A Good Thing for Stewart’s Company

Martha Stewart’s namesake company might have a new recipe for success, courtesy of Stewart herself.

With the lifestyle guru drawing a lighter-than-expected sentence Friday, speculation flourished that Martha Stewart Living Omnimedia Inc. could now rebuild its business with the taint of its founder’s stock-trading scandal largely behind it.

Investors seemed to agree, as the company’s stock soared 37% to its highest level since Stewart was convicted in March. The stock rose $3.17 to $11.81 a share as 17 million shares changed hands on the New York Stock Exchange.

“Assuming she takes her medicine and behaves properly, I don’t see any problem” for the company’s long-term future, said Alan Siegel, chairman of Siegel & Gale, a consultant on corporate branding. “She and the company will come out of it fine. The major damage was done during the trial.”

In an ironic twist, Stewart reaped a $95-million stock market windfall on the same day she was sentenced to five months in prison and fined $30,000 for obstructing justice and lying to the government about her sale of shares in ImClone Systems Inc.

That’s because Stewart remains the controlling stockholder of Martha Stewart Living Omnimedia, even though she resigned as chairwoman and chief executive after being indicted a year ago.

Stewart owns all of the New York-based company’s 30 million Class B shares, which carry superior voting rights over the Class A shares that are traded on the stock market.

Stewart’s shares also are convertible 1-for-1 into the Class A shares, and on that basis she controls 61% of the publicly traded stock. After Friday’s rally, Stewart’s interest in the company was worth $354.3 million; four years ago, the stake was worth about $1 billion.

Martha Stewart Living Omnimedia suffered as its founder’s problems grew. Its sales and stock price fell, and some advertisers shied away from its flagship Martha Stewart Living magazine and other publications.

The company suffered a $2.8-million loss in 2003 as its revenue tumbled 17% from the previous year to $246 million. Its syndicated television show, hosted by Stewart, is scheduled to go on hiatus in September.

But a defiant Stewart, who is appealing her conviction, made her own, unusual sales pitch for the company Friday after being sentenced to five months in prison and five months of detention at her semirural New York estate. She urged her fans to “show your support by subscribing to our magazines, by buying our products, by encouraging our advertisers to come back in full force to our magazines.”

Many customers and advertisers are likely to do just that, especially because it appears Stewart could return with a larger role at Martha Stewart Living Omnimedia within perhaps a year, some analysts and corporate image experts said.

One of the company’s major customers, Kmart Holding Co., immediately renewed its support of the Martha Stewart Everyday brand of housewares, bedding items and other products.

“We look forward to continuing our mutually beneficial and successful relationship,” the discount chain said.

Martha Stewart Living Omnimedia said it viewed Stewart’s sentencing “as an important step toward closure” for the company and thanked its advertisers and customers “for sticking with us through these challenging times.”

But some analysts have doubts about the company’s prospects.

Alissa Goldwasser, an analyst with investment firm William Blair & Co., said that there was “no closure” and that Stewart actually was prolonging the company’s problems by continuing to appeal.

“The best thing for Martha Stewart Living Omnimedia as it attempts to win back advertisers is to have Ms. Stewart’s legal issues out of the headlines,” Goldwasser said in a note to clients. By appealing, “there is the potential for the circus to start all over again if a new trial is granted,” she said.

The stock’s surge Friday also reflected a mad dash by short sellers to cover their positions, traders said.

A big portion of Martha Stewart Living Omnimedia’s stock had been sold short by investors betting that its price would fall further. The investors had sold borrowed shares in the market and hoped to eventually buy them back at a lower price, return them to their lenders and pocket the difference.

As of mid-June, nearly 6 million shares -- or about 30% of the company’s total Class A shares outstanding -- had been sold short and not yet repurchased. But when the stock moved up after Stewart’s sentencing, the short sellers were forced to quickly buy back the shares to limit their losses, thus bidding the price higher.

As for Stewart, she vowed Friday, “I will be back.... I’m used to all kinds of hard work as you know, and I’m not afraid. I’m not afraid whatsoever.”