Picturing Martha--Minus Martha

If Stewart were forced out, how strong would the company be?

Quick, who's the editor-in-chief of Martha Stewart Living magazine? No, it's not the famed founder whose name is on the cover. It's longtime staffer Margaret Roach. She may be a talented editor, but Roach's relative anonymity points to a basic weakness in parent company Martha Stewart Living Omnimedia Inc. (MSO ). With the investigation of Chairman and Chief Executive Martha Stewart for obstruction of justice and insider trading coming to a head, the question arises: Can a media company founded on a celebrity personality survive the possible downfall and departure of that personality?

That question becomes more urgent in the wake of former ImClone Systems (IMCL ) CEO Samuel D. Waksal's guilty plea on Oct. 15 to charges of securities fraud. True, Waksal did not implicate Stewart. But the assistant to Stewart's broker at Merrill Lynch & Co. pled guilty to misdemeanor charges two weeks earlier, admitting that he withheld information about the circumstances surrounding Stewart's sale of ImClone stock last year. Now he is cooperating with investigators, and in the coming weeks they will decide whether enough evidence exists to charge her.

Company execs are quick to point out that Stewart remains very much the CEO and chairman. In any case, they insist, she has a strong bench. The company "has a deep management and creative team," says President and Chief Operating Officer Sharon Patrick.

Still, investors haven't waited to see how things play out. Omnimedia shares have plunged by two-thirds since news of the probe leaked in March, to a recent $7. With fall ad buying all locked up last summer, it won't be clear until early next year whether advertisers will continue to support the magazine. Similarly, circulation through June, when l'affaire Martha was far from its crescendo, was down 5%, but new six-month figures won't be available until early next year.

If Stewart is forced out, the media businesses will likely be hardest hit. The TV programs and the magazine, which alone accounts for some 60% of the company's $320 million in annual sales, are the most direct reflection of her persona. At the magazine, a first-half drop in newsstand sales and paid circulation has been magnified by signs that fans are pulling back. The Waldenbooks (BGP ) store in the West Ridge Mall in Topeka, Kan.--once a Martha Stewart stronghold--has seen a drop in demand for the company's books and magazines. "She had a strong following, but it's tapering off," says manager Stephanie Johnson.

The bigger worry is advertisers. Double-digit gains from early this year are already gone, and if Stewart is charged, advertisers will bolt. Says Robin Steinberg, vice-president at media buyer Carat USA: "I'm telling my clients to take a cautious approach."

Meantime, viewership for Stewart's syndicated TV show, which has been dropping for four years, fell from an average of 1.7 million in May, to 1.3 million lately, says Nielsen Media Research. The even larger danger is lost exposure and brand-building if she no longer makes frequent TV appearances.

By contrast, the merchandising business--built on sheets, paint, and other household items that offer tangible value beyond their association with Stewart--is likely to be more stable. The wild card is Kmart Corp. (KM ), which could try to renegotiate a contract that guarantees Omnimedia an increasing royalty each year. "She's got the best contract in the business but may have to go back to a more normal contract," says Burt P. Flickinger III, a consultant at Reach Marketing Inc. in Westport, Conn.

If Stewart takes a fall, her empire won't go away. But it could be severely diminished. Indeed, the question of whether Omnimedia could thrive without Martha Stewart has troubled investors since the company went public in 1999. Right now, no one else at Omnimedia has anything approaching a public profile. That will make building Brand Martha much harder if she's not around to help.

By Gerry Khermouch, with Tom Lowry in New York and Joann Muller in Detroit

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