Outlook Worsens for Harry & David

Harry & David Holdings confirmed Tuesday that its second-quarter sales were lower than the same period last year. And there’s a growing concern that the mailer, which owns food-gifts merchants Harry & David, Wolferman’s and Cushman’s, won’t be able to stay in business.

The company said in a Feb. 8 10-Q filing with the Securities and Exchange Commission that it won’t be able to finance continuing operations, including servicing its payment obligations under its senior notes, without securing new capital and restructuring its obligations.

Harry & David Holdings said it “intends to conduct discussions with its revolving credit lenders, bondholders, other creditors and owners in an effort to recapitalize.”

How bad is it? The company’s net sales for its fiscal second quarter ended Dec. 25 were $262 million, down from $267 million the quarter last year. Its net income was $13.8 million for the quarter, down from $31.7 million the same period in 2009.

Harry & David’s second-quarter gross profit decreased 20.6% from the prior year to $104.2 million, and its gross profit margin was 39.7%, a decrease from 49.1% in same period last year. Steeper discounts and markdowns during the holiday season, lower average selling prices and higher product costs all hurt the company, it said.

Chairman/CEO Steven Heyer said in the report that Harry & David Holdings saw a significant rise in web traffic and was successful in obtaining new customers and reactivating old ones. He blamed the fall on “market and competitive conditions.”

Could this be the end of Harry & David? Tony Cox, president of multichannel consultancy 5th Food Group, doesn’t believe the merchant will cease operations.

“I think someone’s going to buy that company,” he notes, maybe even a group headed up by former Harry & David CEO Bill Williams. “It wouldn’t surprise me at all if Harry & David was sold at pennies on dollar,” Cox says.

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