| HOME | NEWS ALERTS | SMK RECOMMENDATIONS |

Less than a month after the third-largest U.S. discount chain emerged from bankruptcy, news that Stewart, the chief executive of a top supplier, may soon be indicted can only hurt Kmart's reputation, although the impact on sales should be minor, analysts said on Tuesday

Any negative news for Kmart at this point is probably magnified, so I don't think this is going to help Kmart," said Ken Harris, a partner with consultants Cannondale Associates.

Martha Stewart, the domestic style expert who is the target of a probe into insider-trading allegations, could soon be indicted on criminal charges, her company, Martha Stewart Living Omnimedia Inc. (NYSE:MSO - News), said on Tuesday.

Kmart said in a statement that this matter was between the federal government and Martha Stewart, and it would be inappropriate to comment. Sears Canada Ltd. (Toronto:SCC.TO - News), which will carry a line of Martha Stewart products beginning this summer, was not immediately available to comment.

WestPoint Stevens Inc. (NYSE:WXS - News), the textiles company that makes Martha Stewart sheets and towels for Kmart, declined to comment. The company filed for bankruptcy this week.

"When Martha was hot, this was a competitive advantage for Kmart," Harris said.

"When someone builds a brand based on their reputation and personality, it can be devastating" if that reputation is tainted, he said.

LONG-TERM DEAL

Kmart launched the Martha Stewart Everyday line in 1997, and carries exclusive merchandise ranging from pillowcases to patio furniture. The companies signed a new seven-year marketing agreement in June 2001, just seven months before Kmart declared bankruptcy.

At the time, the two lauded the contract extension as a boon to both, giving Kmart an exclusive brand and Martha Stewart a huge outlet for her products.

Kurt Barnard, president of Barnard's Retail Consulting Group, said Stewart's legal problems would not hurt sales.

"This lady has style, fashion, a sense of aesthetics, a sense of what appeals. That is something which no indictment can deny," he said.

"Mrs. Smith walking into a Kmart store and seeing a pink pillowcase that she adores is not going to say, 'I love this pink pillowcase but Martha Stewart has been indicted so I can't buy this,"' he said.

Still, sales at Kmart stores have not lived up to expectations. Kmart closed about 600 of its 2,100 stores as part of its bankruptcy reorganization.

In a recent filing with the U.S. Securities and Exchange Commission (News - Websites), Stewart's company said Kmart royalties based on sales were below an agreed minimum and that the retailer would owe at least $47.5 million for the year ending January 2004.

For now, analysts say even with the legal problems, Kmart needs Martha more than Martha needs Kmart. The retailer has yet to convince Wall Street it has a strategy to compete in a discount sector dominated by Wal-Mart Stores Inc. (NYSE:WMT - News), and it needs exclusive brands to attract customers.