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Verdict Hits Her Company

Its share price falls 23%. The founder's unusually close connection to the firm spurs questions about her empire's future.

March 06, 2004|Leslie Earnest | Times Staff Writer

When the jury came out swinging Friday at domestic doyenne Martha Stewart -- convicting her of obstructing justice and lying to the government -- it was the company bearing her name that took the first blow.

Shares of Martha Stewart Living Omnimedia Inc. -- which earlier in the day had hit a 52-week high on the misguided expectation that the media mogul would be acquitted -- plunged nearly 23%. When the battering was over and the final bell had rung, the shares had plunged $3.17 to $10.86 on the New York Stock Exchange.

Do unto Martha, it seems, means doing unto Martha Stewart Living Omnimedia, a purveyor of magazines, TV programs and merchandise all related to house and home.

Although there's nothing new about a company taking a hit when a key executive linked to it lands in trouble, marketing experts said the connection between Stewart and the company she took public in 1999 was unique. Never, they said, has a persona been more tightly woven into the fabric of a business.

And that may have been one of her biggest mistakes. As her legal woes mounted, she stepped down as chief executive, taking the title chief creative officer instead. But there was no way for Stewart to sufficiently dissociate herself from an enterprise that was founded on her distinct approach to the domestic arts.

"I don't know that the company's going to survive her incarceration," said Peter Sealey, a UC Berkeley marketing professor.

Stewart, who said she would appeal the jury's verdict, faces a maximum penalty of 20 years in prison but is likely to serve far fewer when she is sentenced June 17 in U.S. District Court in Manhattan.

Martha Stewart Living Omnimedia issued a statement after the verdicts saying that it was "deeply saddened" by Stewart's convictions and that her contributions had improved "the quality of life in and around our homes."

"Our board of directors will meet promptly to carefully evaluate the current situation and take actions as appropriate," the statement said, adding that that the firm has other talented employees, quality brands and financial strength. In fact, the company has $169 million in cash in the bank and no debt.

Stewart shot off her own "open letter" on the Web, thanking supporters for backing her and vowing to appeal the verdict and fight to clear her name.

But her powerful -- and very lucrative -- connection to the company she founded ended with Friday's verdict, said Morris Reid, a marketing and political strategist.

"Her daughter may be able to step in and make the pitch and maybe sell some towels, but no one's going to be able to be her," Reid said. "No matter what happens with the appeal -- win, lose or draw -- that chapter of her life is closed and is never going to be reopened again."

Over the last 22 months, the company has been feeling the effects of Stewart's legal problems and has taken steps to distance itself from its founder. Last year, as advertising revenue for its flagship Martha Stewart Living magazine was declining, the firm launched Everyday Food, a monthly publication that carries no mention of Stewart. It also began airing a TV program about pets in which she doesn't appear.

On Thursday, Martha Stewart Living Omnimedia reported better-than-expected fourth-quarter earnings, driven in part by strong royalties from retailer Kmart Corp., which sells linens and other home goods under the Martha Stewart brand. (Kmart issued a brief statement after the verdict, saying it was "saddened to hear that Martha Stewart was found guilty today." It declined to comment further.)

Nonetheless, Martha Stewart Living Omnimedia at the same time reported its first annual loss and saw its revenue drop 17% to $245 million. It also warned that Stewart's travails would affect first-quarter sales and earnings.

Just hours after Friday's verdict, the fallout began. CBS said it would pull the syndicated series "Martha Stewart Living" from eight of its owned-and-operated stations, including KCBS-TV in Los Angeles and WCBS-TV in New York.

Still, how far the damage may continue to spread remains to be seen.

"You can forget about the TV show; the magazine, maybe, I don't know yet," said Reid. "The towels? Perhaps, if you make good towels, people will still buy."

Indeed, some contend that it will take more than a trip to the slammer to drain the juice from so indomitable a brand. Shoppers, said retail expert Kurt Barnard, aren't likely to say, " 'Oh, this is exactly what I wanted and I wish I could buy it, but I can't. She's convicted of crimes.'

"I really believe the name Martha Stewart is a very valuable asset and will continue to be a very valuable asset so long as it's an icon of good taste and gracious living, affordable to many people," he said.

UC Irvine marketing professor Mary Gilly agreed. After all, she said, Stewart "wasn't convicted of bad taste."

"There's been so much damage in the last several months that it's hard to imagine this conviction is going to change consumers' purchasing behavior if they still see the product as being representative of quality and fine living," Gilly said.

"The question is how much brand equity is left in the Martha Stewart name," she added. "Only time will tell."

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