ATTENTION K MARTHA SHOPPERS

By Stacy Perman

She urged Americans to create a Russian buffet for 24 guests featuring coulibiac of bass; to make egg topiaries; to etch their own glass; and to garnish their Easter hams with grass so fresh from the yard that the morning dew had yet to disappear. She upstaged First Lady Hillary Clinton in wreath making, and the First Lady of Cooking, Julia Child, in pastry making. And she has admitted, without reservation, her determination to take over Christmas. So revitalizing K Mart, the $32 billion discount-store dud, should be a piece of cake for Martha Stewart.

K Mart is retailing's biggest fixer-upper, and Stewart, author of laborious decorating tips and arbiter of God-is-in-the-details perfectionism, is in the midst of injecting it with a large dose of the upper-crust life-style that is Martha Stewart living. In a joint venture with K Mart, Stewart has launched a signature paint (with Sherwin-Williams) and home collection: Martha Stewart Everyday, the first salvo in an all-out assault on K Mart's style sensibility. If Stewart has her way (and she usually does), America will soon be changing its sheets the Martha way.

Like a perfectly timed souffle, the K Mart-Martha alliance comes at a time when the fortunes of both entities are rising. K Mart has managed to pull itself back from almost complete disaster, although it is a long way from being top shelf. Meanwhile, Stewart has gained control of all things Martha and rolled them into Martha Stewart Living Omnimedia, a slew of new businesses that will greatly expand her nearly $150 million life-style empire.

K Martha is the latest example of how consumers have forced retailers to deliver more value in terms of quality and class to the mass end of the market. A low price isn't everything, as a dozen now defunct or bankrupt discounters (Jamesway and Caldor, to name a couple) can tell you. The value trend also shows up in the success of retailers such as Gap's Old Navy Clothing and every outlet store you can think of. No one is going to mistake K Mart for Neiman Marcus, but K Mart can no longer draw shoppers with cheap, and cheaply made, goods.

The K Mart deal is really the second harvest of a previously unfruitful Martha-K Mart association. Since 1987, Stewart has been a mostly decorative "life-style consultant" for the retailer. But the arrangement, like K Mart's bottom line, foundered badly as competitors like Wal-Mart and Target flourished. When Stewart joined K Mart, she was the author of several successful books on entertaining and wedding planning, and the company, based in Troy, Mich., was the nation's biggest retailer, with sales of $23.99 billion and a stock price of $14.88. Back then, Wal-Mart was a distant second, with sales of $11.9 billion, and its stock at $6.50.

In the nearly 10 years since, the attention of K Mart shoppers and investors has seesawed. By 1996 Wal-Mart's sales had increased nearly seven times, to $104.8 billion, eclipsing K Mart, whose sales barely pushed $32 billion after the retailer got rid of such divisions as Walden Books and Builders Square, acquired during an ill-fated diversification foray. Wal-Mart stock closed last week at $36.25, compared with K Mart's $14.375. And, of course, Martha Stewart, 56, became that Martha Stewart. "When I first started with K Mart, I was very enthusiastic to build a fine business with them," she says. "Little did I know that management was extremely weak and their inventory control and computer programs a complete disaster."

Neither did K Mart, apparently. Former chief executive Joseph Antonini took a huge gamble in upgrading lines of apparel just as that industry was tanking. In the meantime, the company didn't invest enough in its stores and systems to remain sufficiently competitive. Disaster loomed. From 1993 to 1996, K Mart suffered 13 consecutive quarters of losses.

Trying to make things right today are Floyd Hall, 59, and Warren Flick, 54. A former CEO of Target, Hall replaced Antonini in June 1995, then installed Flick, previously a Sears executive, as president and began the Herculean task of quashing the death knell that Wall Street had been sounding. That wasn't easy. Last year a debt provision that would have allowed 70 bondholders to demand $550 million in payouts, likely to force a bankruptcy filing, was staved off at the 11th hour. The company negotiated a new line of bank credit and maneuvered a $1 billion preferred-stock offering. "Looking back, when Wall Street was sounding the alarm, they had justification," says Hall. "They needed to see that we could get our act together, and by and large we did."

