On Mar. 6, after hanging up her prison garb, Martha Stewart will begin the next chapter in what's shaping up to be the most memorable comeback story in Corporate America in years. The domestic icon is, if anything, a bigger celebrity than before the scandal over her suspicious trading activity broke nearly three years ago, with a lofty price for her company's stock, two TV shows lined up, and surging public support. Donald Trump, who is co-producing Martha's version of his NBC prime-time hit The Apprentice, goes so far as to say: "I've gained more respect for her because of the dignity and style with which she has handled all this."
But Stewart's personal triumph is just that -- personal. While the initial burst of publicity and enthusiasm will undoubtedly help her company, Martha Stewart Living Omnimedia Inc. (MSO), in the short term, it actually sets the company back in its most important goal: moving beyond Martha. The biggest risk for the company has always been its dependence on one individual -- and an often polarizing 63-year-old individual at that. In its prospectus before its 1999 listing on the New York Stock Exchange, the company cited the fact that "Martha Stewart remains the personification of our brands" as a major risk factor. Executives said reducing that dependence was a key goal. Even without a felony conviction of the CEO, there was always the fear that MSO would simply be unable to outlive its celebrity founder.
Clearly, the company has yet to make great strides on that front. The blows that Stewart suffered translated into immediate and sustained damage at her company. On Feb. 23, MSO announced a net loss of $59.6 million on declining sales of $187.4 million -- its second straight year of red ink. Merchandising, the business least associated with Stewart herself, was the only segment to post even slight growth. Meanwhile, ad revenues for flagship Martha Stewart Living magazine dropped to $71.7 million last year, less than one-third of what the publication hauled in during 2002. At the same time, average circulation fell from about 2.4 million to 1.9 million. Advertisers remain wary, says Jon Mandel, global buying officer of MediaCom Worldwide, because they're not yet sure if Martha mania will mean more readers.
TRIUMPH OVER ADVERSITY
Lately, though, investors haven't seemed to care about all that. The stock has been trading wildly on speculation about Stewart's return, with daily volumes of more than 1.5 million shares despite the relatively limited public float of 20.7 million shares. Some feel that new Securities & Exchange Commission rules have put the squeeze on traders who were short-selling the stock, thus driving the price up. Few attribute it to long-term investors who have carefully evaluated the company's fundamentals.
Although Martha's prison stint did accelerate company efforts to acquire or develop secondary brands, the temptation now is to go back to being all about Martha. After all, she has legions of fans who are thrilled to see their heroine triumph over adversity. And despite efforts to promote other personalities within MSO, such as pet expert Marc Morrone, no one has come close to achieving the same level of fame. To many, Martha is the underdog who's back to reclaim her rightful place in the kitchens and gardens of America.
But even her most ardent admirers could grow weary. With so much Martha in the news and on the airwaves, there's a real risk of Martha fatigue, or even a backlash. The Apprentice, from which MSO will get no revenues, may not even generate the right kind of buzz. What if reality show Martha, in which she may be shown as an implacable boss, doesn't square with the cherished image of the perfect homemaker? "We already know she's a tough boss," says Paul A. Argenti, a professor at Dartmouth College's Tuck School of Business. "Going on TV to show her management style is a mistake."
That's why the real pressure isn't on Martha, it's on CEO Susan Lyne, an experienced media exec who took the position while Martha was in prison. Her goal is to build on the core brand while nurturing new franchises and partnerships. To help out, she brought in director Charles A. Koppelman -- a music industry veteran who has advised such troubled clients as Michael Jackson and shoe entrepreneur Steve Madden -- on a one-year, $450,000 contract to help assess new merchandising and media deals.
STILL THE NO. 1 SHAREHOLDER
Lyne wants to build a lasting brand and talks about leveraging MSO's library of recipes, articles, TV shows, and other content, as well as nurturing new talent and attracting advertisers. Lyne, the former president of ABC Entertainment (DIS), is also building up brands such as Everyday Food, which now has a magazine and TV show, and properties such as Body & Soul, a natural-lifestyle magazine MSO bought last year that relaunches in April. "The challenge is how to grow this for the next decade," she says. But Lyne also argues that for right now, Martha is key to the brand and calls her imminent release "transformational" in getting the company back on course.
Other than being herself, it's not clear what Stewart's role will be once she finishes her five months of house arrest. Her title has yet to be decided, though she remains MSO's single largest shareholder, with more than 29 million shares. With that kind of clout, it almost doesn't matter what her title is -- her voice will carry a lot of weight. Obviously, that could make Lyne's job a whole lot more difficult. Lyne needs to position the company to evoke a lifestyle and sense of taste, much as Ralph Lauren has done with his Polo brand. Doing that while MSO's namesake rushes back into the public spotlight and company meetings will be no easy task.
Still, veteran staffers appear thrilled to have her back, even if she's not in an executive role. Insiders speak of a new sense of excitement after years of being in the doldrums. In the March issue of Martha Stewart Living, Editor-in-Chief Margaret Roach regaled readers with tales of Stewart "foraging for wild greens" on prison property and ordering her seeds for the spring. Roach says Stewart will return to the magazine with a column in the April issue. Koppelman insists the brand is more than Martha -- but he concedes that she remains the public's arbiter of taste.
Stewart, not her company, is also the main attraction for NBC Universal Inc., which produces The Apprentice. "I don't think her popularity is in any way diminished," says Chairman and CEO Robert C. Wright. While it's no sure thing that her prime-time show will be a hit -- the third season of Trump's version is getting mixed ratings -- Wright feels no compunction about promoting her after the prison stint. "We're not here saying that she got a raw deal," says Wright. "She's paid her dues." Lyne compares the saga of Stewart's rise, fall, and redemption to classic dramatic structure: "Americans are waiting for the second act. They want to see a happy ending."
At the moment, events do point to a happy ending for Stewart. She's the rare convicted felon who will emerge from prison far richer than when she went in. She will personally get $100,000 per episode for The Apprentice. And her stake in MSO has almost quadrupled in value, to nearly $1 billion since last May. Investors can only hope they do as well.
By Diane Brady in New York