/:3BB3@ ]ifdJljXe Xe[:_Xic\j ;\Xi=\ccfnJkfZb_fc[\ij# What an exciting and productive year 2006 was for Martha In our last letter, we had just opened our irst Martha Stewart- Stewart Living Omnimedia! Our revenue rose 36 percent to KB Home community near Raleigh, North Carolina. Since $288.3 million, our largest growth rate since the company then, we have opened Martha Stewart homes and communities went public in 1999. This surge in revenue was driven by in Atlanta, Georgia; Perris, California; and Katy, Texas. We extraordinary growth in Publishing and bolstered by solid are at work on four more, in Florida, Georgia, North Carolina performances in our other business segments, including our and California. Inspired by Martha’s own homes in New irst full year of revenue from our nationally syndicated daily York and Maine, the Martha Stewart Homes are beautifully television show. In short, this year marked our return to designed and surprisingly affordable with wonderful Martha growth as a media and merchandising company distinguished touches like wainscoting, spacious foyers, extra-large closets, by the singular how-to content that turns dreamers into custom mantels, and stamped-concrete driveways. While we doers, and by our beautiful and practical product designs have felt the effect of the soft residential real estate market that enable consumers to live the dream. Our resurgence along with everyone else, our homes continue to sell and our has allowed us to invest in new ideas and product lines to conidence in the value of this collaboration remains high. further serve our customers, diversify our income streams, We’re not alone in our enthusiasm for these homes: Business and leverage our formidable brand. Week included the homes on its list of the top 20 most innovative products for 2006. In our letter to stockholders last year, we detailed our plans to build new businesses in categories where our brand has The KB Home and EK Success deals were important elements genuine equity—home decorating and design, home goods, of our new business strategy to diversify our business and our home solutions, cooking, entertaining, organizing and crafts. revenue stream. They also help to satisfy and drive consumer At the time, we had just forged an agreement with EK Success demand for our products. Our research shows that brand and GTCR Golder Rauner to design and distribute a new recognition of Martha Stewart products is high, and that Martha Stewart Crafts line of paper-based crafting products. these products are associated with quality and style. But it As of this writing, the line is slated to launch at Michaels also shows that the No. 1 reason people had not purchased stores nationwide in May 2007, and to roll out to independent our products was because the products were not available retailers later this year. Paper crafts may sound like a quaint where they shop. pursuit, but scrapbooking is a rapidly growing $3 billion business for which there is no national brand. We intend to This year, we set about rectifying that problem in a big way. change that. If you step into Michaels this spring and browse In April 2006, we began developing an all-new line of home our inspired products and practical tools, you’ll understand merchandise exclusively for Macy’s—the Martha Stewart why we’re conident that Martha Stewart Crafts will make an Collection. The line will debut in late summer 2007, and impact in this high-margin growth area. will encompass a broad range of home goods—including bed and bath textiles, housewares, casual dinnerware, latware Paper crafting is not the only corner of the $30 billion crafts and glassware, cookware, holiday decorating, and tree- industry that interests us. Last fall, we collaborated with trimming items—developed especially for the more upscale, Kodak to introduce Martha Stewart Holiday Cards, the irst traditional Macy’s customer. piece of a digital-photo product line that now includes photo albums, stickers, invitations, baby announcements, and Our Martha Stewart Collection with Macy’s was the irst calendars, with more to come. This fantastic new line brings of many licensing deals we forged with a broad range of the quality of off-line products to the online realm, making manufacturers in 2006, including area rugs with Safavieh, the purchase of beautiful, personalized photo products as modular carpet tiles with FLOR, ceiling fans and lighting with easy as point and click. Generation Brands, and a new paint program with Lowe’s. The Lowe’s deal is an important building block in our strategic special issues we produced last year, and a best-selling book, expansion into the home-improvement category. We plan to Martha Stewart’s Homekeeping Handbook: The Essential build a home-improvement