Yesterday afternoon, online gift retailer and Motley Fool Hidden Gems recommendation RedEnvelope
Around this time last year, the story looked somewhat similar. After disappointing investors with a fulfillment problem in the Christmas 2003 season, RedEnvelope pulled off Mother's Day and Valentine's Day without a hitch. At that time, net revenues for fiscal 2005 were expected to come in between $93 and $96 million, with an anticipated net loss of $2.5 million to $3.5 million.
The actual result was mixed. On one hand, $101.4 million in net revenues is encouraging. What RedEnvelope did with those additional sales, however, is less than encouraging, as net loss for the year rang in at $5.1 million. The culprit here is a 45% hike in marketing spending, with 18% of the marketing budget spent on marketing research and shoring up the brand image via print and outdoor advertising.
But while it's easy to balk at such spending -- especially when net loss actually increased from fiscal 2004 -- such general marketing is crucial to the company's ultimate goal of becoming a premier gift-giving-occasion destination, even if it doesn't pay immediate dividends by way of higher sales. A business of RedEnvelope's sort hinges upon scalability (because it has relatively low costs of operation, additional revenue results in higher margins) yet still depends on a consistent stream of new and returning customers to generate the desired profit margins and maybe back off marketing expenditure, which would also move the company toward profitability, if the company can reliably expect to generate return customers.
Also remember that RedEnvelope isn't quite like competitors Amazon.com
Looking ahead, management stayed away from providing specific guidance for fiscal 2006 and instead forecast revenue growth of at least 20% and positive net earnings -- the now-familiar promise. The company also forecast net results for Q1 2006 below Q1 2005 levels.
RedEnvelope's current position is much like last year's: still unprofitable and facing some questions about its value to long-term investors. As such, I wouldn't recommend much more than a speculative position in your portfolio. However, even with these uncertainties, the company is not exactly unproven: $100 million in annual revenues shows that the demand for its product is there. And it's hard to argue with the price, in my opinion -- RedEnvelope sells at a little over half its previous-year sales (enterprise value over revenue).
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