It's been a case of bad news and ... less bad news for shareholders of Motley Fool Hidden Gems recommendation New York & Co. (NYSE:NWY) this week. The stock suffered mightily in the wake of Tuesday's Q3 earnings report, falling 11% after the company reported better-than-expected sales growth (6.3% in the core New York & Co. (NYC) brand, 5.9% after the to-be-exited JasmineSola business took its cut), but a $0.27 per share net loss. Blame that latter business for the loss. NYC proper earned $0.09 per share (down by almost half from last year's Q3), while a series of impairment charges related to its sale loaded up the JasmineSola unit with $0.36 per share in losses.

The future
Bad as this news looks, though, it's concerned primarily with the past. What's important now is where this company is headed. Sadly, I don't see a whole lot to be optimistic about here. Including JasmineSola, the combined company grossed just 29.5% on its sales in Q3. Back out the JasmineSola numbers, though, and NYC still only grosses 29.7%. That 20-basis point improvement still leaves the core NYC far short of the gross margins achieved by most any competitor you could name: Gap (NYSE:GPS), AnnTaylor (NYSE:ANN), Kohl's (NYSE:KSS), Target (NYSE:TGT), J.C. Penney (NYSE:JCP), and Macy's (NYSE:M) -- they all score several percentage points higher than NYC.

Cash profits
Last week, I promised to focus on cash flow at the continuing operations -- NYC CEO Richard Crystal argues that a 6% decline in "inventory per average store" shows he is "controlling inventory and managing expenses." Most of the time this should result in the expansion of free cash flow. Unfortunately, that is not the case here.

The way I read the balance sheet, total inventory at the company has grown 15% since this time last year. If per-store inventory (a figure I can neither confirm nor deny) is indeed down 6%, that could mean that the expanding store base is carrying fewer inventories per store. But it doesn't change the fact that, as a whole, the company has 15% more cash held up in total inventory.

The firm's cash flow statement supports my interpretation of the numbers. Through the first nine months of last year, this company generated negative $33 million in cash. That's pretty awful, but not quite as awful as this week's news: So far this year, the company has used more than $50 million in cash. Maybe ridding itself of JasmineSola will fix that -- but I wouldn't bet on it.

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Fool contributor Rich Smith does not own shares of any company named above. Gap has been recommended by both our Stock Advisor and Inside Value newsletters. Get your free refresher course in The Motley Fool's disclosure policy right here.