Black Friday looms large. Retailers are rushing to get their financial reporting done so they can focus on the crucial holiday shopping season.

Retailers in general are wrecked by the housing market. But those that target a customer base over age 25, like Ann Taylor (NYSE:ANN), Chico's (NYSE:CHS), and the Gap (NYSE:GPS), have bigger problems -- they can't seem to get their merchandise mix right.

Tomorrow's release of Motley Fool Hidden Gems recommendation New York & Co. (NYSE:NWY) will show us if this company really can grow by contracting.

What analysts say:

  • Buy, sell, or waffle? A dozen analysts follow NYC, giving it three buy ratings and nine holds.
  • Revenues. On average, they're looking for 5.4% sales growth to $285.5 million.
  • Earnings. Profits, however, are predicted to plummet 69% to $0.05 per share.

What management says:
Management gave us a rare double-dose of good news earlier this month, announcing that sales grew not the predicted 5%, but 6%, to $287 million. Unfortunately, all that growth came from new store openings. Same-store sales actually declined at both the company's New York & Company brand stores, and at the JasmineSola brand.

The second bit of good news was that the company confirmed its earlier announcement that it will be "exiting" this latter brand -- which, if you read carefully, means converting existing JasmineSola stores into New York & Co. stores instead.

The costs of "exiting" the business will subtract between $28 million and $30 million "over the third and fourth quarters of fiscal 2007." Last quarter, management predicted earnings to be at the high end of its previously issued guidance range of $0.03 to $0.07 for the core brand, minus operating loss and exit costs related to JasmineSola.

What management does:
Margins have been dropping at each of the gross, operating, and net levels for two straight quarters now. What will happen Wednesday? Hard to say about the gross and operating numbers -- but that net is going to fall off the hanger when the JasmineSola charges bite.

Margins

4/06

7/06

10/06

2/07

5/07

8/07

Gross

30.8%

30.0%

30.9%

31.4%

30.9%

30.6%

Operating

6.9%

5.9%

6.5%

6.8%

5.9%

5.5%

Net

3.8%

3.3%

3.7%

3.9%

3.4%

3.1%

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:
One other tidbit from the sales release bears mention here. CEO Richard Crystal asserted that: "We executed our strategy well, maximizing profitability driven by our efforts to control inventory. ... As we begin the fourth quarter, our inventory is down by 6% on an average store basis versus a year ago, and is well under control. We believe this, as well as diligent expense management, positions us well to continue to maximize profitability and achieve our guidance for the year."

I'm not sure how to parse that statement -- or whether it needs parsing. Taken at face value, it sounds like things are turning around at New York & Co. Yet something's nagging me:

At the end of Q2 2007, total inventory was 20% higher than at the end of Q2 2006. I'm curious to learn how New York & Co. managed to reverse the trend of inventory growth so quickly. Could it be that when JasmineSola was put in a "separate box" from the core brand, part of the inventory glut went into that box with it?

One clue we can look for on Wednesday: If inventory was indeed converted into cash, rather than just culled from the continuing operations, then we should see a marked rise in free cash flow, which stood at negative $40.6 million at the end of the first two quarters of this year. Trust that I'll be taking a close look at this line of Wednesday's report. 

For more on New York (New York), read:

Fool contributor Rich Smith does not own shares of any company named above. Gap is a Stock Advisor and Inside Value pick. Get your free refresher course in The Motley Fool's disclosure policy right here.