The holidays are usually kind to RedEnvelope (NASDAQ:REDE). The online gift retailer saw quarterly profits soar to $0.56 a share -- well ahead of the $0.43 per share it had earned a year earlier, and the $0.49 a share that Wall Street was expecting.

Sales growth wasn't as kind, inching just 8% higher to hit $57 million. Analysts were looking for a 13% uptick on the top line.

The sales shortfall didn't dampen spirits, though. RedEnvelope shares soared 9% higher in after-hours trading last night on the news. The main attraction are those fat margins. The company's decision to sacrifice sales growth to ensure sales of higher-margin wares paid off. It may have lost a few orders that way, yet the average buy clocked in $10 higher this holiday season, at $93.

Investors shouldn't get too spoiled; the company still expects to post a loss for all of fiscal 2007. That's just the way things have gone for RedEnvelope; it's failed to earn enough in the seasonally charged holiday quarter to offset the steep losses that accumulate the rest of the year.

The former Motley Fool Hidden Gems recommendation has struggled, despite its clever premise. Long before Netflix (NASDAQ:NFLX) was making waves with its red envelopes, RedEnvelope was carving out its e-commerce corner by selling gifts delivered in signature red boxes. It's a good hook. Unfortunately, that red ink has had a nasty habit of bleeding into the income statements.

RedEnvelope has amassed an accumulated deficit of a whopping $88.7 million in its brief online tenure. For those keeping score at home, that's actually more than the company's market cap, and way more than its lower enterprise value.

That said, if RedEnvelope finally claws its way towards becoming an annually profitable company, shareholders will be the gifted ones. Nearly a third of the company's present market cap is backed by the company's cash and marketable securities. The debt-free company is also trading at a sales multiple that is a third of (NASDAQ:AMZN) and a fifth of Blue Nile (NASDAQ:NILE). Granted, both of those winners are consistently profitable and growing much faster.

So keep an eye on sales and profit trends over the next three dry quarters. If shoppers don't feel gypped in buying higher-margin home and jewelry wares, RedEnvelope will follow its fundamentals out of the single-digits cellar.

Amazon and Netflix have been recommended to Motley Fool Stock Advisor newsletter subscribers. Blue Nile is a pick in both Motley Fool Hidden Gems and Rule Breakers.

Longtime Fool contributor Rick Munarriz has been shopping online for ages but he has never been swayed by a RedEnvelope offer. He does own shares in Netflix. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.