The slide in Martha Stewart Living Omnimedia Inc shares and the decline in the company's earnings underscore the risk in companies tied to personalities.
Friday's 15 percent drop in Martha Stewart Living stock brought its loss for the year to 56 percent.
The previous day, Tommy Hilfiger Corp shares tumbled 20 percent after the company said profit will fall because of slowing sales and the cost of closing stores. Polo Ralph Lauren Corp's shares have dropped 29 percent this year as sales slid.
"It's a double-edged sword," said David Yucius, president of Aurora Investment Counsel, who manages about US$110 million in Atlanta. He said he successfully bet on the decline in Martha Stewart Living's stock. "It's hard to predict when reliance on a key individual is going to turn against you."
Stocks that soar when companies cash in on the designer's success are equally prone to crash as customers lose interest in the brand. In the case of Martha Stewart and shoe designer Steve Madden, the companies took a hit when their founders got media attention for alleged improprieties.
Martha Stewart rose US$0.49 to US$7.69 at 4:18pm in New York Stock Exchange trading. Steve Madden Ltd fell US$0.09 to US$17.
Personalities, though, can provide a boost. Shoe designer Kenneth Cole Productions Inc's shares almost doubled in the past year. Analysts credit Target Corp's success in clothing in part to its Mossimo line, while shares of designer Mossimo Giannulli's own company, Mossimo Inc, more than tripled.
"Some of these higher profile names are extremely meaningful to the price success of their companies," said Cummins Catherwood, who oversees US$750 million at Walnut Asset Management. "We don't tend to own them because our investors like to buy and hold. Retail is such an erratic business, you've got to be prepared to sell them as soon as you buy."
Martha Stewart Living, the media and housewares company built on its founder's homemaking tips, yesterday said profit this quarter will miss estimates after earnings in the third quarter declined 42 percent.
Company executives said on a conference call that a federal investigation into its founder and chief executive is overshadowing the business, creating higher public relations and insurance costs. Lower Internet and television revenue also will cut into profit.
Stewart has been under investigation into whether she sold ImClone Systems Inc shares on the basis of inside information and then lied about the extent of her knowledge. SEC enforcement staff notified Stewart last month that they plan to recommend charges against her, said people familiar with the situation.
Nine lawsuits have been filed in New York federal court since August charging that Stewart damaged her company's stock by not revealing her ImClone stock trade to the public.
Martha Stewart housewares sell at Kmart Corp, the largest US retailer to file for bankruptcy. Kmart's woes aren't helping, said Aurora's Yucius, who bought Martha Stewart Living shares short -- borrowing them on a bet he could buy them back later at a lower price -- because he realized "at some point, that was going to filter through to Martha Stewart."
Shares of Steve Madden Ltd plunged 40 percent on June 22, 2000, after Madden was arrested on charges of securities fraud.
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