Red Envelope (REDE) finds a way to make money in e-tailing (4Q04 earnings)

| About: RedEnvelope, Inc. (REDEQ)
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Red Envelope, a catalog and online gift retailer, beat earnings expectations for Q4 (the company's fiscal Q3) and guided in-line with consensus. But the really interesting points were in its business model. Details of the results first, then some comments about REDE and e-tailing:

Q4 Results:

  • EPS was $0.30 versus consensus of $0.28.
  • Net revenue grew to 32% to $47.5 million.
  • Weather conditions pushed out $1.5 million of orders into Q1.
  • Orders rose 21% year over year.
  • Average order size rose to $87 versus $79 a year earlier.
  • 72% to 73% of orders for the quarter were placed over the web.
  • Gross margin rose to 64.3% versus 49.5% a year earlier.
  • Gross profit per order was $47 versus $39 a year earlier.
  • 84% of REDE's top 50 sellers for the quarter were exclusive to RedEnvelope and 58% were designed in-house, versus 74% and 30% respectively last year.
  • Repeat customer traffic increased 38 percent versus a year ago.
  • Repeat customers spent 35% more on average than a year earlier.


  • Q1 2005 (REDE's fiscal fourth quarter): revenues of $21-$23 million; net income between break-even and $500,000.
  • F2005: net revenues between $100m and $102m net loss of $2 million - $1.5 million.

Quick analysis:
The Internet is brutally competitive for retailers of commodity products. Search engines reduce brand value, and easy price comparison from shopping engines compresses gross margins. E-tailers like Amazon, Overstock,, IBuyDigital, and SmartBargains will likely be under constant margin pressure. Ultimately the profits in commodity e-tailing may flow to the search engines and comparison shopping engines rather than the e-tailers themselves.

Red Envelope's business is therefore fascinating. It has avoided commodity products in three ways:

  1. Most of its products are exclusive to Red Envelope.
  2. The majority of its products are designed in-house.
  3. One third of the products it sold in Q4 were personalized.

How does this show up in REDE's metrics? In two key metrics:

  1. Gross margins: far higher than those of commodity e-tailers.
  2. The rate of repeat customers: high, because they can't shop around for REDE's products elsewhere.

REDE doesn't publish this metric, but it would be interesting to see how much of its traffic is dependent on search engine and comparison shopping engine advertising. Much less than the commodity e-tailers, one would guess. And that means that REDE will be less impacted by rising pay-per-click ad prices.

One final point. REDE's conversion rate was flat year over year. That means there's plenty of room for improvement (and financial leverage).

One year REDE chart below.