There's certainly nothing elegant about the management at snazzy gift dealer RedEnvelope (NASDAQ:REDE). We've seen before that its ham-fisted execution has led to major earnings disappointments, along with helping to brew acrimonious proxy fights.
So, at least stockholders won't be surprised by the latest bit of drama. Today, the firm announced that the chief financial officer was getting the heave-ho. Eric Wong will be replaced by Polly Boe, who has a long resume in retail financial departments. Let's hope she's got a magic wand, too.
Because we also found out that the firm expects to lose big money in the fourth quarter, erasing earlier, moderately sanguine predictions for flat results, or a small profit.
Want to know a good way to generate surprise losses? Try shrinking your gross margins. How does, oh, 10 full percentage points worse than expected sound?
How on earth did big Red get its predictions so wrong? Well, it attributes a point to aged inventory that needs to be written off, along with three points each to low demand on Valentine's Day, higher return rates, and a major budgeting screw-up. Former CFO Wong didn't get the official blame for this "error," but he's clearly either the cause or the sacrificial lamb.
I can't say I'm sorry to see him go, after learning this morning that he was director of finance at Network Associates, now McAfee (NYSE:MFE). That's hardly a gold-standard pedigree, given that firm's ugly financial history -- voluminous, confusing restatements and investigations by the Department of Justice and the Securities and Exchange Commission.
Some of us shareholders -- like this writer -- have stuck with the firm because we thought the concept had legs and the company wasn't bleeding too much cash. Some have been rewarded, some pummeled (moi), and some are just treading water. Round trips on the roller-coaster are normal for small caps, especially in a spooky market environment. But I'm not sure how much longer I'll be willing to ride with this crowd. Cash flow negative. Consistent record of failures and mangament shuffles. Need I mention competition from heavyweight InterActiveCorp's (NASDAQ:IACI) gifts.com?
A peek at the tape over the past couple of weeks shows some major down days on unusually high volume. I wondered silently then. No longer. Why do I get the feeling that some of us got the bad news a bit later than others? Maybe I'm just paranoid. But as the saying goes, that doesn't mean someone's not after us.
From this investor's perspective, RedEnvelope has only one strike left. Screw-ups are bad, continuing screw-ups are worse, but major flubs and executive exits anticipated by heavy selling? That suggests to me that things are spinning out of control back at HQ. With a dead gift season on the way, I'm betting that today's 25% haircut is just the beginning of a long, cold summer.
For related Foolishness, see:
- RedEnvelope: Fail, redeem, repeat.
- Most of us would take mediocre.
Seth Jayson has been a happy RedEnvelope customer, but at the time of publication, he had shares of RedEnvelope and sure wished he didn't. RedEnvelope is a Motley Fool Hidden Gems pick. View Seth's stock holdings and Fool profile here . Fool rules are here .
