Investors in online gift retailer RedEnvelope (NASDAQ:REDE) have been eagerly awaiting some good news since its fulfillment debacle this past Christmas. They may not have to wait much longer.

Last night, RedEnvelope reported revenues of $10.6 million and a net loss of $0.44 per share, beating the analyst estimate of a $0.46 loss. Top-line revenue growth for the second quarter of fiscal 2005 came in at a healthy 27%, and the margins held steady at 48.5% while the customer file reached the 2 million mark.

When Tom Gardner recommended RedEnvelope in Motley Fool Hidden Gems, this recent IPO was debt-free, sitting on a nice stash of cash, bounding into profitability, and looking like it had a fair shot at establishing itself as a niche online gifts outfit. Though RedEnvelope is down -- to the tune of 20% since the original recommendation -- it's not out quite yet. The balance sheet remains solid, and a strong showing during the upcoming holiday season could put the company on the path to profitability sooner than forecast.

Whether that's likely to happen is a different question.

On one hand, execution problems are often a sign of a deficient management and can cascade into other problems; case in point, a nasty proxy fight this past summer that revealed a vocal minority of doubters and cost shareholders $.02 per share in proxy solicitation.

On the other hand, the company's problem last Christmas was execution -- not a lack of orders -- and as far as problems go, that one is solvable. Management has built up inventory in anticipation of the holiday rush, focused on training its customer service teams and implemented new systems to improve shipping and handling.

The key metric will be whether RedEnvelope can capture the upscale, personalized gifts niche it seeks by distinguishing itself from Sharper Image (NASDAQ:SHRP) and the Internet behemoth (NASDAQ:AMZN), especially with the latter's recent expansion into jewelry -- RedEnvelope's largest product category. CEO Alison May's mention during the conference call that the company is moving away from low-margin products such as men's gadgets and instead focusing on men's accessories is a step in the right direction.

Still, to that end there's only one litmus test -- the holiday season. The company's performance in the upcoming quarter will be the true determinant of whether investors are in for another year of stormy seas of red.

Fool contributor Marko Djuranovic does not own shares in any companies mentioned in this article.