Red Envelope: New 5% Owners, Chairman Buying, Director Selling

| About: RedEnvelope, Inc. (REDEQ)

Insider Score LogoFrom InsiderScore: After a rather quiet period of insider activity, the directors at RedEnvelope (REDE) have suddenly been filling out Form 4s. Meanwhile, a hedge fund has popped up as a new 5% owner in the online upscale gifts retailer. Here is a rundown of all the action:

Chairman Daniel Lyle bought 3K shares at $8.18 on August 10th, increasing his holdings to 5.5K shares, and marking his first open market buy. A partner at PriceWaterhouseCoopers from 1982 to 2003, Lyle has been on REDE's board and chairing the company's Audit Committee since July 2003. He was named chairman in September 2005. Directors at REDE receive an annual retainer of $10K plus fees. As chair of the Audit Committee, Lyle receives an additional $2.5K in cash compensation, plus options for 20K shares (other directors receive options for 10K shares). Lyle currently holds options for 50K shares.

Director John Pound bought 772.725K shares at $8.00 on August 11th. The shares were purchased for Integrity Brands Funds, the value-focused hedge fund Pound launched in 1999 to invest in consumer brand and specialty retail companies. With the purchase, Pound now holds an 8.17% stake in REDE, along with options for 10K shares.

Pound joined REDE's board in July 2005 after the company settled with Scott Galloway, its dissident co-founder who threatened a proxy battle and had named Pound as one of his nominees. A corporate governance expert, Pound worked for the SEC and taught the subject for ten years at Harvard University. Prior to launching Integrity Brands, Pound helped raise a $1B equity fund for Taylor & Co., an affiliate of the Bass family. He is also currently on the board of Gymboree (NASDAQ:GYMB).

Director Brett Hendrickson sold 135K shares at $8.00, leaving him with no holdings. Bonanza Capital, a hedge fund for which Hendrickson is the managing partner, sold the shares. Hendrickson, who also holds options for 10K shares, joined REDE's board in August 2005. Though Pound and Hendrickson each completed their transactions at the same price on the same day, there is no indication on either man's Form 4 that they completed a private transaction.

At the end of Q2, Bonanza Capital had a 12.9% stake in Uroplasty (NASDAQ:UPI), an 8.2% stake in Telular (NASDAQ:WRLS), a 6.3% stake in Channel Commercial (OTCPK:CHNL), and better than 5% stakes in Silverleaf Resorts (SVL) and Cybex International (NYSEARCA:CYB). The firm also had a 5% weighting, or $12M stake, in Sun Healthcare Group (NASDAQ:SUNH).

Fine Capital Management disclosed on August 14th that it now holds 559.65K shares of REDE, or a 5.9% stake, up from 377.97K shares, or a 4% stake, at the end of Q1. Fine Capital filed as an "active" shareholder, but the firm did not offer up any comments or suggestions in its filing. Fine Capital's cost basis on its REDE investment is $9.627 per share.

Debra Fine, the former director of global equities for Loews Corp. (LTR), launched Fine Capital in January 2005. Fine reportedly raised more than $460M to get her fund off the ground.

At the end of the second quarter, Fine Capital disclosed holdings in 34 companies worth approximately $438.4M, including 5% or greater stakes in Carmike Cinemas (NASDAQ:CKEC), CPI Corp. (NYSE:CPY), and Milacron (Private:MZ). The firm's largest position in terms of value is a more than $51.6M stake in Cleveland-Cliffs (NYSE:CLF), giving the stock an 11.79% weighting in Fine Capital's reported portfolio. During Q2, Fine Capital was an aggressive buyer of AK Steel (NYSE:AKS), Liberty Capital (LCAPA), Liberty Interactive (LINTA), Cendant (CD), and Sanmina-SCI Corporation (NASDAQ:SANM), among others.

Shares of REDE fell to a 52-week low of $7.84 on August 9th, a week after the company reported fiscal first-quarter 2007 (ended July 2nd, 2006) results, and down from a November 2005, 52-week high of $13.25. The weakness came despite a better-than-expected earnings report.

For Q1, REDE reported a net loss of -$900K, or -10 cents per share, compared to -$1.8M, or -20 cents per share, a year ago, and a consensus estimate of a -13-cent per share loss. Revenues rose 7.5% to $26.9M, giving the company a slight top-line beat. Net revenues per order rose from $77 to $81, gross profit per order grew from $41 to $43, and the number of orders shipped increased by 2.2% to 330K. REDE's gross margins were consistent at about 53%, and the company reduced its marketing and fulfillment expenses.

"We are very pleased with the results achieved by our skilled management team and employees during the first quarter of fiscal 2007," said Ken Constable, president and chief executive officer. "Our on-target revenue growth and effective margin management resulted in significant leveraging of our operating expenses. We believe that this validates our conviction that we can successfully demonstrate the financial viability of our business model in fiscal 2007. As we continue to build a strong financial and operational foundation, based on a culture of accountability and a concentrated strategic focus, we are confident that REDE is well-positioned to realize our potential during the upcoming holiday gift giving season."

Looking forward, REDE said it expects FY07 revenues of $121.12M to $124.52M, compared to a consensus forecast of $122.77M. The guidance represents year-over-year top-line growth of 7% to 10%.

When it reported earnings, REDE said that it has decided not to pursue a sale. The company had hired WRHambrecht + Co. in May to look at strategic alternatives, including a sale or merger.

Worth Noting: Shares of REDE shot up more than 9% yesterday, and the run coincided with Pound's disclosure, which was filed at 3:01 PM ET. Yesterday morning, we noted Fine Capital's disclosure in a Research Note covering recent institutional activity.

The fight between Galloway and REDE was one of more the interesting battles in the small-cap arena over the past few years.

Galloway stepped down from his executive posts at the company before its late 2003 IPO, allowing a "professional" CEO to come on board. The IPO was lukewarmly received, and REDE proceeded to ring up a string of disappointing quarters, with a new excuse and scapegoat emerging virtually each time.

Galloway lost an initial proxy battle, but returned less than a year later and was more successful, reaching an agreement with the company last summer to install board members. In February, CEO Alison May finally stepped down, as did REDE's top merchandising executive. Meanwhile, the company's chief marketing officer is slated to leave on Friday.