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For Martha Stewart, it was a rare mea culpa. In a February "askMartha" column in her Martha Stewart Living magazine, she said readers could safely reach into a garbage disposal if the power was turned off. She later "clarified" the advice, warning that putting a hand into such machines at any time is always a bad idea. If only she could issue a clarification to undo the damage from her now infamous sale of shares in ImClone Systems (IMCL ) in late 2001.
While the world waits to see if allegations of insider trading, lying, or obstruction of justice lead to Stewart being charged, the company that bears her name must grapple with how to handle the iconic CEO from here. With the exception of a few, carefully orchestrated interviews and public appearances, Stewart has kept a low profile since news broke last June of her suspiciously well-timed trades. She says she did nothing wrong and is cooperating with investigators, but screaming headlines and innuendo have seriously hurt her business.
Investors sure seem disappointed with Martha Stewart Living Omnimedia's (MSO ) fourth-quarter earnings report that came out on Mar. 4. They knocked the stock down to $7.26 from its Mar. 3 close of $7.55 in early trading after the news. Although MSO managed to make 6 cents a share (excluding restructuring charges), vs. 13 cents a year earlier, President Sharon Patrick warned that it could lose 6 cents to 8 cents a share in the first quarter because of "the ongoing uncertainty related to the investigations into the sale of noncompany stock by Martha Stewart." Added Patrick: "Until this situation is resolved, we will likely continue to face challenges throughout our businesses."
WHAT'S THE PLAN? MSO has already suffered from allegations that Stewart may have received inside information that prompted her to dump ImClone stock one day before a devastating Food & Drug Administration ruling savaged the outfit's share price. Newsstand sales of Martha Stewart Living dropped more than 20% in the latter half of 2002, vs. those of a year earlier. Ad sales are down, and the share price is less than half its value before the scandal broke.
Shareholders want to know how MSO plans to handle Stewart once this matter is resolved. If America's celebrated homemaker is cleared of all charges, should the board immediately trot her back out in the social circuit, Kmart commercials, and late-night TV? If she's charged and convicted, should it try to further diminish the profile of the brand's soul, face, and publicity machine? And what if she's merely slapped on the wrist with a fine and charges of, well, fudging the truth? As headhunter Peter Crist, CEO of Crist Associates, puts it: "The challenge the board faces today is coming to a decision about how to utilize her as an asset."
It's not an easy call for a business so intimately tied to its namesake and founder. More than in any other personality-centered company, Stewart is the brand. She hosts the TV show, writes the magazine columns, broadcasts the radio spots, and is the face on almost every part of her business. Her monthly calendar in Martha Stewart Living has become the stuff of legends and parodies (the Mar. 3 listing: remove burlap wraps from shrubs and make cake for her sister, Laura). And her appearances on everything from The Early Show (which stopped soon after the scandal broke) to David Letterman's The Late Show have been powerful generators of publicity for her company.
EARLY POSITIONING. Simply reducing Stewart's role or removing her from the board, as some have suggested, probably isn't a desirable option. At this point, she's too critical to the success of her brand. She's also MSO's majority shareholder and someone who shows no inclination to retire any time soon. There's a lot the board can do, however, to start positioning Stewart and the company for its post-ImClone path (see BW Online, 2/14/03, "Martha's Company Could Dodge Her Woes").
One good start would be for executives and board members to show more faith in their own investment. MSO insiders have been significant net sellers of stock since the company went public in late 1999 and are active sellers over the past year. Stewart herself sold 3 million shares, or about 9% of her stake, in the early part of 2002. Other senior execs sold off stock earlier in the year.
Even former director L. John Doerr, previously one of MSO's greatest cheerleaders in the press, chose to dump his stake and quit the board last March. Spokeswoman Elizabeth Estroff points out that "none of the executives has sold more than a small fraction of their total holdings since the company went public."
All the same, the result doesn't look good. If MSO's anemic stock price doesn't look like a buying opportunity within the company (it closed at $7.55 on Mar. 3), why should investors leap aboard? At the very least, key executives should hold on to what they have at this point.
Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.
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