Martha Stewart Living Omnimedia Struggles as Trial Nears

As lifestyle maven Martha Stewart (search) readies her defense for her obstruction of justice trial, her namesake company faces challenges of its own.

Martha Stewart Living Omnimedia Inc. (MSO) faces a drooping stock price and sluggish advertising at its flagship magazine on the eve of its founder's high-profile trial. The company is not accused of any crimes, but analysts say its reputation could be on the line because it is so closely tied to Stewart's image as an icon of style and taste.

"Anything short of complete exoneration in this case will have some sort of negative impact on the business," said T.K. MacKay, an analyst at Morningstar Inc. in Chicago. "The evidence is already there that her marred reputation is having an impact."

Stewart, 62, who has advised millions in the arts of entertaining, gardening and decorating, goes on trial this month on federal charges stemming from her late 2001 sale of shares in drugmaker ImClone Systems Inc. (IMCL). She resigned as chief executive hours after her June 2003 indictment but remains a board member and was named chief creative officer.

Martha Stewart stock is down about 40 percent since the probe heated up in June 2002. But shares are up about 16 percent so far in January, closing at $11.35 on Friday on the New York Stock Exchange (search). The recent gains, analysts say, are a sign some traders think Stewart will be acquitted.

The company has acknowledged that business has been hurt by the scandal and recently cut guaranteed circulation to advertisers at Martha Stewart Living magazine (search) because of readership declines. In late October, it posted a third-quarter loss, hurt by a 28 percent drop in revenues, and said it expects ad sales to remain depressed early this year.

The company's board likely is mulling several possibilities as it awaits the outcome of Stewart's trial, said management consultant Peter Cohan in Marlborough, Massachusetts.

"One scenario is where she manages to avoid going to jail, and she comes back" as CEO, he said. "The other scenario is where she does go to jail, and they end up selling the company."

Company spokeswoman Elizabeth Estroff declined comment about the trial's possible outcome. But she said the attitude at the New York-based company remains "business as usual" and that morale among its 550 employees is good.

"All of us at MSO stand squarely in support of Martha and hope for a positive resolution," she said. "As company founder and our chief creative officer, she is a continuing source of inspiration and creative direction to all of us..."

Regardless of the trial's outcome, the company must grapple with new competition, said Dennis McAlpine, an analyst at McAlpine Associates. Time Warner Inc.'s (TWX) home magazine Real Simple and TV shows like "Queer Eye for the Straight Guy (search)" and "Trading Spaces (search)" have encroached onto Stewart's territory, he said.

The company, meanwhile, has been trying to distance itself from Stewart -- a plan company executives say is unrelated to her legal plight. It launched a new magazine called Everyday Food (search) that does not prominently bear her name and a program on caring for pets featuring a different TV personality.

If Stewart is acquitted, she likely will be back at the helm, Cohan said.

"The company's future depends on her getting back and showing the world that not only were they (her accusers) wrong but that she's still got it," he said.