MSLO, there is always the chance that Martha would sell her 50% control of the company and venture off. Based upon analysis of Martha Stewart Living Omnimedia’s financial statements, their lack of actively managing costs is their most pressing issue. Operating costs as a function of sales have seen an increase year over year with quite a bit of absolute percentage volatility.
These costs alone accounting for 105%, 124%, and 108% of total revenues for 2009, 2010, and 2011, respectively. If these were primarily variable costs, then with the reduction in total revenues these should have decreased as well somewhat proportionately. With production, distribution, and editorial costs comprising over 50% as a function of sales, MSLO is not controlling key product & distribution costs in a manner that will help increase their profit margins and possibly take them back to profitability. Because of this, the entities ability to continue as a going concern is questionable.
With three years of massive losses and an accumulated deficit reaching almost $200 million, MSLO benefits from having an equity multiplier of ~1. 46. The lack of liquidity issues ensures that MSLO can continue operating a net loss for a while longer. The flat growth/decay in general and administrative expenses indicates the firm is maintaining the same level of salary for a contracting business. In order to rein in the risks of not continuing on as a going concern, MSLO needs to focus on serious cost stabilizing and cutting.
If their fixed costs are such a large percentage of their cost structure, fluctuations in volume output will have a larger impact on earnings before interest and taxes. The larger the volatility of sales puts MSLO in a position that requires a restructuring to ensure they are achieving more efficiency in asset utilization. With both accounts receivable and payable decreasing, the business appears to be tightening their credit policies because the percent decrease is more than the decrease in sales output and paying back creditors in more efficient manner, possibly to take advantage of trade discounts.
Using invested capital from equity holders will create higher capital costs than financing operations with debt. Albeit, their low equity multiplier ratio is more attractive for creditors as short and long term liquidity issues are not as dire as they could be. Two account that we would allocate more hours of work to are: restructuring charges and other than temporary loss on cost-based investments. Restructuring charges first to see what exactly happened that made MSLO incur the expense.
Perhaps there were plans to downsize employees, shut down part of manufacturing plants, or write offs. This could potentially be a significant indicator to the investors if it is deemed a going concern. Secondly, other than temporary loss on cost-based investments to see what investments are losing value that MSLO has significant share in. As a result of the credit crisis from previous years, MSLO must keep in mind if their investments are impaired and writing down the value of their investments.