K Mart, like Sears before it, had great locations and a vast customer base hugely disappointed by the company's crummy merchandise and lousy housekeeping. K Mart's corporate culture was locked in the past. Hall replaced 20 of the 33 top managers and got to work overhauling everything from warehouses to marketing. The company started to get a grip on its inventory and control systems--there is still a lot more to do--helping narrow overall operating costs to 20% of sales, from 23% three years ago. That's a saving of nearly $1 billion that will cover the $750 million that Hall plans to spend over the next three years to convert all the company's 2,100 stores to Big K Marts. The Big Ks, as the name implies, have more selling space for everything from food to fishing rods. "The management team is now showing us that they have influence on the destiny of their business," says Richard Church, an analyst at Smith Barney. But not everything is working. Although same-store sales were up 5.7% through August, K Mart's apparel business is still a mess and continues to be a drag on profit margins.

To truly improve profits and close the gap with Wal-Mart, K Mart needs to grow sales, and that's where K Martha fits in. She's both a brand and a department--domestics--that represent a huge swath of sales and personify K Mart's attempt to differentiate its merchandise by eliminating secondary labels and focusing on well-known and exclusive brand names.

Hamstrung by her earlier, small licensing agreement, Stewart had just about given up on K Mart. "It was an unimaginative retailer and much too difficult for me to cope with," she says. "Little by little I got out of my contract. I was not too happy. There was no quality control, which I needed for my grandiose plans for my department." Then Hall, only two weeks on the job, wooed her back. The company's research had shown that K Mart shoppers trusted Martha Stewart even more than their own doctors. Hall took this as a prescription for profit and gave America's home diva her own store-within-a-store, called Martha's World. It is expected to generate $500 million in sales in its inaugural year, 25% above initial projections.

Millions of fans know that world. They are on intimate terms with the onetime stockbroker. They know that Stewart, the daughter of Polish-American teachers (nee Kostyra), grew up in Nutley, N.J., learned to cook from her mother and garden from her father. She paid her way through Barnard College by modeling, married, had daughter Alexis, wore velvet hot pants on Wall Street in the late '60s, started a catering business, left Wall Street and, after 29 years of marriage, her husband left her. She has six palatial homes, four Chow dogs, six Himalayan cats and nearly 150 Araucana chickens. When she's not being chauffeured in a GMC Suburban, she drives a Jaguar XJ6.

And can Martha ever drive sales too. When she featured hydrangeas in her magazine, Martha Stewart Living, and on a guest spot on the Today show, fledgling gardeners ran riot at nurseries and florists to get the flower-clustered shrubs. On her weekly syndicated TV show, she did a guacamole-making segment with New York City restaurateur Josefina Howard. Lines soon formed around the block at Howard's Rosa Mexicana eatery.

The idea behind the Everyday collection is to offer K Mart's shoppers (median income: $35,000) the kind of items that Martha might buy, at an affordable price. "Most people don't have the imagination to mix and match bed sheets," says Stewart, who clearly does. "We're going to bring them along." The collection consists of coordinated bed and bath at three price levels, signified by blue, white and silver labels. For instance, you can buy a blue-label bath towel in sage for $4.99, a white-label bath towel in claret for $6.99 or a silver-label bath towel in jasper for $7.99.

The blue label is what discounters call an opening price point, and it is a critical competitive line in the sand. K Mart is trying to protect its price image while enticing shoppers to move up the ladder. And Martha fans who don't shop K Mart might be lured inside by the department-store quality of the silver-label, 230-thread-count sheets and plush 100% Egyptian cotton towels--for which Stewart launched the nationwide rollout last week at a Manhattan K Mart.

Stewart and her chief strategist, Sharon Patrick, a former partner at McKinsey & Co., negotiated a deal that netted $16 million up front and a cut of every paint can and pillowcase sold. K Mart is supporting the project with a $10 million ad campaign. Martha Stewart Everyday is expected to become a $1 billion brand by the end of next year.

The deal was announced in February in a decidedly un-K Mart fashion. Journalists were flown by private jet to Stewart's $1.5 million home on Lily Pond Lane in East Hampton, N.Y., the luxury summer beach colony for Manhattanites. (She also owns a $3 million East Hampton home built by architect Gordon Bunshaft on Georgica Pond--the In spot in that In town.) After leading a tour of 12 bedrooms and five bathrooms in the main house and guest cottage (all displaying the Everyday line and indeed complementing her Stickley furniture and McCoy pottery), Stewart served a lunch of salmon, two salads, saffron risotto and five different layer cakes that later graced the May edition of Martha Stewart Living. She also displayed her temper, as famous as her zinnias, yelling at the help for setting out the wrong-size spoons.

