It's deja vu all over again.
Now, the forecast for fiscal 2006 is a loss of less than $5 million and annual revenue growth of only 7% to 10%, as fourth quarter revenues are expected to come in lower than last year (previous-year sales were inflated by an extra week in the period and recognition of delayed revenues from Christmas 2004).
Oh . and on top of that, CEO Alison May resigned along with the merchandising and creative Executive VP Kristine Dang.
Still, RedEnvelope performed OK in the metrics crucial for long-term growth. The number of orders shipped grew by 15% to 638,000 and would have likely clocked higher if it hadn't been for a software fulfillment problem that caused the company to have to delay delivery of a small percentage of orders. The yield on the customer file declined slightly to 12.9%, meaning the company still has decent leverage on its customer catalog.
Instead, the miss took place in the one avenue I've warned investors about, which was padding the company's sales growth in the past few years -- the rise in revenues per order as the company shifted a greater portion of its sales to more expensive items like jewelry. This Christmas, RedEnvelope's jewelry selection wasn't as well received, and revenues per order declined by 3.5% to $83. Pulling down revenues per order were also lower shipping revenues, which resulted from the company deciding to match various free-shipping offers from competitors.
As for the CEO's departure, it's hard to say that it was unexpected in light of what are now three consecutive years of falling short on the profitability goal, an accounting snafu, and a repeat fulfillment problem. What remains to be seen is whether May's gracious exit will make another costly proxy battle by co-founder Scott Galloway unnecessary. But it's also possible that May stepped down to give the board time to find a suitable replacement who won't be a liability if Galloway nominates a number of dissident board members for a shareholder vote at the upcoming annual meeting in August. Regardless, Galloway had been buying up the company's stock hand-over-fist in 2005, and investors should pay attention to whether he continues to do so.
For those who held the company as a short-term play on earnings, I'm sorry it didn't work out. For those with patience and a long-term approach, all of the new events strike me as temporary issues. Still, I should concede that for the past three years, RedEnvelope has been plagued by an awful lot of "temporary" problems. Providing that you share my belief in the company's future capability of being profitable, at less than $10 per share, RedEnvelope still deserves a place in your portfolio.