Private equity firm Apollo Global Management will take Rackspace private in the all-cash deal.
With CEO Ken Constable out of the picture, the board of San Francisco-based online and catalog gifts retailer RedEnvelope expects to boost finances by focusing more on new products and marketing. In contrast, Constable was oriented more toward improving operations.
RedEnvelope has a hip name derived from the Asian tradition of giving gifts in red envelopes, and an array of high-end gifts it offers through its web site and catalogs. What it does not have is a history of making money or a growth rate as fast as that of Internet retailing as a whole. And, as of last month, it no longer has a CEO.
The San Francisco-based company announced in early April that Ken Constable, president and CEO, was leaving “to pursue other business opportunities.” John Pound, the company’s chairman, took over day-to-day operations, and sources say the company is looking for a new chief executive.
The company declined to comment beyond a statement in which Pound said “our focus shifts to re-energizing the RedEnvelope brand and product offering.” That comment apparently hinted at the disagreement between Constable and the company’s board over the priorities for RedEnvelope, which generated 77.5% of its sales online in the first three quarters of its current fiscal year.
“Ken was very operationally oriented,” says Steve Weinstein, vice president and senior research analyst at Pacific Crest Securities. “The board has more of a brand and product focus.”
Weinstein says the board wanted senior management to concentrate on freshening the product line and more aggressively promoting the RedEnvelope brand, while Constable’s priorities were in such areas as fulfillment and logistics. That rift led to Constable’s departure, which another source describes as “quite sudden.”
Weinstein says Constable, who joined RedEnvelope in February 2006, succeeded in improving order accuracy and on-time delivery, two problem areas in the past. On the negative side, he says, “revenue growth has not been very strong for awhile.”
The company’s third-quarter results, which include the last three months of 2006, illustrate that point. RedEnvelope reported net revenue grew 7.5% from $53 million to $57 million. But that growth paled before the 26% increase in online shopping during the 2006 holiday season reported by comScore Networks.
RedEnvelope, which reported the home and jewelry categories each represented 22% of sales in the quarter, said it attracted 258,000 new customers in the quarter, bringing the total customer file to 3.3 million names. Despite projecting revenue growth of 7% to 10% for the fiscal year ending March 31, the company projected a loss of $2 million to $2.5 million for the year.
Losing money is nothing new for the company, founded in 1997 as Giftworks Online Inc. and renamed RedEnvelope in 1999. It has never reported a full-year profit and had an accumulated deficit of $88.7 million as of the end of 2006.
The fundamental problem for RedEnvelope may be the “intense competition” the company pointed to in a recent financial report. The report provided a long list of rivals, including online and multi-channel retailers. Among them are Amazon.com, eBay, Macy’s, Neiman Marcus, Pottery Barn and Williams-Sonoma.