With Martha Stewart running around with his retail competitors, will Ed Lampert be able to salvage his turbulent merchandising marriage to the domestic diva?

Stewart's media empire,

Martha Stewart Living Omnimedia

(MSO)

, announced a deal Wednesday to sell a line of house paints at

Lowe's

(LOW) - Get Report

called Martha Stewart Colors.

The move marks Stewart's second fling with a retail chain that is a competitor of her longtime partner, Kmart, which is now owned by Lampert's

Sears Holdings

(SHLD)

. Industry sources say its further evidence that Stewart's relationship with Kmart is headed for the rocks, and investors are wondering how the already struggling discount chain would fare without her brand on its shelves.

"One of the first things that Lampert tried to do after he resuscitated Kmart from bankruptcy

in 2003 was renegotiate the terms of its deal with Martha Stewart because it was a horrible deal that made no sense for the company," says Howard Davidowitz, chairman of a New York-based retail consulting and investment banking firm called Davidowitz & Associates. "Martha wouldn't budge because it was a great deal for her, and she was headed for prison at the time."

After Lampert later used Kmart to acquire Sears, he tried to cut a deal with Stewart's company to sell its merchandise in Sears stores, but the two sides couldn't reach an agreement. Some have speculated that, as Sears continues to lose market share to competitors like

Wal-Mart

(WMT) - Get Report

and

Target

(TGT) - Get Report

, Martha Stewart wasn't interested in connecting its brand with the chain.

Sears Holdings' same-store sales, a key retail metric gauging sales at stores open at least a year, have consistently declined. In its second quarter, the retailer's same-store sales fell 3.8%, reflecting a 6.3% drop at Sears stores and a 0.6% slump at Kmart.

"If you were Martha Stewart, or any top designer for that matter, would you want to have a deal with Sears or Kmart right now?" asked Davidowitz.

Last spring, Stewart's company announced a deal with

Federated's

(FD)

Macy's department store chain to launch a line of home products called The Martha Stewart Collection. Not unlike the Martha Stewart line sold in Kmart stores, Macy's will sell branded towels, dinnerware and holiday décor in its stores and on its Web site.

Martha Stewart also has merchandising deals with a slew of other companies, like

Kraft Foods

(KFT)

and

KB Home

(KBH) - Get Report

. The company sees such deals as way to grow its business, and it plans to further diversify its distribution channels.

Next year, Kmart will pay Martha Stewart Living $65 million for its products. Lampert has reportedly said that the contract is too pricey with its guaranteed minimum royalty fees from Kmart. The two sides have been unable to work out a long-term agreement to sell Stewart's goods at Kmart or Sears, and observers say it's likely that the Kmart contract won't be renewed when it runs out.

A Sears spokesman, Chris Brathwaite, had no comment on Stewart's deal, which ends in January of 2010.

"We'll cross that bridge when we get to it," said Martha Stewart Living's chief financial officer, Howard Hochhauser, when asked about whether the company was interested in renewing the contract.

For his part, Davidowitz speculates that Kmart stores won't even be operating by 2010.

"Will

Lampert have a sustainable retail entity by then? All the things he has done don't leave you with a sustainable retail entity, and the fact that Kmart's signature brand, Martha Stewart, is now headed elsewhere is an outgrowth of that strategy," he says. "He's turned over his share of that retail business to

J.C. Penney

(JCP) - Get Report

and

Kohl's

(KSS) - Get Report

because he raised his retail prices, cut his inventories, cut his assortments, cut his service, cut his promotions and invested no money in the stores."

"Did he generate cash with that strategy?" adds Davidowitz. "Of course he did."

The pile of cash on Sears' balance sheet, recently totaling $3.7 billion, is the central focus of investors who are buying the retailer's shares these days -- along with the company's sizable stable of real estate assets.

Many observers are speculating that Lampert will gradually sell off Sears' assets and use its cash to invest elsewhere. With his value-finding acumen, such a strategy has the potential to enrich shareholders far more than any profits Sears could generate as a retailer.

In his latest quarterly earnings release, Lampert

signaled to Wall Street that the time for finding new investments is drawing nigh.

"Our strong financial position and cash-flow generation provide us with the flexibility to capitalize on a wide range of market opportunities," he said. "In addition to investing in our business and acquiring our shares, we are prepared to invest substantial amounts of capital if we identify other attractive investment opportunities."

Since then, the stock market has been hit with bursts of speculation that Lampert is buying shares of the likes of

Home Depot

(HD) - Get Report

,

Gap

(GPS) - Get Report

, and even the world's largest automaker,

General Motors

(GM) - Get Report

.

"I wouldn't doubt that Sears is really more of a liquidation scenario, and that Lampert is looking elsewhere to allocate capital," says Jeff Matthews, a retail consultant who heads the firm Jeff Matthews Partners.