NEW YORK (CNN/Money) -
About one in five consumers no longer thinks Martha Stewart's brand is such a "good thing," a recent poll showed. And that could spell trouble for bankrupt discount chain Kmart Corp., which features her products.
About 56 percent of Americans surveyed said they had purchased Martha Stewart's products in the past, according to a July 7-8 survey by consumer tracking firm America's Research Group. Of those, nearly 20 percent said they were less likely to buy them now because of questions of insider trading surrounding the domestic diva.
A Stewart spokeswoman was unavailable for comment regarding the survey Wednesday.
Congressional investigators are looking into whether Stewart's broker tipped her off about the Food and Drug Administration's rejection of an application for the cancer drug Erbitux before she dumped nearly 4,000 shares of ImClone Systems, the drug's maker, last December. Stewart repeatedly has denied any wrongdoing.
Her friend and former ImClone CEO Samuel Waksal also tried to sell his shares the same day Stewart sold hers.
Stewart's company, Martha Stewart Living Omnimedia, slashed its third-quarter earnings forecast by more than half of Wall Street's expectations Wednesday, after posting a higher second quarter profit. The company said it has "begun to see some impact on our business resulting from the uncertainty relating to the investigations of Martha Stewart's stock sale."
Stewart is Kmart's biggest brand partner, and a sharp drop in sales of her "Every Day" line of products would make it that much more difficult for the chain to emerge from Chapter 11 protection, retail analysts said.
"Martha Stewart is the foundation for Kmart's success, and if Martha goes down for any reason, Kmart goes down with her," said Britt Beemer, a consumer pollster who conducted the survey and is the author of the best-selling book "Predatory Marketing."
That issue likely will be on Kmart officials' minds Wednesday as they head into their next bankruptcy court hearing in Chicago.
Kmart, which filed for Chapter 11 bankruptcy protection on Jan. 22, is expected to ask for an extension of the deadline to file a reorganization plan. If Judge Susan Sonderby grants the extension, which is common in such cases, Kmart could gain significant leverage over the interests of creditors, who would then be precluded from filing their own plans, said Barry Adler, a New York University law professor specializing in bankruptcy.
Kmart spokeswoman Nicole Dowswell declined to say how much of the retailer's annual $36 billion in sales Stewart's products account for, but acknowledged Wednesday that Stewart's line is the centerpiece of Kmart's home merchandising strategy.
"It would be inappropriate to comment on her personal matters. But she continues to be a valued brand partner and her product continues to sell well in our stores," Dowswell said when asked about the survey. "She's always been a customer favorite."
However, in a filing with the Securities and Exchange Commission Monday, Kmart reported an 8.7 percent drop in June sales at stores open at least a year, a key gauge known as same-store sales, and a net loss of $137 million for the month.
Kmart's (KM: Research, Estimates) stock has been trading under $1 a share for weeks and faces possible delisting by the New York Stock Exchange.
Shares of Martha Stewart Living Omnimedia (MSO: Research, Estimates) have fallen by half since March as questions of insider trading emerged.
Kmart and Stewart first joined forces in 1997 to market branded home furnishings and products from the company she founded and of which she is chairwoman.
But Kmart has said it has no plans to end or alter its agreement with Stewart, and some Wall Street analysts believe the accusations of insider trading, whether true or false, are likely to have little effect on sales of her products.
"My opinion is that the consumer really does not give a damn," said Kurt Barnard, president of Barnard's Retail Consulting Group. "The consumer wants that pink pillowcase that has the Martha Stewart insignia on it, and if the consumer finds this pink pillowcase is priced just right and it fits into her décor, she'll buy it."
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SIDE BAR
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Questions surrounding Stewart are just one of a slew of crises Kmart is trying to juggle.
The Troy, Mich.-based chain is conducting a stewardship review of former CEO Charles Conaway and his management team. Conaway was hired two years ago to revive the discount retailer's sagging image.
Many credit Conaway for cleaning up the company's stores, streamlining inventory and improving store efficiency. Yet Wall Street roundly criticized him for trying unsuccessfully to compete head-to-head on price with Wal-Mart Stores Inc, the world's biggest retailer.
Additionally, the Federal Bureau of Investigation is investigating Kmart, though it has declined to give a reason.
"It's still a pending case. It's still ongoing," FBI Special Agent Dawn Clenney said. "There is not any statement we can make publicly about it right now. The matter is still ongoing, and that's where we are."
Part of Kmart's problems stem from what is known in the industry as vendor rebates, discounts retailers often take from vendors for ordering a certain amount of goods. Though the law on this practice is fuzzy, it has been going on for years.
However, the recent attention given to corporate accounting scandals such as at Enron and WorldCom, could bring a renewed interest on vendor rebates, some analysts say.
On Jan. 25, Kmart disclosed that it had received copies of anonymous letters sent to the Securities and Exchange Commission, the company's auditors, directors and legal counsel expressing concern about various matters, including accounting concerns.
The letters, from people claiming to be Kmart employees, are being investigating by Kmart's audit committee, outside counsel, the SEC and the U.S. Attorney's office for the Eastern District of Michigan.
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