NEW YORK (CNN/Money) - Martha Stewart Living Omnimedia Inc. reported lower third-quarter earnings Thursday, hurt in part by the ImClone insider trading scandal involving its founder, and warned its fourth-quarter earnings will miss Wall Street estimates.

The New York-based home decor and marketing company said it earned $2.8 million in the quarter, or 6 cents per share, down from $4.8 million, or 10 cents, a year earlier. Wall Street analysts expected 6 cents a share, according to earnings tracker First Call.

The 42 percent earnings drop came despite a slight increase in revenue to $70.9 million from $68 million a year ago.

"The company and the brand have shown strength and resilience in a difficult environment," CEO Martha Stewart said in a news release. "We are pleased to have generated increased revenue in a tough economy and continue to operate this business with a long-term outlook."

But the company also warned its fourth-quarter earnings will be just 3 cents per share, well below consensus estimates of 10 cents, according to First Call. The company also declined to give 2003 guidance, due to continuing uncertainty regarding the investigation into the ImClone scandal, chief financial officer James Follo said during a conference call with analysts and investors.

Gains in publishing and merchandising during the quarter helped offset weakness in the television and web components. Publishing revenue rose 6 percent as advertising pages for its flagship Martha Stewart Living magazine increased 9 percent. The company also published one additional special issue in the quarter than a year earlier.

Sales of company products at Kmart (KM: down $0.01 to $0.62, Research, Estimates) decreased in the third quarter, but performed better than Kmart's overall sales at stores open a year or more, the company said. Subscriptions for Martha Stewart Living and overall advertising pages were down, but that was not inconsistent with industry trends. The company said it was too early to tell how the ImClone scandal might impact subscription and advertising sales in the future.

The company stressed that Kmart remains a contracted partner but that it is always in discussions with other potential partners around core content areas in retail areas not currently covered by Kmart.

The stock has been battered by the ongoing scandal involving Stewart's sale last December of nearly 4,000 shares of drugmaker ImClone Systems (IMCL: Research, Estimates), just before the Food and Drug Administration refused to review an application for an anti-cancer drug ImClone was developing.

ImClone's former CEO Sam Waksal, a friend of Stewart, has pleaded guilty to securities fraud charges. Prosecutors accused him of tipping off family members in December that the FDA's decision was coming. Stewart has denied having any knowledge of the FDA decision before making her sale.

Stewart began the conference call by stating that due to the ongoing nature of the investigation, it would be inappropriate for her to discuss her personal matters in the context of the company's performance, adding that her personal affairs have unfortunately overshadowed the strength of the company.

However, the company did acknowledge the impact of the investigation in other ways.

"Clearly our business is feeling some degree of pressure [regarding ImClone]," chief operating officer Sharon Patrick said. "However, the strength of our brand and support of our advertisers" continue to hold up.

The company said the costs associated with the scandal helped push its "corporate overhead" in the third quarter up to $9.8 million from $2.6 million a year ago. For the fourth quarter, the company expects approximately $1 million in corporate expenses associated with the ongoing investigation, which would amount to about 2 cents per share, among other costs.

The company will not broadcast its annual prime time television holiday special due to high network costs and continued concerns about Stewart's personal life, Follo said, referring to ImClone.

Ratings for the company's television shows and specials broadcast on cable have held up in the last quarter but have fallen for its daily morning show on network television, due to a combination of network erosion, concerns about ImClone and a weak lead-in show, the company said.

As for the potential impact the ImClone scandal has had on branding -- an issue of some importance at companies like Martha Stewart Living, where the person and the brand are essentially synonymous -- the firm was non-specific. The company's surveys, focus groups and reader surveys have shown generally that core consumers remain loyal, while non-core consumers are taking a more "wait and see" approach, Patrick said.

One step in the future that may address the branding issue is the introduction of a new digest-size magazine in early 2003 called "Everyday Food" which will not have the name Martha Stewart in the title. The magazine is intended to offer short, simple recipes in contrast to the more elaborate menus in the flagship publication and will be sold in supermarkets and newsstands.

The magazine will launch in January as a four-issue test. Based on the response, it could be picked up as a 10 issue per year regular magazine, the company said.

Shares of Martha Stewart Living (MSO: down $0.62 to $7.84, Research, Estimates) stock fell 7 percent in afternoon trade Thursday.