Probe Mess Punishes Martha Stewart Stock

Updated from 1:46 p.m. EDT

Martha Stewart's image problems are finally hurting business.

Her company, Martha Stewart Omnimedia(MSO - Cramer's Take - Stockpickr), lowered its financial guidance for the third quarter on Wednesday, as the investigation stemming from her sale of ImClone stock has affected business, particularly advertising for the company's magazine. Investors have sold off the stock for the last month or so, since news of the investigation broke, shaving off nearly half the company's market value.

"Looking forward, we have begun to see some impact on our business resulting from the uncertainty relating to the investigations of Martha Stewart's stock sale," said CFO James Follo, in a statement. "Since those investigations are still pending, our ability to provide accurate guidance is constrained."

On a conference call that followed the release of second-quarter earnings, management went to lengths to convince investors that the business runs deeper than Martha herself. The company admitted that the ongoing investigations into Stewart's sale of ImClone stock has weighed on results, but says it is hopeful consumers and television viewers will ultimately stick by the company.

Stewart, who early in the call said she would not answer specific questions about the investigations, said the company is "much larger than myself."

Sharon Patrick, president and COO, said some advertisers are taking a "wait-and-see approach" with the investigations, but said the company's attractive demographics will "ultimately alleviate skittishness toward the investigations."

Investors were skeptical however, as the shares closed at $9.05, down 95 cents, or 9.5%. Earlier in the day, the stock had been off more than 20%.

A sidelight in all this was the company's second-quarter earnings, which were hardly mentioned on the conference call, as questions about the investigation and its impact dominated. In the second quarter, Martha Stewart earned $6.7 million, or 14 cents a share, up from $5.3 million, or 11 cents a share, in the year-ago period. Revenue was up 16% to $78.6 million from $67.8 million last year.

The company said it expects to see third-quarter earnings per share of 6 cents to 7 cents, compared with the consensus estimates of 15 cents provided by Thomson Financial/First Call. For the full year, the company said its results will not meet previous guidance of 53 cents, and it did not offer a specific estimate.

On the call, management said the company will incur higher expenses due to the investigation, particularly for public relations, in the third quarter and possibly the fourth.

"We recognize that the investigations and related speculation and media attention surrounding a personal sale of non-company stock by Martha Stewart present challenges for our company," said Patrick, in a statement. "However, we are confident that MSO is prepared to meet them."