Is Harry & David Out of the Woods?

Sep 01, 2011 9:16 PM  By

Harry & David said on Tuesday that the U.S. Bankruptcy Court in Delaware today approved its Chapter 11 reorganization plan, which will allow the food and gifts merchant to emerge from bankruptcy on Sept. 13.

But is the food and gifts seller out of the woods? Industry experts say Harry & David will exit Chapter 11 in good shape, but they need to adapt to change and preserve its identity in the long run.

“Clearly, they’ve done a lot of things right,” says Portland, OR-based turnaround specialist Renee C. Fellman. “They’ve closed underperforming locations, they were able to shed debt, and they got out of Chapter 11 before the holiday season.”

Fellman says she’s seen Harry & David aggressively recruiting to fill full-time marketing and customer service positions, as well as starting the seasonal staffing hiring process – they are looking to fill 1,200 temporary positions. Those, she says, are signs the merchant is prepared to get back up to speed.

Harry & David’s reorganization plan allows it to convert all of its approximately $200 million of outstanding public notes into equity of the reorganized company. That includes an equity capital raise that will generate $55 million in equity financing upon the Harry & David’s emergence from Chapter 11.

The company also has a $100 million revolving loan commitment to finance its operations after the Company exits Chapter 11.

Chris Kampe, managing director of investment firm Tully & Holland, says this means Harry & David will “live to fight through another gift season.”

Kampe says the conversion of excessive debt to equity paves the way for Harry & David to emerge from bankruptcy with funds lined up to finance the upcoming holiday season.

“The issue for H&D is that it has been underperforming since its fiscal 2009, but it has had a mountain of debt relative to its capacity to repay debt for years,” he says.

With a sharp decline in sales and profitability that began in 2008, Kampe says, “this situation became untenable, ultimately leading to the only solution: bankruptcy.”

Prior to the bankruptcy, the ratio of debt to capitalization was in excess of 100% (deficit net worth), Kampe says. But by converting $200 million in debt to equity, “H&D should have very little debt going into this season, giving it a clean slate to work on retaining, recapturing and growing its customer base.”

Lois Brayfield, president of the consultancy J. Schmid & Associates, says Harry & David remains a “wonderful brand with an incredible gift concept.”

Brayfield believes Harry & David’s efforts should pay off, but “it will be important that they become more efficient in their produce gifts that people enjoy giving and receiving while keeping a close eye on margin.”

The direct channel is still a model that works, Brayfield adds, “as long as they own a differentiated brand that brings true value in the customer’s mind.”