RedEnvelope's Letter Bomb

The CEO resigns as third-quarter earnings miss badly.
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The soap opera at

RedEnvelope

(REDE)

had another twist Tuesday when Alison May, the CEO, resigned as the company reported a disastrous quarter.

The shares tanked $2.42, or 23%, to $8.01.

May, who has been a subject of criticism from RedEnvelope cofounder and major holder Scott Galloway, was accompanied out the door by Kristine Dang, the executive vice president for merchandising and creative operations. May will remain in her position until a successor is named.

The resignations mark the second major management departure in less than a year at RedEnvelope, which sells high-end gifts over the Internet. The company's CFO, Eric Wong, left in March after the company said budgeting errors and a lackluster Valentine's Day would lead to a fourth-quarter earnings shortfall.

RedEnvelope has been a chronic underperformer since going public in late 2003. After debuting around $15, the stock closed Tuesday at $10.43.

In a Jan. 13 filing with the

Securities and Exchange Commission

, a group led by Galloway that controls about 13% of Red Envelope's stock expressed dissatisfaction with management.

"The reporting persons remain concerned by the management failures and operational problems that continue to cause disappointing financial and operational performance by the issuer, as well as disappointing stock price performance. Mr. Galloway personally experienced the Issuer's operational problems in connection with holiday orders he placed in December 2005.

"In light of these continued operational problems and management failures, on Jan. 10, 2006, Mr. Galloway submitted to the issuer a letter notifying the issuer of his intent to solicit stockholder proxies in an attempt to remove several directors, including CEO Alison May, from the issuer's board of directors at the issuer's next annual stockholders meeting."

Separately, RedEnvelope reported third-quarter earnings of $4.1 million, or 43 cents a share, compared with $2.8 million, or 30 cents a share, last year. Sales were $53 million, up from $47.5 million. Analysts had been looking for 52 cents a share on sales of $58 million in the most recent quarter.

The company forecast a loss for the fiscal year ending in March.