Former Motley Fool Hidden Gems pick RedEnvelope (NASDAQ:REDE) has its future on the line when it reports its fiscal Q3 2006 earnings after the close of trading tomorrow. The company struggled and burned cash throughout its entire time in our portfolio, and was finally "let go" last month. Will that decision turn out to have been shortsighted? Tomorrow will tell.

Wall Street Wisdom:

  • General consensus. Only five analysts follow RedEnvelope, and they uniformly recommend holding the stock.
  • Revenues. RedEnvelope is a growth story, plain and simple. Analysts are looking to see 22% sales growth tomorrow.
  • Earnings. Profits are expected to nearly double to $0.52 per share -- still not enough to offset its losses in every other quarter of the year.

Margin watch:
Hope springs eternal. In RedEnvelope's case, it springs from a small increase in gross margins and a tiny decrease in the negativity of net margins -- over the last two quarters.

Margins %

6/04

9/04

12/04

4/05

7/05

10/05

Gross

51.1

51.1

53.2

52.0

52.0

51.7

Op.

(5.0)

(6.3)

(3.9)

(5.2)

(5.8)

(5.3)

Net

(5.9)

(7.0)

(4.5)

(5.1)

(5.7)

(5.2)
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Valuation metrics:
The company is unprofitable on a cash (free cash flow) or an accounting (GAAP net profits) basis. If it has any value at all, it's still in the eye of the beholder at this point. RedEnvelope trades at 0.9 times sales; competitor Sharper Image (NASDAQ:SHRP), which has worse gross margins and is also unprofitable, trades at a small fraction of that price. In short, you be the judge.

Competitors:
Pretty much anyone who's online (isn't everybody?) competes with RedEnvelope to some extent. Competition could come from Stock Advisor recommendations Amazon.com (NASDAQ:AMZN) and eBay (NASDAQ:EBAY), as well as companies like Sportsman's Guide (NASDAQ:SGDE), Federated (NYSE:FD), and dozens more.

Fool contributor Rich Smith does not own shares of any company named above.