RedEnvelope to seek buyer
18 May 2006
TheDeal.com
by David Shabelman in San Francisco
Scott Galloway is back with RedEnvelope Inc., the Internet retailer he co-founded in 1997, but this time his return coincides with a move to sell the gift company with the signature beribboned boxes. ( For more on auction-related deals, visit AuctionBlockDatabase.com. )
The online vendor of upscale products said Tuesday, May 16, that it has hired WR Hambrecht + Co. as its financial adviser to consider finding a buyer for the San Francisco-based company, among other strategic options. In a statement that included release of RedEnvelope's fiscal fourth quarter and 2006 earnings, the company said that Galloway, who served as its chairman from 1997 to 2000 and as a member of the board of directors from 2002 to 2004, would rejoin the board as a director.
Galloway staged an unsuccessful proxy fight for control of the company's board in 2004 and last year threatened another such challenge before reaching a compromise with the company.
Galloway, who has criticized the company for what he says were "operational failures," is a professor at New York University's Stern School of Business, where he teaches brand strategy, and also runs a hedge fund, Firebrand Partners LLC. New York-based Firebrand is RedEnvelope's largest shareholder with a 20% stake.
"I believe it's a tremendous asset that's poised for growth," Galloway said. "That's why I've purchased a great deal of shares and why I'm excited about joining the board."
Galloway and RedEnvelope declined to comment on the potential sale of the company. But he expressed confidence in the company's new management. RedEnvelope appointed Kenneth Constable as chief executive in February to replace Alison May, who had led the company from 2002. Two days after Constable was hired, the company also hired a new chief operating officer, Frank Buettner.
"We're very supportive and impressed by the new leadership," Galloway said.
Before joining RedEnvelope, Constable was senior vice president and general manager of Provide Commerce Inc., a San Diego-based e-marketer of fresh flowers, fruits and meat. Buettner was vice president of operations and information technology for Bag Borrow or Steal Inc., a Seattle-based e-tailer of handbags.
Despite Galloway's optimism, RedEnvelope faces a challenge boosting growth. For its fiscal 2006 ending April 2, RedEnvelope reported a net loss of $5.6 million on revenues of $113.2 million, compared with a net loss of $5.2 million on sales of $101.4 million for fiscal 2005.
The company blamed shipping-related promotional activities in its fiscal third quarter for a decline in gross profit margin from 2005 to 2006.
WR Hambrecht and Portland-based Pacific Crest Securities Inc. underwrote RedEnvelope's 2003 initial public offering. The company's shares debuted at $14 and peaked at $17.49 in March 2005, before plummeting around midyear after RedEnvelope warned that its margins would be lower than expected and that chief financial officer Eric Wong was leaving. Shares bottomed at $7.06 last April before rebounding.
News that the company was seeking a buyer failed to give shares of RedEnvelope a boost. The stock was off 2% midday at $10.05, giving the company a market capitalization of $91.4 million.
Laura Provencale, managing director at San Francisco-based WR Hambrecht, and Devin Granback, senior vice president, are advising RedEnvelope.
