When lifestyle diva Martha Stewart became entangled in the ImClone Systems Inc. insider-trading scandal, retail analysts immediately took it as more bad news for struggling Kmart Corp., which had been banking on the continued success of Stewart's designer brand.

After all, the Martha Stewart Everyday line generated $1.5 billion for Kmart last year and any serious slowdown would complicate the discount chain's efforts to emerge from bankruptcy next year.

Yesterday, the company declared that its faith in the line had been justified. Stewart's products held up better than any other part of Kmart's sales last month, said Julian C. Day, Kmart's president and chief operating officer.

Stewart's troubles deepened yesterday with reports that the Securities and Exchange Commission staff had served her lawyers with notice that it intends to recommend that she be charged with securities fraud in connection with alleged insider trading of ImClone stock. But even before that news emerged, Day said that no matter what happens to her "we feel a great deal of confidence that the merchandise represented under the banner of that brand name will continue to be very strong for us."

Rather than distance itself from Stewart, Kmart featured her in recent television ads promoting a white sale. Her pillows, the company said, did phenomenally well. The chain also committed to launching her first-ever line of holiday decorations in November.

Analysts said the company's focus on pricey marketing campaigns built around exclusive labels -- Martha Stewart Everyday and its Joe Boxer brand -- could be the reason overall store sales in September did not slip as badly as in previous months.

Speaking to reporters, James B. Adamson, Kmart's chairman and chief executive, said customers have given Kmart a "second chance." He reaffirmed his commitment to pull Kmart out of bankruptcy by July 2003 -- a date Kmart backed away from only months ago.

"We have gained some traction," Adamson declared. "The timeline is aggressive, but it should be doable."

Company officials said sales at Kmart stores open more than a year dropped 6.9 percent in September{ndash}an improvement of 5 percentage points over August and better than the chain's 11 percent average monthly decline since filing for the largest retail bankruptcy in history.

In addition, the number of consumer purchases increased as well as the average amount of each transaction, company officials said.

Kmart officials said the launch of the Joe Boxer line had been the most successful in company history. The line -- previously a maker of underwear and pajamas that suffered from lackluster sales -- signed an exclusive licensing agreement with Kmart, which expanded the brand to jeans, ironing boards, laundry hampers, and a slew of merchandise aimed at enticing children and the college-bound set. Some analysts have estimated that the line could generate $1 billion in its first year.

Among other initiatives, Kmart said, it is reaching out to Hispanics, who represent 39 percent of its shoppers, with a monthly Spanish-only magazine in select cities and a line of clothing named after Latin pop star Thalia.

Still, some experts say Kmart's focus on exclusive brands has backfired in the past. Think Sesame Street and Disney, said Don Fritz, a principal at New England Consulting Group. "Given the past failures, the question is whether they have the marketing wherewithal internally to consistently hit winners," Fritz said.

Other retail watchers question whether a few popular brands are enough to help Kmart face healthier rivals such as Wal-Mart Stores Inc. and Target Corp. -- both of which offer their own exclusive brands.

"If you've got an 80,000-square-foot store, you can't fill it up with Joe Boxer and Martha Stewart," said James W. Harris, a bankruptcy attorney with retail experience. "You've got to have more than that. And it's the 'more than that' that's a problem for Kmart."

Kmart said it does have more.

In some Chicago and Detroit area stores, it's given its managers more authority to stock high-demand items. Because those stores have done well, the approach will be expanded to all 1,800 Kmart locations soon, officials said.

The company also is keeping a watchful eye on its "store of the future" in Michigan, a prototype it hopes will provide insights on best practices for the company. In that store, Kmart is toying with a lime-green-and-gray logo in place of its iconic red one, which it says too closely resembles the well-known and ubiquitous Target logo.

Kmart says it has the money and the time to get its fiscal house in order. The Troy, Mich.-based retailer lost $176 million in September and $2.7 billion since January. It had $1.51 billion available as of Sept. 25 under the $2 billion line of credit approved by a federal bankruptcy court in Chicago earlier this year.

By Feb. 24, Kmart plans to submit a plan to the court detailing how it will reorganize itself in time for the July 2003 deadline. It also plans to unveil a five-year business plan by year's end.

But even if Kmart recovers from bankruptcy, some analysts question whether it will regain its standing as a discount powerhouse.

"If they do come out of bankruptcy, they won't be the Kmart of the size and scope they used to be," said James V. McTevia, chairman of turnaround consultancy McTevia & Associates. "They will probably never compete at the level they once did."

Kmart is testing a lime-green-and-gray logo in place of its red one, which it says too closely resembles Target's.Chief executive James B. Adamson, at the Michigan prototype store, says Kmart will be out of bankruptcy by July 2003 -- and Martha Stewart Everyday sales will be critical.