That will not happen at K Mart. Stewart controls everything from the Egyptians weaving the Egyptian cotton to the packaging, all featuring the Martha Stewart visage, Executing things Stewart's way is working. Sales at prototype stores are so strong that the company pushed up a nationwide rollout two years ahead of schedule. Shoppers have flipped for Martha's colors, just as she said they would, eschewing the once popular navy and forest greens for her sages and yellows. "I've taught America the way to make their beds, and they love it," she says.

For K Mart shoppers, finding the Martha line is a nice surprise, not unlike finding Martha herself--and there she was recently, rolling a cart down the aisle at the Linden, N.J., store. With one hand on her cart, the other on her cellular phone, multitask Martha snapped up $330 worth of her own line and four 94-oz. boxes of Tide detergent ("I do a lot of laundry"), helped a customer pick out a bridal-shower gift, signed an autograph and expressed dismay when her favorite-color sheets (light aqua) were obscured by a steel column. When a startled shopper spied Stewart and remarked, "I wonder what she's doing here," his companion replied, "She owns it."

Well, not exactly, but by next fall 70% of K Mart's $2 billion home department will be hers. The brand, including tabletop and window treatments, will probably be extended to lawn and garden products and every other corner of your home that Stewart can paint, mulch, bake and show you how-to much better.

Stewart's no slouch in the boardroom either. Just two weeks before announcing her alliance with K Mart, she bought control of her company, Martha Stewart Living Enterprises, from Time Inc. (publisher of TIME). After more than a year of arduous negotiations, Stewart cut loose from her corporate masters, who had financed Martha Stewart Living magazine. Under the hush-hush deal, she will potentially pay them more than $75 million. The move reduces Time Inc.'s equity stake in her company from 100% to less than 20%.

The magazine, launched in 1991, earned a $10 million profit last year, after losing $2 million to $3 million annually in prior years. Sumptuously designed and lushly photographed, Martha Stewart Living defies conventional magazine wisdom by chronicling Stewart's aesthetic sense, from gardening to housekeeping. Circulation has jumped from 250,000 to 2.3 million. The October issue has more than 160 ad pages--10 hawking her other various enterprises--and the magazine may break 1,000 ad pages this year.

Martha Stewart Living feeds all other Martha Stewart Living Omnimedia businesses. Sprawled over three floors of a landmarked Manhattan building, the offices, all natural bright light and blond wood, look like an MSL feature spread come to life. "What's unique about Martha Stewart Living is that it is a living brand," says Patrick, 54, the company's president. "The ideas and information we cover, we present and create. Our up-front costs are higher than other magazines', but now that will be spread over Omnimedia. We present information, and it is all repurposed material." Translation: everything in the magazine will be recycled through all Stewart's media and merchandise outlets.

And Stewart is, as the saying goes, wired. Last month she premiered a six-day-a-week television show on CBS, Martha Stewart Living, replacing a syndicated program of the same name. Earlier this year she jumped from her twice-weekly guest spot on nbc's Today show to a weekly slot on rival CBS This Morning. Now, instead of earning appearance fees, she controls all advertising for her segment. The new daily show, which she owns outright, will follow cbs This Morning in most markets. "Sometimes you have to do things for an economic and brand sensibility," she says. "I have more fun with Katie [Couric] and Matt [Lauer]. But on CBS I got an amazing lead-in to my show. It only made sense." A new daily national radio show, askMartha, that reaches 63% of the listening population, was introduced the same day as her TV show, which complements Stewart's nationally syndicated newspaper column, called, of course, askMartha. Her 12th book, Martha Stewart's Healthy Quick Cook, will hit shelves next month. With an advance order of 375,000 copies, it is publisher Clarkson Potter's largest printing ever.

Stewart's new Website (www.martha stewart.com hit cyberspace on Sept. 8 and is already averaging 550,000 visitors a week. (By comparison, National Geographic's site gets 500,000 visitors a month.) The site will send daily reminders on a variety of topics and will allow surfers an interactive venue with Martha, a potentially huge market. "Say our audience is 20 million people," she says. "Over the next four years, if each one has a computer and spends $1,000 on our online system, even over five years, even on software products, it is the hugest business. Do the math."

