These are the days when Motley Fool Hidden Gems pick RedEnvelope (NASDAQ:REDE) shareholders' hearts are filled with hope. Not only is the company's stock price currently undergoing its annual rise back from the summer doldrums, but with Christmas fast approaching, the possibility of annual profitability seems to be getting closer -- for the third year in a row.

This giddy mood was further reinforced when RedEnvelope reported its second-quarter fiscal 2006 results yesterday. The company announced an earnings loss of $0.39 per share on revenues of $13.1 million, beating analysts' average estimates on both counts. Total sales grew 24%, while orders shipped grew 21% -- the latter showing an expanding growth rate for the seasonally slow summer quarter (last year, the company grew orders shipped by 16.8%).

Analyzing the income statement further, gross margins dropped by 140 basis points to 47.1%, making that sales growth a little less impressive. On the other hand, RedEnvelope was able to reduce operating expenses to improve the profit margin from -36.8% last year to -26.6%. Remember that RedEnvelope runs at a loss for the majority of the year and makes up the difference in the upcoming fiscal third quarter. Finally, dilution was a manageable 2.9%.

In a previous article, I highlighted three metrics specific to RedEnvelope that investors should keep track of, and I'm happy to report that all three look quite healthy. Revenues per order shipped, which I've warned investors not to expect to keep rising forever, inched up to $74 from $72. The customer file has grown by 580,000, which is a bit faster than the usual half-million year-over-year growth. And I calculated the yield on the customer file to be 4.5%, which is not significantly changed from last year.

As usual, the upcoming Christmas quarter will make or break RedEnvelope's fiscal 2006 year. So far, it appears that results will meet expectations. The company claims that its holiday season items will be featured in 44 new publications and that some changes to its website, like the addition of product reviews and multiple pictures, have increased conversion rates. Also, the rollout of a customer loyalty program and the switch to UPS as the designated shipper appear to be signs of a company starting to come into its own.

Last time I looked at RedEnvelope, I thought it was a good buy up to a price-to-sales-to-growth ratio of 1, which is $12 per share at the moment. I still feel that way, although the margin of safety is clearly lower as the price approaches $12. But for those willing to take on a sizable amount of risk, it seems that there's a valuable upside to RedEnvelope's stock, particularly over the next six months. Especially considering the wild price gyrations its low float has produced in the past.

The Motley Fool has kicked off its ninth annual Foolanthropy campaign! Nominate your favorite charities on our Foolanthropy discussion board through Nov. 6. For guidelines on what makes a charity Foolish, visit www.foolanthropy.com.

Fool contributor Marko Djuranovic owns shares of RedEnvelope. The Motley Fool has an ironclad disclosure policy.