If you think retail revenue growth of 4.8% is a disappointment, then you'll likely find little to enjoy in the recent results from Motley Fool Hidden Gems pick New York and Co. (NYSE:NWY). Second-quarter sales reached $255 million, a couple mil shy of what the Street wanted to see, but in line with Hidden Gems analyst Bill Mann's expectations.

If you like earnings, however, there's more to get excited about. Last year's bottom line was written in red, to the tune of a $0.20 loss per share. This year, there were earnings of $0.21. The profits jumped because of strong gains in operating margins, reduced interest expenses, and the year-ago quarter's big loss on a derivative instrument.

The thing that's got me most concerned is inventory. I don't like the looks of that 26.1% jump. While bloating inventory isn't always a sign of doom, it can be a cause for concern when it's coupled with considerably slimmer sales growth.

Even if you give the firm a pass on the hunk of inventory that came along with its recent acquisition of JasmineSola, inventories still grew by 21.8%. In the conference call, management described the inventory increase as consistent with its plans for new store growth. However, given that forward sales guidance isn't exactly eye-popping -- topping out at growth targets of 13.1% to 15.8% for the fourth quarter -- I'm giving the firm a C+ here and putting it into my "stuff that needs watching" file.

All in all, I think New York and Co. shareholders should remain in wait-and-see mode. The firm has carved out a strong brand and niche, not an easy thing to do with a wealth of hungry competitors like Ann Taylor (NYSE:ANN), Gap (NYSE:GPS), Limited Brands (NYSE:LTD), and Chico's FAS (NYSE:CHS). This fall, it's also adding desperate housewife Eva Longoria to the advertising campaign.

That kind of desperation I can handle. I just hope that, come Q4, the firm won't find itself desperate to move all that extra merchandise.

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Seth Jayson had to buy this stock. His wife ordered him to -- not that he's sorry or anything. At the time of publication, he had shares of New York and Co. View his stock holdings and Fool profile here. Fool rules are here.