O.K., Martha, that would be $20 billion. Even if she's only 10% right, it's not a bad business, and as we already know, Martha is 100% right. Stewart says such business "visions" come to her rapid-fire. "I have one now that I can't tell you, but it will change people's lives."

She's already changed American style. The Pottery Barn's catalogs are virtual mash notes to Martha's aesthetic. This has not gone unnoticed. "Pottery Barn--total copy!" she exclaims. "They all copy. You can accept it as flattery or have your own catalog." Guess what? A catalog of Martha-inspired items, Martha by Mail, will land in mailboxes next month. She also hopes to put out a line of staples like sugar and flour. "I want people to cook," she says, pounding the air. "I'll make the piecrust, but I want people to fill their own pies."

The complex, horizontally integrated empire of Martha Stewart Living Omnimedia is based on an almost insipid ethos: make life nicer and prettier. But implementation is not that simple. She says, "It took 100 years for someone to tell ordinary people in a doable manner not how to make an Escoffier or 100 amazing recipes that you will never do on a daily basis." Instead Stewart focuses on simple perfection. "I knew that the how-to would be my niche," she says. Adds her friend, dealmaker Ronald Perelman, the Revlon mogul: "I put her right up there as one of the most dynamic entrepreneurs around. She's created a company and product around a life-style not dissimilar to Ralph Lauren's in fashion."

Make that Thomas Jefferson. Two Pennsylvania State University lecturers, at work on a book about Stewart, liken her influence to that of Jefferson, the Founding Father of the home-and-garden set, also a dabbler in politics. Stewart, while pleased, begs to differ. "I'm reaching more people than he," she explains. "He had a job to do, and so do I."

Not since June Cleaver has domesticity been so glorified or vilified. Her avid fans tape her shows and catalog the contents on index cards. On an unofficial Martha Website, they exchange information and offer to buy back issues at twice the newsstand price. And they declare their allegiance in open messages: "When she smiles, all is peace in the world," writes one. "Whoever says she's a conniving, evil, nasty, selfish materialistic witch is really, like me, envious, frustrated, totally enamored."

Stewart has collected a set of sobriquets just as she has Depression glass and vintage linens: nabob of nesting, for example, and doyenne of domesticity. And she has earned a reputation for being too perfect, a control freak and an overachiever, who while still in grammar school organized all the neighborhood kids' birthday parties. With her image and life so open, she has become ripe for parody and criticism. She is the subject of a recent scathing, unauthorized biography, Just Desserts. Stewart says she finds the criticism boring: "It's sexist, jealous and stupid, and it all comes from one little area--journalism." Ouch.

A 1994 trip climbing Mount Kilimanjaro gave some idea of why many say she sets an impossible standard for regular women. Finding the food at Horombo Hut at 12,500 ft. "inedible," she commandeered the porters and put together vegetable soup, chicken risotto and tomato salad using her Swiss Army knife. "She drives me insane," says Katherine Stuart, 33, of Los Angeles. "Part of me loves her. I mean, my God, she picks her own eggs, makes her own paint and makes everything so pretty. I had a subscription for two months, but she made me feel so deficient, so I canceled. Reading it made me feel bad about myself." Even high-powered friends pale in comparison. While buddy Charlotte Beers, chairman emeritus of Ogilvy & Mather, calls Stewart a "really elegant teacher," she also says, "It's true she can make a pie in four minutes, and I'm a great piemaker myself. It's maddening."

Maybe so, but Martha and her growing World are indisputably a recipe for success. Her company will probably head for an initial public offering on Wall Street. With her newly launched products and media outlets, Stewart's influence reaches more than 30 million people a week, in addition to the 70 million American households that already shop K Mart yearly. At the discount chain, her matelasse covers, an item usually found at the toniest boutiques, are starting to sell like garden hoses, which is just what K Mart needs to bring in the sales. "We have a million ideas that they can benefit from," Stewart says. But even she can't do everything. "That's their challenge, to make the rest of their store as good as its parts," she says. And as she has proved with her various enterprises, if all those parts were Martha, then it would all add up just perfectly, wouldn't it?