Salad days over for Stewart's empire

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She can appeal the verdict, but by the time she does, Martha Stewart's company may have suffered an irreparable loss of advertising revenue and subscribers.

As Advertising Age has already reported, ad revenue at the company has slumped as advertisers turned to other alternatives (AA, Feb. 2), so it is hard to imagine a scenario in which Ms. Stewart's guilty verdict is anything less than disastrous for the company she founded and built into a business empire that takes in a quarter-billion dollars a year.

On March 5, Ms. Stewart was convicted of obstruction of justice, conspiracy and two counts of making false statements related to her sale of shares of drug company ImClone Systems. A charge of securities fraud had been dismissed earlier.

Even marketers' most middling-sounding statements contained the seeds of more bad news for the company: "We will evaluate how her media and properties respond, as well as how consumers respond to this news," said a spokeswoman for Procter & Gamble Co.

But it's known how consumers responded to less-dire stages of Ms. Stewart's legal trouble: Many fled. For the two six-month periods ending June 30, 2003, newsstand sales of Martha Stewart Living fell 18.1% and 21.8%. Ad pages at the company flagship fell an additional 30.1% in the first two issues of 2004. The company cut the rate base, or circulation guaranteed to advertisers, 22% to 1.8 million.

Ratings at her TV show were less affected, though they've also declined. But in a previous public filing the company warned, "We believe our syndicated `Martha Stewart Living' program, in particular, is susceptible to an immediate adverse impact from a negative outcome in Ms. Stewart's legal proceedings, including the loss of distribution."

"Advertisers were taking a wait-and-see stance," said Charles Valan, VP-strategic print services at Interpublic Group of Cos.' Universal McCann, New York, referring to the many advertisers who'd pulled out of the company's properties during the run-up to the trial. "Now they see."

`distressed'

In the last quarter of 2003, said Martha Stewart Living Omnimedia's Chief Financial Officer James Follo in a conference call with investors, ad pages in the publishing sector-by far the largest in the company-fell 40%, and ad revenue fell even further.

In a statement posted on marthatalks.com, Ms. Stewart said she was "distressed" by the outcome but vowed she'd appeal the verdict. The company said the board "will meet promptly to carefully evaluate the current situation."

In an earnings call with analysts March 4, Omnimedia CEO Sharon Patrick said the company had been working on "contingency planning" in preparation for various trial outcomes. She did not say what those plans might be, but said the company would "measure impact on consumers" and "listen carefully to ... advertisers and partners."

In a statement, Kmart, her longtime retail partner, said it was "saddened to hear Martha Stewart was found guilty today."

Each of the counts Ms. Stewart was convicted of carries a potential sentence of five years and a $250,000 fine. She will be sentenced June 17. MSLO stock closed down 22.6% to $10.86 on March 5.

Public relations experts were similarly downbeat. "In the short-term, it will have a fairly devastating impact," said Dan Klores, who runs a renowned PR firm in New York. "There is a chance, however, that she can position herself as a comeback player of the year 12 to 18 months from now.

"But in order to do that, she has to do the one thing she should have done from the get-go: Express remorse and ask for forgiveness."

contributing: claire atkinson, mercedes m. cardona, jack neff

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