Renovating Martha Inc.

When Martha Stewart's people first approached KB Home CEO Bruce Karatz last May about building mini-versions of Martha's mansions, he was skeptical. After all, Stewart was still under house arrest for her conviction in the ImClone stock scandal. "There was a little risk that the public might not forgive her," says Karatz. But Stewart laid out an enticing deal to design Martha manses for the masses, priced between $200,000 and $450,000, that can be tastefully decorated by you-know-who. So Karatz agreed to an experiment: he'd build 650 Martha homes in Cary, N.C., and see how it went. The reaction: 3,800 home buyers wanted in. And Martha sent each of them a hand-signed thank-you note. If she's going to keep that up, she'd better be ready for writer's cramp. This week, KB will announce plans to build "Marthavilles'' in seven more cities, from Orlando to L.A.

One year out of the big house, Martha Stewart is finally starting to rebuild her own house of style. Oh, sure, there have been plenty of setbacks: Her "Apprentice" show flopped and her stock is down by more than half over the past year. But there are signs that the worst may be over. This week, Martha Stewart Living Omnimedia is expected to post its first quarterly profit in two years--albeit a skimpy $7 million. Advertisers and subscribers are now flooding back, with ad pages in her magazine doubling in the last three months. And she's spinning out reams of new projects, like a Sirius satellite radio show and a new magazine, Blueprint, aimed at young nesters. "The company is at an inflection point," says analyst Robert Routh. "The public has forgiven or forgotten."

But even Martha Stewart isn't ready to declare her comeback complete. In an interview with NEWSWEEK, she said her business is back to her preconviction days of two years ago, but not yet at the pre-scandal glory days of 2001. "Maybe our revenues aren't as high," she says, "but we're back in spirit and in business dealings." Last month Stewart lost her appeal, putting an end to the four-year criminal case. "I'm not happy about the appeal. I'm not happy about the entire situation. I never will be," she says. "But you just have to do what you have to do and get on with it."

With her courthouse battles over, Stewart is returning to what made her a household name: the household. Three days a week, she's in her TV kitchen filming her daily "Martha" show in front of a live audience, which, after a rocky start, is being picked up for a second season. Meanwhile, her CEO, Susan Lyne, is working to expand the reach of her stylish Kmart housewares. By now, most analysts expected Martha's merchandise to be lining the shelves at Sears, which merged with Kmart a year ago. But so far, Sears Holdings' hard-bargaining chairman, Eddie Lampert, hasn't agreed to a deal. So she's taking her new wares elsewhere. A new scrapbooking line will be sold in craft stores. And those Martha mini-mansions will be outfitted with Martha cabinets, lighting and flooring.

The biggest mark on Martha's rep these days is her prime-time failure on "The Apprentice." Martha blames it on "Apprentice" overload. She says she was supposed to have started out by firing Trump on the air, clearing the way for her show to be the sole "Apprentice." "Having two 'Apprentices' was as unfair to him as it was unfair to me," she says. "But Donald really wanted to stay on." "Apprentice" producer Mark Burnett admits that dumping the Donald was suggested, but adds: "Thank God that didn't happen." (Trump didn't respond to an interview request.) Burnett, also producer of her daily show, says Stewart's version of "The Apprentice" just didn't "ignite viewer interest." Some found her unnaturally saccharine, particularly when she wrote thank-you notes to contestants she just fired. "That was all Martha's idea," says Burnett. "Maybe Martha was a little concerned about coming out of jail, getting a second chance, and she softened a bit."

Martha never goes soft in the face of adversity, and she says that's what will keep her nascent comeback going--despite the recent stumbles. "People certainly appreciated the way that I handled myself through this very intolerable situation," she says. "To not whine and not complain and not kvetch." They also admired her sense of humor. Asked if her latest burst of creativity suggests she's feeling, pardon the pun, untethered, Stewart laughs and embellishes the joke. "I still have 12 months of probation to live through," she says. "So there's still a slight little tether there."