Martha Stewart empire may crumble

By Anne D'innocenzio
Associated Press

NEW YORK — The guilty verdict for Martha Stewart will badly damage her company, scaring more advertisers and perhaps readers and viewers away from her media business, industry experts said. Sales of her towels and other household goods may hold up better.

Martha Stewart smiled wanly as she arrived at court with attorney John Tigue. Smiles were gone when she left. Associated Press

"In the meantime, we are confident that our assets ... are more than sufficient to continue MSO's development as a leading 'how to' brand building company," it said.

Stewart said in a statement on her Web site that she would appeal and "continue to fight to clear my name."

Observers, however, believe that with the name and face of the company tarnished by a conviction, it will be difficult to sustain the brand — especially with competition that has intensified since Stewart's legal woes began 22 months ago.

With the conviction, the government may press to have Stewart removed from the board of her company. She resigned as chief executive after being indicted last summer but remained as chief creative officer.

The Martha Stewart brand, associated with gracious living, has been stamped on magazines, TV shows and household products. Analysts say that without her image of perfection, the brand has lost its distinctive edge.

"This is a terrible tragedy for a great brand," said Seth Siegel, co-founder of The Beanstalk Group, a trademark licensing agency.

Martha Stewart Living, which has been adding new magazines and TV shows without Stewart's name over the past year — Petkeeping With Marc Morrone, and Everyday Food — will have to keep developing other brands or personalities, he said.

"The company can still survive because it has phenomenal infrastructure," Siegel said. But he also said it could take years for many advertisers to come back to its flagship magazine Martha Stewart Living and other namesake publications.

And he warned that Stewart's appeal will prolong the agony and keep the company in an awkward position.

"They can't be in a position of abandoning her, but at the same time they need to separate from her," Siegel said.

Regardless of the trial's outcome, Martha Stewart Living Omnimedia "has to rebuild itself" because of its dramatic declines in ad revenue, said T.K. MacKay, an analyst at Morningstar.

"The Martha Stewart brand is damaged, and they have to figure out ways to distance themselves, or convince advertisers to come back, or both," he said.

Some in the industry also speculated on the possibility of a name change for the company.

"If she is going to jail, why not change the name to Everyday Living?" said Dennis McAlpine, managing partner of the research firm McAlpine Associates.

The good news, analysts said, is that Martha Stewart Living has $170 million in cash on hand — enough to withstand several more quarters of declining ad revenue.

Investors didn't immediately see an upside. Shares in the company plunged nearly 23 percent after the verdict was announced, or $3.17, to close at $10.86. Then they lost 67 cents more in the extended session. The stock had been trading around $19 per share before Stewart's name was tied to the scandal.

Stewart, who owns 61.2 percent of her multimedia empire — about 30 million shares — has seen her personal stake in the company drop about $250 million to approximately $326 million.

Yesterday's verdict came on the heels of the company's report of its first annual loss. Revenues from publishing, which account for 60 percent of sales, fell 28 percent and TV revenue dropped 8 percent to $5.9 million in the fourth quarter.

CEO Sharon Patrick acknowledged Thursday that the TV division, including Stewart's syndicated show, was the "most vulnerable" of the company's business segments, but it plans to continue to invest in new programs beyond those such as the pet show.

The company also warned Thursday that pressure from Stewart's trial would further weigh down advertising revenues in the first quarter, resulting in a bigger-than-expected loss.

While advertisers have fled, sales of Martha Stewart-branded merchandise at Kmart and other stores held up well during and before the trial.

Still, the relationship with Kmart, its key retail partner, has been strained by a lawsuit filed last month that accuses Martha Stewart Living of overcharging for the exclusive rights to sell its branded housewares and other products. And Kmart shares followed Martha Stewart Living shares downward on the verdict, dropping 39 cents to close at $32.51, and losing 37 cents more in extended trading.

Kmart issued a brief statement saying it was "saddened to hear that Martha Stewart was found guilty." A spokesman said the company would not comment further.

Mac Ryland, a strategist at the retail consulting company Kurt Salmon Associates, doesn't believe that retailers will abandon Martha Stewart.

And G. Alex Bernhardt Sr., CEO of Bernhardt Furniture Co., which recently launched furniture collections under the Martha Stewart brand, said the brand is separate from Stewart's legal problems. "We are totally committed," Bernhardt said.

But Vince Power, a spokesman at Sears Canada, which launched a line of Martha Stewart-branded bed, bath and housewares products last September, appears to be waiting for a verdict from consumers.