Did Prison Ruin Martha Stewart?

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- Since the mid-1970s, domestic diva Martha Stewart has been an icon of American style. Over the years, Stewart's catering business has blossomed into a hydra-headed business offering everything from cookbooks and magazines to home furnishings, flowers, food, wine and even houses. Building from one success to another, Stewart became a media icon, editor-in-chief of her eponymous Martha Stewart Living magazine and star of an hourlong television show devoted to food, decorating, holidays and other niceties of gracious living.

While rumors that she was temperamental and difficult to work with swirled around Stewart from the beginning, she continued to be viewed by her fans as the consummate authority on all things stylish and genteel. Consequently, when Stewart was charged in 2002 with insider trading and ultimately convicted and jailed, the public was shocked and speculation about the impact of her conviction on her business empire ran rampant.

Even as comedians quipped about Stewart sponge-painting the walls of her prison cell and accessorizing her orange prison jumpsuit, investors wondered whether her business could survive the disgrace of its founder and spokeswoman. Prospective buyers hovered around her Martha Stewart Living Omnimedia corporation, and the editorial board of Martha Stewart Living reportedly wondered whether it would be better for the magazine for Stewart to be quietly removed as its spokesperson.

In 2005, Stewart made a highly publicized and apparently successful comeback. Her company's home furnishings line at K-Mart was expanded, and her company launched a line of housewares with Macy's ( M). Stewart returned to daytime television with "The Martha Stewart Show" and came to primetime on "The Apprentice: Martha Stewart." For a while, it appeared as if Stewart and her company had come through her conviction unscathed.

In hindsight, however, celebrations of Martha Stewart's triumphal return may have been premature. "The Apprentice: Martha Stewart" was cancelled after its first season. Her company's relationship with K-Mart foundered in 2009 when sales of her merchandise fell below expectations. Stewart was quoted as blaming K-Mart's parent company, Sears Holdings ( SHLD), for letting the quality of her line deteriorate. However, Sears' representatives shot back that the products were designed and manufactured to her team's specifications and bluntly stated, "we think that Ms. Stewart should accept responsibility for her product."

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More recently, Stewart's empire has continued to produce mixed results. In 2010, her "Martha Stewart Show" moved from network to cable on The Hallmark Channel in what was then described as a multi-year strategic partnership. However, The Hallmark Channel recently announced that the show would be cancelled at the end of its first broadcast season due to disappointing ratings. Home Depot ( HD) recently announced that it will no longer sell her branded paints, though do-it-yourselfers will still be able to mix her color palette into Glidden bases. Last December, J.C. Penney ( JCP) announced plans to purchase 16.6% of Stewart's company, but the Martha Stewart mini-stores in J.C. Penney locations aren't expected to open until 2013, leaving plenty of time for the new relationship to sour.

So, why does Martha Stewart's empire apparently continue to struggle? There may be several reasons. First, although the sluggish economy has caused many homeowners to renovate the houses they have instead of trading up to more lavish residences, consumers may be reluctant to spend money on decorative fripperies even if they can afford to do so. (When the next-door neighbors are out of work and on the edge of ruin, color-coordinated tableware and faux finished walls may seem a trifle de trop.)

Second, Stewart is no longer the only game in town. Ever the generalist, Stewart sometimes seemed positively fumble-fingered compared to expert guests on her show even in her heyday. Celebrity decorators, chefs, gardeners and travel experts now crowd the lifestyle industry Stewart essentially invented. Even The Hallmark Channel announced its intent to expand its lifestyle lineup when it cancelled her show. Perhaps Stewart fares less well with capable competitors nipping at her heels.

Sadly, though, it seems most likely that her company's difficulties are attributable to Stewart herself. Seven years after her release, Martha Stewart remains the domestic goddess who fell from grace. Once her serene, gracious public image had been tarnished by her insider-trading conviction, tell-all books and articles describing Stewart as an ill-mannered harridan sprouted like the exotic mushrooms she uses in her ragout. It may well be that her products seem less elegant to consumers now that Stewart herself has been exposed as something less than aristocratic. Just the fact that Stewart's show drew such poor ratings for The Hallmark Channel may suggest that, even if consumers continue to like her company's merchandise, they don't necessarily like her.

Fashions come and go quickly, and it's entirely possible that Martha Stewart, now 70, is simply starting to go out of style. Still, other would-be media moguls who hope to become the face of their own successful companies would be wise to learn from her story. Consumers buy from people they admire and trust, and convicts rarely qualify.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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