Martha's Shrinking Act

As Martha Stewart's legal troubles grow, finding her face in her magazine is like playing Where's Waldo? The former model was once splashed across the pages of Martha Stewart Living. But in the new Thanksgiving issue, Stewart appears only in an ad for her home-decorating products and a promo for her TV show. Even her signed "Letter From Martha" at the front of the magazine is Martha-free. Instead of her usual photo, we're treated to a shot of her antique rolling-pin collection.

Martha's disappearing act might soon spread to her entire company. The investigations into her ImClone stock sale are coming to a head and could cost her her job. Last week sources close to the SEC investigation confirmed she had been served a "Wells notice," signaling the stock-market cops' intent to file civil charges. And the criminal probe into her activities also is heating up, law-enforcement sources say. Martha denies she had any inside info when she unloaded nearly 4,000 ImClone shares a day before federal regulators rejected the company's promising cancer drug. And her lawyers are contesting the SEC's case. Still, a Wells notice almost always results in charges. And the SEC has the authority to seek her ouster as chairman and CEO of Martha Stewart Living Omnimedia. Wall Street, bracing for Stewart's company to report a 40 percent drop in earnings this week, is growing weary of the scandal. "Investors still like Martha Stewart," says analyst Laura Richardson of Adams, Harkness & Hill. "But some of them don't like her running the business."

Can Martha Inc. survive without Martha? Oddly enough, the more Martha steps back from her company, the better off it may be, marketing experts say. Martha's brand needs less face time from its founder. "It would be wise for her to become a label," says brand consultant Peter Dixon of Lippincott & Margulies. Collateral damage from Martha's mess seems to hurt some of the properties most associated with her face. Ratings are falling for "From Martha's Home" on HGTV, and the cable network says it will decide at the year-end whether to keep airing it. (King World, producer of her syndicated show, says ratings are steady.) At Stewart's magazine, execs have admitted the controversy has hurt ad sales.

But Stewart's merchandise--paint, pots and pans, and patio furniture--is weathering the storm. And those products generate 30 percent of company profits. Last week Kmart executives raved to stock analysts about the success of Martha's Labor Day pillow sale, adding that her entire line of housewares remains a "bright spot" for the bankrupt retailer. "There's Martha the personality and Martha the brand, and they've been blended so much it has killed her stock," Kmart CEO Jim Adamson told NEWSWEEK. "But the reality is that her products are still selling. Consumers make the distinction, the stock market doesn't." Still, as Kmart prepares to unveil an important new line of Martha holiday goods, Adamson admits he will not have her star in TV commercials if she's indicted.

Getting Martha to loosen her grip on her company might not be easy. After all, she will remain its largest shareholder--and conceivably a spokeswoman--even if she's ordered to resign as an executive. And the notoriously controlling tastemaker likes to fuss over the details. She trooped down to North Carolina earlier this year to teach Bernhardt furniture craftsmen how to apply silver leaf to glass by hand. The results will be seen next spring in her new upscale Skylands and Lily Pond furniture lines (named after her mansions in Maine and the Hamptons). By then, though, Martha could be pursuing other interests.