RedEnvelope Gets Ripped

RedEnvelope (Nasdaq: REDE  ) delivered the equivalent of a letter bomb to investors Friday, when the upscale gift retailer drastically lowered its third-quarter profit expectations. In early trading, the stock plunged, though it began to regain some ground later in the morning.

The company said it now expects net income of $0.9 million to $1.2 million and revenues of $35 million to $35.7 million, not a pretty comparison to its rosy expectations in October. Then, RedEnvelope expected net income of $4.3 million to $4.7 million, with revenues of $39.5 million to $42.5 million.

RedEnvelope blamed an unexpected rush of demand for some proprietary products that it had purchased "conservatively," and blamed distribution center snags for additional problems with personalized products. The company also said its shipping revenues will also be lower due to lower sales and promotional pricing, surely implemented to compete with online leaders such as Amazon.com (Nasdaq: AMZN  ) , which offer perks like free shipping to entice shoppers.

In its announcement, RedEnvelope's president said that the company had let customers know that some personalized products would be late, as opposed to disappointing them with late deliveries, which of course led to order cancellations.

Clearly, RedEnvelope missed several big opportunities here. Namely, a holiday shopper preoccupied with searching out upscale gifts. Making matters worse, 'twas was a season in which the click of the old mouse enjoyed unrivaled popularity among shoppers.

And of course, given the seasonality of RedEnvelope's business, a disappointing third quarter hardly makes for a happy occasion. Especially when the problem wasn't even a matter of product flops, but more often, not enough product to meet demand. If there's a silver lining to this red-letter day, it's the fact that some products showed such promise -- if only the company had had enough of them in stock.

RedEnvelope has only been a public company for a few short months, and today's confession called every holiday season a "learning experience." Going forward, investors can't be expected to tolerate many more lessons learned the hard way, especially during the crucial holiday season.

Talk about RedEnvelope with other Fools on the Retail discussion board.Alyce Lomax welcomes your feedback at alomax@fool.com.


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