Bankrupt retailer Kmart may need backup plan if Stewart's troubles get messier

DETROIT (AP) _ Kmart Corp. once counted on Martha Stewart and her top-selling sheets and kitchenware to get the discounter out of bankruptcy. <br><br>Now, with the ImClone insider trading scandal tarnishing

Friday, June 28th 2002, 12:00 am

By: News On 6

DETROIT (AP) _ Kmart Corp. once counted on Martha Stewart and her top-selling sheets and kitchenware to get the discounter out of bankruptcy.

Now, with the ImClone insider trading scandal tarnishing the decorating maven's image, the name may become a liability.

Some analysts believe the struggling discounter may have to find a contingency plan in case Stewart's legal problems get more complicated.

Bankrupt Kmart can ill afford another blow, especially to the products that make it stand out from rivals Wal-Mart Stores Inc. and Target Corp.

``If Martha falls, Kmart is the single biggest loser, after the investors in her company,'' said Seth Siegel, co-founder of the Beanstalk Group, a licensing and consulting firm.

There's no sign that the unsavory publicity is turning off her fans. The Martha Stewart Everyday brand, which includes sheets, towels, paints and kitchenware, is Kmart's largest volume-producing label, generating about $1.5 billion in sales last year.

But analysts said the longer Stewart's current troubles drag on _ and if they worsen _ the more likely Kmart will feel the pinch.

Stewart has said that her sale in December of almost 4,000 shares of ImClone Systems Inc. was based on public information. The trade occurred the day before the Food and Drug Administration announced it would not review the biotech company's application for a cancer drug.

Shares of Martha Stewart Living Omnimedia Inc. have taken a beating ever since news broke earlier this month that Stewart's trade was under scrutiny. The shares were up more than 5 percent, or 60 cents, on Thursday, closing at $11 on the New York Stock Exchange.

But the stock fell nearly 24 percent Wednesday following reports that Stewart may be facing a wider probe, including possible charges of obstruction of justice and making false statements.

Kmart has not commented on Stewart's situation, saying it would be inappropriate to discuss her personal affairs.

When Kmart filed for bankruptcy Jan. 22, analysts said Stewart's products should get greater emphasis in store space and advertising.

On Thursday the company said it hasn't dedicated more store space to Stewart's products, and wouldn't discuss future ad campaigns.

``She's extremely important to our business,'' said Kmart spokeswoman Nicole Dowswell.

Kmart's stock was up 5 cents on Thursday, closing at 93 cents on the New York Stock Exchange. It reported losses of more than $1 billion the last two quarters.

Ulysses A. Yannas, with Buckman, Buckman & Reid, said Kmart is probably looking at ``some kind of plan B,'' but said it's too soon to tell how Stewart will affect the retailer's already suffering sales.