Posted on: Sunday, July 18, 2004

Stewart's appeal of conviction bad for business

By Anne D'Innocenzio
Associated Press

NEW YORK — Martha Stewart the person wants exoneration. Martha Stewart the company needs it all to just end.

With the dame of domesticity planning to fight her criminal conviction in a stock sale case, she effectively threatens to perpetuate the cloud that has hung over her business empire for two years. It's a cloud not just of scandal but of uncertainty — and uncertainty hurts any business.

"Martha the person is doing what she needs to do and that is looking out for herself, but it is not consistent with looking out for the brand," said Seth Siegel, co-founder of The Beanstalk Group, a trademark licensing agency. "Martha the brand needs closure, and Martha the person needs to fight."

The founder and former chairman and CEO of Martha Stewart Living Omnimedia Inc. has maintained her innocence, and said after her sentencing Friday she plans to take her case to a federal appeals court. She received five months of prison and five months in home confinement, and was fined $30,000; the sentence was stayed pending appeal.

"I will be back. Whatever I have to do in the next few months, I hope the months go by quickly," Stewart said afterward.

She also appealed to consumers to buy her magazines and merchandise.

In a statement after the sentencing, Martha Stewart Living Omnimedia called the sentencing "an important step toward closure" for the company and said, "we continue to manage the company for the long-term, with a commitment to preserving our many assets and brand labels."

Beanstalk's Siegel noted that while the lighter-than-expected sentence "removes the worst of the stigma from Martha, it is by no means closure" because Stewart intends to exhaust her appeal. The best scenario for the brand would be for Stewart to complete her prison term immediately, he said.

Since her March 5 conviction on charges that she lied to investigators about why she sold shares of ImClone Systems Inc. in 2001, Stewart has clearly showed she's not going to prison without a fight. She has already twice asked the trial judge to throw out her conviction and was turned down. She hasn't been contrite, and instead has been a regular fixture on the social circuit.

The office of her attorney Robert Morvillo directed calls to publicist George Sard, who did not return a call from The Associated Press.

A delayed resolution to Stewart's legal situation does not bode well for Martha Stewart Living Omnimedia, whose officials have told investors that the sooner the matter is closed, the sooner the company can expect a rebound in advertising at its magazines, including Martha Stewart Living.

Even if Stewart wins an appeal or ultimately clears her name, analysts say the damage has already been done to the brand that was built on her reputation as a perfect homemaker and stamped on a wide array of products from magazines to pots and pans.

Not to mention that an increasing number of personalities like Chris Madden, who's now selling a line of home furnishing at J.C. Penney Co. Inc., and magazines like Real Simple have nibbled at Stewart's market share.

If and when advertisers return is anyone's guess. Sales of Martha Stewart merchandise, sold at Kmart Holding Corp. and other stores, have held up, but the company's television and publishing businesses have fared poorly.

Martha Stewart Living Omnimedia reported a wider-than-expected loss for the first quarter, and warned that advertiser defections will likely push losses for the second quarter beyond Wall Street projections.

Meanwhile, its stock has fallen more than 50 percent from where it traded before Stewart's name was tied to the ImClone insider trading scandal two years ago.

After the sentencing, the stock rose as much as 40 percent, to a high of $12.12 a share, before slipping back. Shares closed at $11.81, up 37 percent, or $3.17 on the New York Stock Exchange yesterday.

Robert Passikoff, president of Brand Keys Inc., a New York market research company, said even a successful appeal won't help the Martha Stewart brand.

"No one is waiting around with bated breath," he said.

Stewart resigned as chairman and CEO in June 2003 after being indicted. After her conviction, she stepped down as chief creative officer and resigned from the company's board, but remains as founding editorial director.

In a move to distance itself from its founder, the company will place a greater emphasis on the name "living" with its Martha Stewart Living magazine, starting with the September issue. Meanwhile, it is expanding its Everyday Food magazine.

Some believe the company should divorce itself completely of Stewart.

But with 61 percent ownership of the company's stock, Stewart will probably retain an influential role.

Since her conviction, Stewart has continued to receive her annual salary of $900,000 and annual guaranteed bonus of $300,000, which remains in effect until October. The company had said that if Stewart was sentenced to prison, it would review that arrangement.