Martha Stewart Living Omnimedia Inc. (MSO) expects to return to profitability this year, as the loss-ridden media-and-merchandise company reported a narrower first-quarter loss despite lower revenue.

Its large, struggling publishing division is set for a turnaround in the second half, Chief Operating Officer Lisa Gersh said. The company's newly installed advertising-sales teams for the segment are expected to drive improved results in the unit, which produces a bevy of magazines and books.

"This objective, combined with expectations of continued growth in merchandising and the benefit of a lower-cost broadcasting platform, should position MSLO to return to profitability in 2012," she said.

The company--which publishes magazines and books, produces television programming and designs merchandise, many under the brand of do-it-yourself maven Martha Stewart--has been unprofitable for the last nine years except for a single year in the black in 2007. While its merchandising arm has steadily strengthened recently, the publishing and broadcasting divisions have been plagued by a downtrodden advertising market alongside wide cost base.

To turn around, it is aiming to improve its publishing performance with the new sales teams, reimagine its video business, accelerate the growing merchandising operations and operate more efficiently.

In the latest period, sales in the publishing business--its largest by revenue--fell 11%, better than its March prediction for a drop in a middle-teen percentage. Print advertising was down 21% and digital advertising was down 8%. The publishing unit's operating loss widened because of the lower top line and costs from the company's advertising-team hiring spree.

The installation of the new ad-sales teams "sets us up for what we hope and plan to be marked improvement in the second half," Gersh said, also noting that advertiser response has been improving.

The broadcasting unit's loss narrowed despite a 31% plunge in revenue, which Chief Financial Officer Kenneth L. West said was nonetheless better than anticipated because ad revenue for Stewart's daily live-audience show on Hallmark Cards Inc.'s Hallmark Channel was higher than company assumptions.

The coming expiration of the Hallmark Channel deal will significantly lower the costs of Martha Stewart Living's broadcasting operations as it exits an expensive studio used for the program. While that program will cease after the summer, Martha Stewart recently disclosed a new weekly cooking show on PBS, the Public Broadcasting Service, slated for the autumn, which maintains her television presence on a network with better prime-time ratings than Hallmark Channel's in "areas where our content is most relevant," Gersh said.

In a thrifty maneuver, Martha Stewart Living plans to shoot both seasons of Martha Stewart's Cooking School in the live-show studio before the lease expires at the end of June. "This puts the otherwise-vacant capacity to great use," Gersh said.

Merchandising continued to strengthen. Revenue jumped 33%, driven by the launch of a home-office supplies line at Staples Inc. (SPLS) as well as initial design fees from J.C. Penney Co. (JCP). Operating profit surged 80%. Martha Stewart Living expects segment-revenue growth to approach 20% in the second quarter and to accelerate throughout the year.

J.C. Penney's partnership with Martha Stewart Living spawned an ongoing lawsuit from Macy's Inc. (M), which said it has exclusive rights to Martha Stewart merchandise.

Separately, the companies' lawyers in the case sparred over deposing Macy's Chairman and Chief Executive Terry J. Lundgren, according to court filings.

In a letter to the judge Tuesday, Martha Stewart's firm asked to depose Lundgren as soon as possible. Macy's was refusing to produce him, the lawyers said, based on a legal argument that high-ranking executives needn't provide testimony when lower-level employees' deposition would suffice, an argument the Martha Stewart lawyers challenged.

Macy's lawyers defended that legal argument as sound in their own letter to the judge Wednesday, and asked the court to deny Martha Stewart Living's deposition request.

The case casts legal risk over a potentially lucrative merchandise partnership for Martha Stewart.

Overall, Martha Stewart Living posted a first-quarter loss of $3.6 million, or 5 cents a share, compared with a year-earlier loss of $7.1 million, or 13 cents. Revenue decreased 5.4% to $49.8 million.

On an adjusted basis before interest, taxes, depreciation and amortization, the loss narrowed to $1.8 million from $4.3 million, better than the company's March expectation for the first-quarter loss to be in line with the prior year's.

Shares were recently down 1.1% at $3.41. The stock has slumped 23% so far this year.

-By Joan E. Solsman, Dow Jones Newswires; 212-416-2291; joan.solsman@dowjones.com

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