line with loor coverings, lighting Guide to Caring for Everything in Your Home, published by ixtures, bathroom ixtures, kitchen cabinets, and closet Clarkson Potter in November. organizers, and expect the full collection to debut in late 2007, The superior quality of our publications is widely recognized. initially in KB Studios nationwide. As is the case with all of In 2006 alone, we took the No. 1 spot on Mediaweek’s irst- our licensing deals, a relatively small investment is required for ever Brand Blazers list. Martha Stewart, Lauren Stanich, Sally us to establish a presence in what are high-margin and high- Preston, Gael Towey, Margaret Roach, and Eric Pike were growth businesses. We will have no inventory or capital costs; named “Executive Team of the Year” in Adweek’s 2006 “Hot our principal investment is in our design staff, which we have List.” Everyday Food topped Adweek’s 2006 “Hot List” for expanded to meet the demands of our new product lines. magazines with less than $50 million in annual revenues. Thanks We continue to offer our Martha Stewart Everyday line of to the publishing team’s stellar performance, Advertising Age products at Kmart, currently our biggest single inancial named Susan Lyne “Publishing Executive of the Year.” This driver. We will be refreshing our MSE soft home assortment year is off to a great start, with Living garnering a spot on this year to provide mass market customers with the high- Adweek’s 2007 “Hot List” and Everyday Food once again quality, beautiful, and affordable home products they expect occupying the top spot on the “Hot List” for magazines in its from our company. category. Living is also a inalist for two National Magazine Awards, for General Excellence and for Photography, from the It’s worth noting that we are not interested in creating new American Society of Magazine Editors. product lines simply to create new revenue streams. We get many requests to create Martha Stewart–branded products— We’re honored and gratiied by these accolades, which relect many more than we could possibly design—and we’re very the company’s creative vision but also its good business sense. stringent about where and under what conditions we will enter Our newer publications are gathering steam. Everyday Food, a new market. As we noted last year, we choose our licensing which we launched in 2003, became proitable a year ahead of partners very carefully. The prospective product must be “on schedule. We raised Body + Soul’s rate base, not once but twice brand” and in a category where our customer would expect in 2006—from 275,000 to 350,000 in March, and to 400,000 to ind us. And we have to believe we can create a markedly in July. That 45 percent gain in circulation made Body + Soul better product than what is available at that price point. the leader in its category. In 2006, we published two test issues of Blueprint: Design Your Life, a magazine designed for readers We know that when we launch a new product line, it has to ages 25 to 39. Younger women are not just serious magazine make a splash. The “wow” factor is important. With that in buyers, they are also a demographic that advertisers are eager mind, we are very focused on execution. We can tell you that to reach and one that we understand very well. Our company our creative teams have done a brilliant job this past year, and is illed with women in that very demographic: talented, busy we cannot wait to unveil our Martha Stewart Collection at women who wanted a magazine that spoke to their needs, their Macy’s, our updated Martha Stewart Everyday products at style, their lives. Now, with the advent of Blueprint, they have Kmart, and our crafts line at Michaels. one. Blueprint was named one of the hottest launches of the year by Media Industry Newsletter. As we extend and expand our Merchandising lines, we have continued to diversify our Publishing business, which Our Broadcasting business also had a strong year, thanks delivered another big year with revenue up 24 percent to to The Martha Stewart Show, our nationally syndicated $157 million. These impressive numbers are due in no small daily television show, and the Martha Stewart Living Radio measure to Martha Stewart Living, our lagship magazine, channel on SIRIUS Satellite Radio. The Martha Stewart Show which had an outstanding year with a 41 percent increase is a powerful marketing vehicle for us and a key element of in ad pages in a period when the industry as a whole was our business strategy. It reaches 1.6 million viewers daily relatively lat. Together, our magazines delivered incomparable and drives them to our magazines, our Internet site and to inspiration and how-to information to more than 41 million retailers that carry our merchandising lines.