Martha Stewart: down but definitely not out

Martha Stewart Living Omnimedia founder Martha Stewart

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LOS ANGELES (Fortune) -- What's cooking with Martha Stewart? No, It's not the name of a new segment on her TV show, one of her recipe books, or a page in her eponymous magazine (well, actually it might be). But it is a serious question about all the activity at Martha Stewart Living Omnimedia lately. Its stock is down nearly 60% over the past year and MSLO has gone through a raft of changes - most notably the abrupt departure of well-regarded CEO Susan Lyne last month.

Outside the executive suite, the company is moving in interesting new directions that emphasize merchandising over media. This week, it finally got a toe-hold at Wal-Mart (WMT, Fortune 500), via a deal under which Martha-branded scrapbooks and other craft items will be sold there. A few weeks ago, the company completed the $50 million purchase of the licensing business of celebrity chef Emeril Lagasse, underscoring that MSLO is no longer all about Brand "M".

What this amounts to, I'd wager, is that Martha Stewart, both the brand and the person, are settling into what might best be called post-phenomenon life. This is no small thing and may not feel like "a good thing" to Stewart, who has worked tirelessly for many of her 66 years toward being a larger-than-life tastemaker and media baroness.

A quick memory jog: Stewart's creation went public at the height of the dot-com bubble in 1999, and was valued at well over $1 billion. Then came her trial and conviction in 2004 for lying to investigators about an ill-conceived stock trade for her private account. Advertisers fled, deals fell through and her company began losing money. With her incarceration and home detention, a whole new wave of hype surrounded Stewart and her company, as she maintained she had done nothing wrong. Investors bid up the company's stock to absurd levels on the expectation that Martha was going to come back bigger than ever. She/it didn't, and the air went out of MSO (MSO) shares - at $6.40, they are a long way from the $37.45 they hit a few days before Stewart was released from a West Virginia jail in 2005.

But Stewart and Lyne did deliver on their ambitions to remake their company and restore it to profitability - which was finally achieved last year after five years of losses. And in doing so, they also made the company measurable, and therefore mortal. Suddenly there were margins and multiples and economic trends to take into account. There are well-worn concerns about her deal at K-Mart ending in 2010, despite deals to expand into new venues such as Macy's, Costco (COST, Fortune 500) and now Wal-Mart.

The company projects it will make as much as $14.5 million in operating profit in 2008 on revenue of $300 million. Still, you can't help but wonder if Stewart's brand can ever be as ubiquitous or powerful as it once was - especially in the cloudy media business that still accounts for close to three-quarters of MSLO revenue. Her syndicated daytime TV's daily audience has declined by a third over the past two years, according to Nielsen. The company's flagship magazine, Martha Stewart Living, has held up relatively well both in terms of readers and ad pages. But as analyst David Bank of RBC Dominion cheekily wrote when he downgraded MSLO's stock from outperform to market perform recently: "A good guest knows when it's time to thank the host and leave."

Charles Koppelman, the former music executive who is chairman of MSLO, told me that it's important that the evolution of the company be viewed in the context of what it was on the verge of becoming when Stewart ran afoul of the Feds - and how far it has come back. "Clearly it's taken us time and a lot of hard work from Martha and everybody else to right that ship," he said.

Now, Koppelman says the company is looking for more personalities and brands like Emeril's to put through its distribution channels and relationships and "Martha-ize." (Fortune reported in January that Stewart had talked with designers Jonathan Adler and Cynthia Rowley, but there was no deal.)

MSLO is now valued at $370 million. Stewart herself holds 53% of the shares but 91% of the votes, though she's barred from serving as a director or executive due to her brush with the law. Michael Meltz of JP Morgan - who has a neutral rating on the stock - says that one potential boost to its price is the possibility of the company going private. Koppelman said there is no imminent plan to do so, and that he's confident of the company's strategy - which is now directed by himself, Stewart and co-CEOs Robin Marino and Wenda Harris Millard, who were selected from inside the company. "I think everyone's going to have a smile on their face 12 months from now," he contends.

Of course every entrepreneur wants to be ever bigger and more successful, and few are more ambitious than Stewart. And the debate over whether she brought her woes on herself will never fully go away. But post-phenomenon Martha Stewart is one of the few media mavens around who could take a bow (not that she would) even though her stock has tanked. In today's uneasy and over-consolidated media landscape, she built something distinct, independent and apparently enduring.

When she was released in prison, she declared on the cover of Fortune: "I cannot be destroyed." She was right.