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RedEnvelope Revises Outlook

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RedEnvelope announced its revised outlook for the fourth quarter of fiscal year 2005, which ends April 3, 2005.

Net revenues for the fourth quarter of fiscal year 2005 are currently anticipated to be between $21.5 million to $22.0 million, an increase of approximately 24% to 27% over the prior year. Net loss is currently expected to be approximately $(3.5) million to $(3.0) million. During the fourth quarter of fiscal year 2004, net revenues were $17.3 million and the net loss was $(2.3) million.

As a result, net revenues for the fiscal year 2005 are currently anticipated to be between $100.7 million to $101.2 million, an increase of approximately 27% to 28% over the prior year. The net loss is currently expected to be approximately $(5.6) million to $(5.1) million. For fiscal year 2004, net revenues were $79.3 million, and the net loss was $(5.1) million.

RedEnvelope currently expects its fourth quarter gross margin to be approximately 10 percentage points lower than anticipated. Following analysis, the Company currently believes that the shortfall is attributable to the following factors:

– Approximately three percentage points of the shortfall are due to lower-than-anticipated Valentine’s Day demand, which resulted in higher discounting to drive revenues during both the Valentine’s Day period and subsequently.

– Approximately one percentage point of the shortfall is due to higher-than-planned inventory adjustments related to aged inventory and discontinued products.

– Approximately three percentage points of the shortfall are due to higher-than-anticipated return rates during the fourth quarter of fiscal 2005.

– Approximately three percentage points of the shortfall are due to a budgeting error that resulted in an overestimation of the Company’s gross margin for the fourth quarter.

Alison May, President and Chief Executive Officer, said, “Our Valentine’s Day business was below our forecast, causing us to discount more heavily than we anticipated in order to drive demand. We had a successful third fiscal quarter, and we were expecting a level of repeat purchases that did not materialize. We have been researching the needs of our customers for Valentine’s Day, and are developing a new marketing strategy for this event next year.

“We also experienced higher-than-anticipated returns this quarter as a percentage of sales. Our returns rate had been declining for most of the fiscal year, and we had expected this trend to continue into the fourth fiscal quarter. We now believe that any further reduction in returns rates will be more gradual,” she said.

Ms. May continued, “As part of reviewing our fourth quarter performance, we discovered an error in budgeting for costs of goods sold, which resulted in an overestimation of our gross margin and consequently our forecasted net income for the quarter.

“While we are disappointed in what we anticipate will be the final results for the fourth quarter, we continue to be encouraged by the growth in traffic to our website. We believe our product offering remains strong, especially in jewelry, men’s accessories, and new baby gifts. We also believe that we have an excellent assortment of unique and thoughtful gifts available for Graduations, Weddings, Mother’s Day and Father’s Day.

“We currently feel confident in reaffirming our three-year business model, which calls for a growth rate in the low-to-mid 20% range per year, and operating income in the range of 12%-18% for our fiscal year ending March 2008,” Ms. May concluded.

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RedEnvelope Revises Outlook
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