Martha, Unfettered And Back in Business

Indeed, analysts said a key challenge for the company will be to draw in new consumers through "The Apprentice," which the company does not own, without alienating the intensely loyal fan base expected to watch the daily lifestyle show and buy the new DVDs. The company owns or co-owns the other new ventures.

"The big issue will be the viewership of ['The Apprentice'] and how the company leverages that into new revenue," said Ivan Feinseth, an analyst at Matrix USA LLC, a research and brokerage firm. Feinseth, like several other Wall Street analysts, has a sell rating on Martha Stewart Living Omnimedia stock.

New revenue is critical for the company. The media firm posted a loss of $33.5 million, or 65 cents a share, in the second quarter of this year, a worse performance than its loss of $17.8 million, or 36 cents a share in second quarter of 2004. The company has suffered since reports of Stewart's involvement in a questionable stock sale surfaced in 2002. Stewart was convicted of obstruction of justice and conspiracy in March 2004. She served five months in federal prison in Alderson, W.Va.

Television revenue at the company disappeared after Stewart's daily show went off the air, and ad pages in the flagship magazine, Martha Stewart Living, collapsed. Ad sales in the flagship, and in the company's new Everyday Food magazine, have rebounded in recent months, but the pace of that rebound has slowed and the outlook for 2006 is uncertain.

"While the fundamental recovery at Martha Stewart Living is progressing, we continue to believe the stock price remains disengaged from the company's fundamental performance," Credit Suisse First Boston analyst William B. Drewry wrote in a recent note to clients. He added that despite the new initiatives, the company remains "a long way from sustained profitability."

Amazement at the performance of Martha Stewart Living Omnimedia stock is common across Wall Street. After dropping as low as $5.26 in October 2002 during the height of the Stewart stock scandal, the shares spiked when Stewart said she would serve her term immediately, even as she pressed her appeal. The stock soared again on media buzz surrounding her two coming shows.

Martha Stewart shares closed at $31.69 on Tuesday, a very rich level that investment bank Bear Stearns says is nearly 140 times estimated 2006 earnings. Some analysts say the stock is worth about $6 or $7 a share.

Meanwhile, Stewart's ongoing legal appeal presents a delicate problem for her comeback campaign. Because she is attempting to have her conviction overturned, Stewart cannot simply apologize for her actions and move on, something experts said could endear her to a new audience. "Here in America, God bless us, we kind of relish that person who made a mistake and comes back and admits that mistake," said McNaughton of CoreBrand. "We love the underdog."

Stewart has walked a fine line, apologizing for the headaches her ordeal caused but continuing to deny wrongdoing and attacking her prosecution as unjustified. Her fans firmly believe it was just that, analysts said. But the stance may not help her win new converts.

Though Stewart will be free to spend more than 48 hours a week outside her home, her non-executive title of company "founder" will not immediately change. Stewart still faces a civil suit by the Securities and Exchange Commission that seeks to bar her from serving as a director and limit her ability to serve as an officer of any public company. Taking on an official executive role at the firm now would not help her case with the SEC, legal experts said.

That suit is on hold pending the completion of her appeal, which is expected to be heard sometime next year. Stewart will not be entirely free, even with the removal of the ankle bracelet and the stripping of monitoring equipment from her home in Bedford, N.Y. She will remain on supervised release for the next 18 months, meaning she must remain employed, refrain from associating with anyone with a criminal record and not leave the Southern District of New York without receiving permission from federal officials.