For three months, Motley Fool Hidden Gems members have been awaiting the next round of earnings news from retailer New York & Co. (NYSE:NWY). Well, the wait is almost over. If they can stand being kept on ice just a few hours more, the news should arrive tomorrow morning.

What analysts say:

  • Buy, sell, or waffle? Seven analysts follow NY&Co, which gets two buy ratings and five holds.

  • Revenues. On average, they're looking for 8% sales growth to $274.5 million.

  • Earnings. Profits are predicted to more than double to $0.15 per share.

What management says:
One nice thing about investing in retailers is that they're so analyst-friendly about reporting their numbers. Knowing that investors hang on their every month's sales results, they dutifully report these numbers every month (natch). In this, NY&Co is no different. A little more than two weeks ago, it gave us a very good picture of what we'll be hearing about in more detail tomorrow. To wit: Sales this quarter increased 6.5% in comparison to last year, coming in at $270.9 million -- a bit shy of Wall Street expectations. About half a percentage point of that increase was due to positive same-store sales. The rest came from expanding the store count.

On the one hand, that's a good thing, because it means this quarter showed real improvement over the year-to-date trend of total sales increasing just 3.1%, and comps falling 4.4%. On the other hand, investors will want to take note that NY&Co's performance weakened as the quarter progressed, with October total sales rising just 3.9%, and comps falling 2.5%. On the third hand, CEO Richard Crystal observed that although sales weren't quite up to snuff this quarter, inventories are under "tight control," discounting is down, and as a result the firm raised its earnings guidance to $0.14 to $0.15 per share. (Oh, and on the fourth hand, let's not forget that unless NY&Co maxes out those earnings, Wall Street, which has already updated its earnings estimates, will call it a "miss.")

What management does:
Investors should cheer to hear about the firm's reduced level of "promotional activity," as it bodes well for NY&Co's ability to start turning its margin trends around. None too soon, either -- rolling gross margins have been falling for at least the last 18 months, operating margins for a full year, and the rolling net for nearly as long.

Margins %

4/05

7/05

10/05

1/06

4/06

7/06

Gross

34.4

34.2

32.8

32.4

30.8

30.0

Op.

9.5

10.2

9.2

9.2

6.9

5.9

Net

2.5

4.4

5.2

5.2

3.8

3.3

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

One Fool says:
The last time we heard from Hidden Gems co-lead analyst Bill Mann on the subject of NY&Co, it was under something less than the best of circumstances. Back in August, the firm caught the rough side of Bill's tongue for its less-than-forthcoming announcement that the founder of one of the company's subsidiaries, JasmineSola, had been terminated over allegations of a series of incidents of sexual harassment at the company. (His wife was also involved.) NY&Co had broken the bad news to shareholders by attaching it to an unrelated press release -- something closer to technical disclosure than full disclosure (and for fans of the legislative process, closer still to being the private-sector version of an "earmark").

While not material to how the business is performing (unless the associated legal bills get really big), we still want to yellow-flag this incident for our subscribers as evidence that NY&Co may not feel entirely comfortable with keeping its outside owners in the loop on goings-on at the office. New York, you're on notice.

Competitors:

  • AnnTaylor (NYSE:ANN)
  • Limited (NYSE:LTD)
  • J C Penney (NYSE:JCP)

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New York & Co. is a Motley Fool Hidden Gems pick. For more small caps poised for big returns, check out a free 30-day trial of the newsletter.

Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.