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|  | JULY 16, 2004
A Split Sentence for Martha The domestic diva gets five months in jail, five months of house arrest -- and an uncertain future for her brand and company After a month's postponement and a failed bid for a new trial, Martha Stewart learned her fate on July 16. U.S. District Judge Miriam Cedarbaum sentenced her to five months in jail, five months of house arrest, and two years of supervisory probation for her role in a suspicious stock trade more than two years ago. She was also fined $30,000. Stewart was found guilty on Mar. 5 of lying to the government and conspiring to hide the reasons behind her sale of stock in ImClone Systems (IMCL ) in late 2001. (See selections from BW Online's coverage of Stewart's legal problems.)BusinessWeek Associate Editor Diane Brady examines the situation for America's famous homemaker and her challenged business empire. Why is Martha going to jail? Judge Cedarbaum rejected repeated efforts to have the charges dismissed, and she turned down Stewart's lawyers' bid for a retrial based on evidence of lying by a juror and a key government witness. The fact that Stewart is a first-time offender and spoke before sentencing about the impact of the case on her likely prompted Judge Cedarbaum to go to the light end of the 10- to 24-month federal sentencing guidelines. That said, that Judge Cederbaum didn't abandon those guides and that she refused bids for a retrial makes it clear that she believes the conviction was valid. When does Martha go to jail, and where will she serve her house arrest? Stewart won't go to jail right away. She'll remain free on appeal. Her chances of an appeal aren't deemed great, so she'll likely land in the slammer eventually. It's unclear in which of her several multimillion-dollar homes she'll serve her house arrest. Didn't Stewart's fans help her? Stewart's celebrity has exerted a pull in both directions. On the one hand, it mobilized thousands of fans to reach out in support. Her personal Web site, marthatalks.com, has logged 34 million hits and registered more than 170,000 supportive e-mails. (It doesn't say how many came in gloating about the prospect of seeing her behind bars.) The e-mail made Stewart feel good, but this wasn't a popularity contest. The fact that so many people love Stewart's towels or TV show may have worked against her. Stewart's success and celebrity have made her a powerful symbol of corporate wrongdoing, greed, and the sense of entitlement that's perceived to infect the rich. The government wanted to make an example of her, and officials didn't want to be seen as giving her preferential treatment. How will her company fare in her absence? Martha Stewart Living Omnimedia (MSO ), her publicly traded company, has already gone to great lengths to distance itself from its famous founder. Stewart resigned as chairman and CEO soon after the charges were laid a year ago. Her monthly calendar disappeared from her flagship Martha Stewart Living magazine last fall -- perhaps because the prospect of printing Stewart's plans to repair deer fencing or whip up brunch for 20 just seemed too ridiculous amid the scandal. After the guilty verdict, her "Editor's Letter" and "Remembering" column were stripped out, too. The magazine is being redesigned to play up the Living name instead of relying on Martha Stewart for its appeal. In a statement after the sentencing, Stewart appealed to her many fans: "Our magazines...deserve your support." The tougher task is in the broadcast segment, where the company's hands-on chief hosted the daily TV show, also called Martha Stewart Living, as well as the holiday specials -- and at one point, radio spots and regular segments on CBS's The Early Show. Martha Stewart Living will be put on hiatus after it wraps up its 11th season in September. It has already been pulled from Viacom's (VIA ) CBS stations, though it now appears in reruns on the Style Network, which is in 36 million households. So, is it over for MSO? The company has areas in which it could arguably thrive. MSO's merchandising arm has held up better than other parts of the business. It was the only segment to post a sales increase in the first quarter, though earnings declined 7.3%, to $6.7 million. Kmart's (KMRT ) Martha Stewart Everyday line sells well because it's pretty, practical, and cheap -- not because of Martha. MSO has also had some success with its Everyday Food magazine, which was launched about a year ago, and it's planning to extend the franchise into TV and other arenas. Then there's the possibility of nurturing other personalities to step into the spotlight. Exhibit A: Pet expert Marc Morrone, who now has his own TV show. Can't she just just resume control of the company after she has served her time? The fundamental task of resurrecting this brand will remain a challenge. Its founder and chief spokesperson is a convicted felon, one who has been forced to step out of management. Her image is all about domestic perfection. It would be different if this were some edgy underground brand, the sort where trouble with the law could be easily shrugged off. Moreover, a growing crop of competitors can easily fill her place, whether it's in magazines, TV, or housewares. Plus, the Securities & Exchange Commission may prevent her from ever again taking a senior executive role in her company. However, Stewart vowed: "I'll be back. "I'll be back." Nevertheless, MSO will probably allow the brand to continue morphing away from her personality, which was a stated goal before her legal problems started. On Aug. 3, Martha turns 63. Shareholders know the company can't lean on her forever. It's always possible to take the company private again. The stock has lingered below $10 for some time, though it shot up some 40% following the sentencing. What's her strategy from here? Since her conviction, Stewart has made it clear that she wouldn't vanish from public view. She remained a regular on the party circuit and was beaming in recent photos that showed her Rollerblading in spandex shorts in the Hamptons. When she addressed the court before her sentencing, she didn't admit any guilt, and she'll continue fighting her conviction on appeal. She should certainly concentrate on being a model prisoner for the brief time she's incarcerated. Brand experts are divided on what should happen after she serves her sentence. Some suggest that she hit the talk-show circuit in earnest and even do guest appearances on others' programs to generate some buzz. Americans will forgive, they argue, but the danger is that they will also forget. Others advise a display of genuine contrition and modesty while Stewart sets out to rebuild her company. Clearly, the best person to map out a comeback is Stewart herself. How this experience has changed her is anyone's guess. But even though the sentence was light, she'll still have a long way to go in returning her life -- and her company -- to a state of normalcy. Editor's Note: This is an updated version of the story originally published on July 15.  Edited by Patricia O'Connell
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