June 11 (Bloomberg) -- Martha Stewart Living Omnimedia Inc. Chief Executive Officer Susan Lyne stepped down after attempting a turnaround that failed to revive the company's shares following Stewart's conviction for obstruction of justice.

Wenda Harris Millard, president of the media division, and Robin Marino, who heads merchandising, will be co-CEOs, the magazine and home-goods company said in a statement today.

Lyne, who helped develop top-rated TV shows ``Desperate Housewives'' and ``Lost'' for Walt Disney Co.'s ABC, became CEO in November 2004 when company founder Stewart was serving a five-month prison sentence. While Lyne, 58, expanded revenue and returned the company to an annual profit last year, the stock dropped 57 percent during her tenure.

``Much of the value destruction in the stock price was really not a result of anything Susan Lyne failed to do,'' said RBC Capital Markets analyst David Bank in New York. ``They had a real challenge in light of Martha Stewart's legal troubles.'' He also cited a slumping U.S. economy and advertising market.

Martha Stewart Living, the New York-based publisher of the namesake magazine and producer of ``The Martha Stewart Show,'' fell 48 cents, or 6 percent, to $7.50 at 4:15 p.m. in New York Stock Exchange composite trading.

``Management turnover is always cause for a certain amount of angst in the investor community,'' Bank said. He rates the stock ``market perform'' and said Millard and Marino, who were hired by Lyne, are ``a formidable team.''

Martha Stewart

Lyne will remain with the company in an advisory role for an unspecified period. During her time as CEO, she won back advertisers that deserted the company as Stewart became mired in legal problems from the sale of ImClone Systems Inc. shares in 2001. Stewart was convicted in 2004.

``Our principal goal was to rebuild the company and return it to profitability,'' Lyne said in the statement. ``We have done that.''

In anticipation of royalty payments from a Kmart merchandising deal declining this year, Lyne oversaw the creation of new partnerships with Macy's Inc. and Costco Wholesale Corp. She also acquired the media and merchandising business of TV chef Emeril Lagasse.

`Herculean Task'

The expansion and an overhaul of the Martha Stewart Web site haven't been enough to lift the company's shares back to where they were before Stewart's conviction.

``The company had to do a really Herculean task of trying to reestablish Martha Stewart's image and to then broaden out its product lines,'' Noble Financial Group analyst Michael Kupinski said in an interview. The Boca Raton, Florida-based analyst recommends buying the company's shares.

Lyne worked to restore a brand that had been tarnished by Stewart's stint in prison. Stewart, 66, has been the company's public face, showing TV viewers how to properly set a table and prepare an Asian salad. When Martha Stewart Living went public in 1999, the shares traded for a record $39.75.

Lyne said in a January e-mail to employees that she wasn't leaving the company. The New York Post had reported a week earlier that Lyne was looking to exit Martha Stewart Living. Lyne's contract officially expired Dec. 31 and was automatically renewed for one year.

`Holding Our Own'

Ad sales rose 6 percent in the first quarter, excluding the now closed Blueprint magazine. The company boosted its ad rates and is pushing advertisers to run promotions across all of its outlets, reducing the chance of cancellations. In April, Martha Stewart Living forecast ad sales will rise by a ``mid-single digits'' percentage in the second quarter.

``We're holding our own in what is decidedly a tough advertising environment,'' Millard said today in a phone interview.

Millard, 53, has overseen the media business, including online, publishing and broadcasting, since joining the company in July 2007. She had previously been Yahoo! Inc.'s chief sales officer since 2001.

Marino, 53, was hired at Martha Stewart Living in May 2005 from her prior position as president and chief operating officer of fashion handbag maker Kate Spade.

Chairman Charles Koppelman said that when the board asked Lyne to be CEO she said she could return the company to a profit and would hold the position for three years.

``Once we got to three years, the job was almost done and Susan said she would want to continue for another year to do this,'' Koppelman said in an interview.

The company reported that Lyne's salary was $900,000 in 2007, the same as 2006. Her reported total compensation last year, including stock awards, option awards and salary, was $3.9 million, according to a regulatory filing.

Lyne could ``make a lot more money'' running a larger entertainment company, Kupinski said in an interview with Bloomberg Radio.

To contact the reporter on this story: Sarah Rabil in New York at srabil@bloomberg.net

Last Updated: June 11, 2008 16:32 EDT