Harry & David listed as high risk for default on bonds

MEDFORD — Harry & David Holdings is among 283 companies considered to have a high risk of default on bonds and weak liquidity, according to a New York credit-rating firm.

The Medford-based company appeared on Moody's first-quarter Bottom Rung list of "speculative-grade non-finance companies." The list reflected the struggling economy, growing from 157 firms a year earlier, and is heavily laden with companies dependent on consumer spending — media, automotive, retail, manufacturing and gaming companies.

Harry & David, a gourmet food and gift retailer, received a Caa3 ("probability of default") rating on a scale where a "C" rating is the lowest mark. The company was downgraded in February.

Moody's analyst Bill Fahy said while Harry & David has relatively strong brand recognition, it has a high probability of default because of its weak liquidity and unsustainable capital structure. Moody's defines a high-risk of default as above 50 percent.

"There are a couple of important things," Fahy said. "One, is that it's viewed as a highly discretionary product. Given the deterioration of consumer spending and the pull-back of business expense accounts, we feel it's directly impacting them. Second, their business is so driven by the Thanksgiving to Christmas holiday period, if they don't have a good quarter in that period, they're not going to make it up."

In February, Harry & David announced a quarterly sales decline of 15.5 percent compared with a year ago, for the period ending Dec. 27. The company recorded net sales of $307.7 million for the 13-week period, down from $364 million in 2007.

"The Christmas-selling season is big for all retailers, but it's magnified with Harry & David, given their products and distribution," Fahy said. "They're doing everything they can, but this year they got caught with a little more inventory than they wanted and had to discount a lot of it. Usually at the end of the (holiday) period they have a significant amount of cash. This year, they ended with less cash and they still have to pay down the revolver (line of credit) and ramp up for the coming Christmas; we're concerned about liquidity."

In January, Harry & David eliminated more than 100 salaried and full-time positions, about 10 percent of its nationwide staff of 1,100. It previously moved to reduce expenses by cutting discretionary spending and capital expenditures, freezing wages and salaries and suspending the company match to the employee 401(k) plan. For the second year in a row, the company did not pay bonuses.

In June 2004, the private equity firm Wasserstein & Co. bought the company from Japanese conglomerate Yamanouchi Pharmaceutical for $253 million. Bruce Wasserstein, chief executive of Lazard, an investment company, owns 65 percent of Harry & David through his private-equity firm, Wasserstein & Co. Highfields Capital Management owns the remaining 35 percent.

Harry & David has a $125 million revolving line of credit for seasonal-working capital to support inventory buildup for the holiday-selling season. During calendar 2008, Harry & David repurchased more than $45 million of its outstanding bonds, reducing long-term debt to $198.8 million of high-yield (primarily 9 percent) interest notes due in 2012 and 2013.

"We are comfortable that we have adequate liquidity in spite of a higher leverage ratio, as we said in our second-quarter conference call," Harry & David Chief Financial Officer Steve O'Connell said in response to the Moody's report. "They're taking a very conservative view of the economy; they may be over-compensating. There is pressure on the rating agencies after what happened with the mortgage rating and that's being felt on Wall Street.

"We don't take comfort in that," O'Connell continued. "We're focused even more so than normal on maximizing sales and margin as well as controlling costs and improving cash flow and efficiencies."

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