• Andrea Lillo

Protesting her innocence, Martha protects MSO brands

New York — Martha Stewart launched a plea for her image and her brands last week even as she pleaded her innocence before a federal judge of criminal charges involving alleged securities fraud and cover up.

It was a striking example of just how much is at stake. Not only will Martha Stewart, the person, be battling for her freedom, Martha Stewart, the brand and the institution, will be struggling to remain free of the tarnish the pending criminal trial and possible conviction might bring.

She's already stepped aside as ceo of her namesake company, Martha Stewart Living Omnimedia. But billions of dollars remain at risk.

With no time to wait, her attorneys offered sound bites and she took out a full page ad in USA Today proclaiming her innocence.

"I simply returned a call from my stockbroker," she wrote.

In the ad, Stewart also established a Website, www. MarthaTalks.com, to offer updates and receive support.

The big unknown, however, is how the charges will impact sales of her products, particularly at retailers like Kmart, itself freshly out of bankruptcy.

"A brand is supposed to bring value; it's entirely invested in a human being," said Robert Passikoff, president, Brand Keys, a brand and customer loyalty research consultancy that has been tracking the Martha Stewart brand for three years. For Kmart, however, it's becoming a liability, he said.

The major differentiation of the product is the brand, he said, "everyone else sells the same thing. Kmart thought it would benefit from a positive halo effect."

Yet, Stewart's legal troubles and potentially fading star power might open the door to Kmart renegotiating its deal with her.

"Kmart's not selling the brand of three years ago," Passikoff said.

If Stewart is not convicted, he suggested, "a good deal of this goes away...Then the brand will come back."

But if Stewart is found guilty, the company needs to "jettison" her as far away from it as possible, and "segue from a person to brand as a brand."

One question, though, is whether Stewart can be distanced from her brands. At the same time, not everyone agrees that is a critical question.

"Kmart has bigger issues to deal with now than Martha Stewart," countered Ken Harris, partner, Cannondale Associates, an Evanston, IL-based marketing consultancy. "If Kmart were Wal-Mart, which is strong and healthy, and if it saw Martha Stewart as deadweight," then that would be a consideration, but that's not the case.

Harris also believed that initially this will have no ill-effect on sales — "if anything it will call attention to the brand." If people like the products and if they're high quality products, there's no reason for them not to buy, he said.

Stewart has "broken the rules from the beginning," and may come out of this triumphant after all, said Michelle Alfandari, president, Moda Intl. Marketing, NY, a brand licensing and marketing company. People told her that she would lose prestige from teaming up with Kmart, and her magazines would be hurt, for example, and yet "none of these things happened."

With a brand wrapped up in an individual, Alfandari added, however, there's always the possibility of something going wrong over the long term. "For the short term, to bring in traffic, personalities are great."

MSO's merchandising segment is dependent on Kmart, last year recording $48.9 million, or about 16.6 percent of total revenues, last year, and over $7 million for the first quarter ended March 31.

In a statement, Kmart commented that it would be inappropriate for it to comment on the charges. It added: "However, Kmart's exclusive line of Martha Stewart Everyday (MSE) home furnishings, known for their excellent quality and competitive price points, remain a Kmart customer favorite and continue to sell well overall."

Bud Frankel, ceo/president, The Arlee Group, New York, which produces the Martha Stewart Everyday window for Kmart, said he feels Stewart's troubles will pass. "I don't think the consumer really gives a damn," he insisted. "If they like her products, they'll keep buying them, and that's it."

Recent sales haven't been negatively affected, he said, adding, "People forget."

But MSO's business, already feeling sharp declines from a staggering economy as well as the investigation to this point, "could get worse before it gets better," Laura Richardson said in a research note for investment banking firm Adams, Harkness & Hill, of Boston.

Reiterating her Reduce rating, Richardson also commented that the management changes will be good for the company long term, as a first step in a turnaround, but "we doubt that it can stem erosion of advertiser and consumer support that we expect following Martha's indictment, nor will it change other factors that are dragging down the company (e.g. maturity of media vehicles, Kmart, Internet/direct commerce, etc.)."

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