Updated from 11:24 a.m. EST The fourth quarter was better than expected for Martha Stewart Living ( MSO), but the company's future remains clouded by its founder's legal troubles. The media and merchandising company beat analysts' expectations by 2 cents, but its core publishing revenue fell 28%. While a royalty payment by Kmart ( KMRT) helped salvage the quarter, the company expects its recent red ink to return in its current period as the difficulty of luring advertisers outweighs any benefit from its Kmart relationship. Advertisers have steadily fled the company since allegations first surfaced that company founder Martha Stewart lied about the circumstances of a December 2001 stock trade. Stewart's trial on
charges of obstructing justice is now before jurors. The company and its management appear to be frozen, awaiting the outcome of the trial, said Scott Rothbort, president of LakeView Asset Management and a contributor to TheStreet.com's professional investing site, Street Insight. While the company's outlook is already below expectations, things might get worse, he said. "They certainly can. If she goes down the river, the company has no paddle," said Rothbort, who is short shares of Martha Stewart Living and long puts. On a conference call with investors and analysts, company CEO Sharon Patrick said Martha Stewart Living is preparing several contingency plans depending on the outcome of the trial. "We're still operating on the uncertainty regarding the trial ," Patrick said. "We're going to have to wait until there's a verdict and we'll have to proceed from there." In the meantime, at least some investors are willing to give the company the benefit of the doubt. "What they earn this quarter, what they'll earn next quarter is irrelevant in the context of what's going on" with Stewart's trial, said one investor who is long the stock. If the trial is resolved in a positive way for Stewart, the company "could be quite attractive," added the investor, who asked to remain anonymous.